Pennsylvania R&D Tax Credits 101: Your Complete Guide to State-Level Innovation Funding

Want to turn your innovation investments into major tax savings? Pennsylvania’s R&D tax credit program could be the opportunity you’ve been waiting for. Here’s your complete guide to getting the most out of both state and federal R&D credits. 

Pennsylvania’s R&D tax credit program gives innovative companies a powerful way to lower their state tax bill while investing in their future. Whether you’re building new software, streamlining manufacturing, or developing breakthrough products, knowing how to use both federal and state credits can make a real difference to your bottom line. 

What is Pennsylvania’s R&D Tax Credit Program? 

Pennsylvania’s Research & Development Tax Credit is a state incentive that rewards businesses and individuals who invest in qualifying R&D activities within Pennsylvania. The program drives innovation by offering tax credits that can be used to offset your Pennsylvania Corporate Net Income Tax or Personal Income Tax generated from a Pennsylvania business. 

Key Numbers to Know: 

• Credit rate: 10% of qualifying expenses above your base amount (20% for qualified small businesses) 
• Total program cap: $60 million per year ($12 million reserved for qualified small businesses) 
• Carryforward period: 15 years (non-refundable) 
• Small business definition: Companies with less than $5 million in assets 

The credit is incremental, so you only get the credit for qualified R&D expenses that are above your historical spending baseline. The goal is to encourage companies to boost their innovation investments year after year. 

Who Can Benefit from Pennsylvania R&D Tax Credits? 

Pennsylvania’s R&D credit eligibility is similar to the federal program, but with some state-specific rules. To qualify, your business must meet several key criteria: 

Basic Eligibility Requirements: 

• Carry out qualified research and development activities within Pennsylvania 
• Have at least two years of R&D spending history 
• Be fully compliant with all state tax laws and regulations 
• Be in good standing with Pennsylvania’s tax clearance requirements 

Eligible Entity Types: C-Corporations, S-Corporations, LLCs, and Partnerships can all apply for the credit. Pass-through entities have extra flexibility; if they can’t use the full credit, they can transfer portions to shareholders, members, or partners based on their ownership share. 

Pennsylvania Location Requirement 

This is a crucial point: Qualified research must be performed in Pennsylvania. You can’t claim Pennsylvania credits for R&D done in other states, even if your company is based in Pennsylvania. But this rule also lets multi-state companies strategically locate R&D to maximize state-level benefits. 

Which R&D Activities Qualify? 

Pennsylvania uses the federal definition of qualified research, which is broader than many companies realize. The R&D tax credit program is designed to encourage innovation; where the work happens isn’t as important. U.S. Tax Court and other courts have ruled in favor of activities that make things faster, better, greener, or more efficient. 

Examples of Qualifying Activities: 

• Developing or improving software 
• Optimizing manufacturing processes 
• Product design and prototyping 
• Engineering solutions to technical challenges 
• Developing new formulas or materials 
• Environmental and efficiency improvements 
• Integration of new technologies 

Qualified Research Expenditures (QREs): 

1. Wages and Salaries 
   1. Direct R&D staff (engineers, developers, scientists) 
   2. Support and supervisory staff helping with R&D 
2. Supplies and Materials 
   1. Materials used up in research (prototypes, test components, lab supplies) 
   2. Note: Capital equipment and general office supplies are not eligible 
3. Contract Research 
   1. Usually 65% of payments to third-party contractors doing qualified research 
4. Computer and Cloud Costs 
   1. Rental or lease costs for computers and cloud platforms used directly in R&D 

What’s Not Eligible: 

• Research done outside Pennsylvania 
• Routine data collection or quality control testing 
• Market research or consumer surveys 
• Land, buildings, and capital equipment purchases 

How Pennsylvania Credits Work with Federal Incentives 

One of the biggest advantages of Pennsylvania’s program is how it works with the federal R&D credit. You can claim both federal and state credits for the same qualifying activities, which can double your tax benefits. 

Real-World Impact: 

A Pennsylvania company with $3.3 million in qualified R&D expenses over four years earned $359,917 in federal credits and another $148,750 in Pennsylvania credits. That’s nearly $150,000 in extra tax savings from the state program—a 41% increase over the federal credit alone. 

The calculation method for both credits is similar, but Pennsylvania requires you to apply through a myPATH account to determine your credit amount. Since both programs use incremental calculations, companies that grow their R&D spending year after year see the biggest benefits. 

How to Apply and Key Deadlines 

Pennsylvania has made it easier than ever to apply for the R&D credit with its myPATH online system. However, preparing the technical narrative still takes specialized expertise, so it’s worth working with tax professionals to make sure your efforts pay off—even if you already have program approval. Timing is everything. 

Key Dates: 

• Application window opens: August 1 
• Application deadline: December 1 
• Eligible expenses: Activities from the previous calendar year 

Application Checklist: 

• Completed Federal Form 6765 (as-filed)  
• PA Form REV-545 (R&D credit calculation) 
• Project details for each Pennsylvania-based R&D activity 
• Contractor and subcontractor information 
• Prior qualified research expenses (at least one year, up to four) 

Step-by-Step Process: 

1. Prepare Federal Documentation: Complete your federal R&D credit calculation first, since Pennsylvania requires your filed Form 6765. 
2. Calculate Pennsylvania Credit: Work with tax credit experts to draft your technical narrative, calculate your claim, and complete the application.  
3. Create myPATH Account: Register for a myPATH account with the Pennsylvania Department of Revenue. 
4. Complete Application: Submit all required documents through the online portal before December 1. 
5. Track Status: Check your application status regularly on myPATH for any requests for more information. 

The Advantage of Credit Transfers 

Pennsylvania offers a unique advantage: Approved R&D tax credits can be sold or assigned to other taxpayers. This gives you extra flexibility and can increase the value of your credits. 

How Credit Transfers Work: 

• You must get approval from the Department of Community and Economic Development 
• You must be fully compliant with all state tax filing and payment requirements 
• The buyer can use the credit to offset up to 75% of their tax bill for the year 
• Sale is considered a taxable transaction for income tax purposes 

Why Companies Sell Credits: 

• Turn tax credits into immediate cash flow 
• Monetize credits when you don’t have enough tax liability 
• Convert future tax savings into working capital 

Pass-Through Entity Benefits: If your business is structured as a pass-through entity and you can't use the full amount of your credit because your tax liability is too low, you can transfer the unused credits to your shareholders, members, or partners based on their ownership share. This way, your credits don't go to waste and you get maximum flexibility, no matter how your company is organized. 

Common Pitfalls to Avoid 

Knowing the most common pitfalls helps you avoid costly mistakes and ensures you get the full value of your credits: 

Documentation Errors: 

• Not keeping detailed records for each project 
• Failing to accurately track time spent on mixed-use activities 
• Not providing enough evidence for the required "process of experimentation" 

Geographic Missteps: 

• Claiming Pennsylvania credits for R&D work done outside the state 
• Not properly splitting expenses between different states 

Timing Issues: 

• Missing the December 1 application deadline 
• Not keeping the required two-year spending history 
• Not responding quickly to requests from the Department of Revenue 

Compliance Oversights: 

• Letting your tax compliance status lapse 
• Poor record-keeping that could cause problems in an audit 
• Mixing qualified and non-qualified activities without clear documentation 

How to Maximize Your R&D Credit Strategy 

To get the most out of Pennsylvania’s R&D credit, use these proven strategies: 

Multi-State Planning: 

• Compare the benefits of doing R&D in Pennsylvania versus other states 
• Think about setting up R&D operations in Pennsylvania to access state credits 
• Coordinate the timing of your federal and state credit claims to improve cash flow 

Project Documentation: 

• Set up strong project tracking systems as early as possible 
• Keep detailed notes on technical challenges and how you solved them 
• Clearly document your experimentation and testing process 
• Carefully track how much time each person spends on eligible activities 

Growth Strategy: 

• Plan your R&D spending to maximize incremental credits 
• Time your major R&D projects to get the most out of each credit year 
• Look at the advantages of increasing your Pennsylvania-based R&D work 

Professional Support: Because federal and state R&D credits are complex, many companies benefit from working with experts. The right guidance helps you: 

• Identify all eligible activities and expenses 
• Keep the right documentation for compliance 
• Navigate the application process smoothly 
• Maximize your credits with strategic planning 

The Future of Pennsylvania R&D Credits 

Pennsylvania’s R&D credit program is here to stay—there’s no end date under current law. This stability makes it a reliable part of your long-term tax planning. 

Program Trends: 

• More focus on technology and innovation sectors 
• Greater recognition of the program’s impact on economic growth 
• Potential for the program to expand or improve 
• Ongoing emphasis on compliance and documentation 

Strategic Implications: 

• Long-term R&D planning can count on predictable state benefits 
• You can make informed decisions about investing in Pennsylvania R&D 
• The program’s permanence supports ongoing innovation strategies 

How to Get Started with Pennsylvania R&D Credits 

If you’re ready to take advantage of Pennsylvania’s R&D tax credit, here’s your action plan: 

Immediate Steps: 

1. Assessment: Review your current and planned R&D to identify which projects qualify in Pennsylvania 
2. Documentation: Put systems in place to accurately track qualifying expenses and activities 
3. Federal Alignment: Make sure your federal R&D credit documentation will also support Pennsylvania applications
4. Professional Consultation: Consider working with R&D credit specialists who know both federal and state rules 

Long-term Strategy: 

• Include R&D credit planning in your annual tax strategy 
• Factor in the benefits of doing R&D in Pennsylvania 
• Look for ways to increase your qualifying R&D investments 
• Monitor program updates and optimization opportunities

Key Takeaways 

Pennsylvania’s R&D tax credit is a major opportunity for innovative companies to lower their tax bill while investing in growth. Since you can claim both federal and state credits for the same activities, you could see significant tax savings that directly support your innovation efforts. 

The key to success is understanding the requirements, keeping the right documentation, and making state credits part of your overall tax and business strategy. While there are specific compliance rules and deadlines, the potential benefits (both financial and strategic) make this a valuable tool for Pennsylvania companies focused on innovation and growth. 

Whether you’re a startup launching your first product or an established company expanding your R&D, Pennsylvania’s R&D credit program can help turn your innovation investments into real tax savings. The combination of federal and state benefits creates a powerful incentive for companies to do what drives long-term success: Investing in the future through research and development. 

Ready to get the most from your R&D tax credits? Boast has helped hundreds of innovative businesses across North America unlock non-dilutive funding and boost their innovation potential. Talk to one of our experts today.