New York: United States

New York takes a different approach from most states. There is no general research credit that any company can claim on its return. Instead, research and development spending is rewarded through economic development programmes administered by Empire State Development, which admit companies by application and issue certificates that are then claimed on the tax return. The two that matter for most companies are the research and development component of the Excelsior Jobs Program and the Life Sciences Research and Development Tax Credit.

Overview

Who can claim

Excelsior Jobs Program. Admission is by application and is competitive. Eligible industries include scientific research and development, software development, manufacturing, agriculture, financial services back office, and others listed by Empire State Development, and applicants commit to net new jobs or a capital investment above a threshold that varies by industry. The research and development credit is one of four Excelsior credits, alongside the jobs, investment and real property credits.

Life Sciences R&D credit. A qualifying life sciences company must be a new business in the life sciences sector certified by Empire State Development...

Companies that qualify for neither have no New York research credit, although New York City offers no research credit either and the state's qualified emerging technology company credits are separate.

Rate and calculation

The Excelsior research credit starts from the federal credit: the taxpayer computes its federal research credit on Form 6765, attributes the portion arising from New York qualified research expenses, takes half of that, and caps the result at 6% of the New York QREs. Because the federal ASC is typically 7% to 14% of the excess over base, the 6% cap often binds for companies with growing research spend.

Illustrative example. Hudson Genomics, a hypothetical admitted Excelsior participant, has US$1,000,000 of federal QREs, all in New York, and a federal ASC of US$84,000. Half of the federal credit is US$42,000. The cap is 6% of US$1,000,000 = US$60,000. The Excelsior research credit is US$42,000, refundable, subject to the benefit in its agreement.

The Life Sciences credit is a flat percentage of qualified research expenses, using the federal definition of QREs for research in New York, at 15% or 20% depending on headcount, up to the US$500,000 three-year cap. A hypothetical eight-person start-up with US$600,000 of New York QREs would compute 20% = US$120,000 in year one, refundable, with US$380,000 of cap remaining for the following two years.

How to claim

1. Apply to Empire State Development for the relevant programme before incurring the expenditure you expect to claim; benefits are prospective from admission.
2. For Excelsior, sign the agreement, meet the job or investment commitments, and file the annual performance report; Empire State Development issues a certificate of tax credit for each year.
3. Excelsior credits are claimed on Form CT-607 or IT-607 with the certificate from Empire State Development; the life sciences credit is claimed on its own form with its certificate..
4. Keep the federal workpapers filtered for New York research; the Department of Taxation and Finance can examine the computation.

Note for the reviewer: the programme rules, caps and end dates for both credits change with the state budget. The figures above should be checked against the current programme documents before publication.

Working with the federal claim

The state claim is built from the federal workpapers, not alongside them. Each business component in the Section G schedule carries a location, and the state qualified research expenses are the federal QREs for components, employees and contractors located in New York. Two points of difference need their own working. The state base uses state figures, so prior-year New York QREs and, where the method needs them, New York gross receipts must be kept as a separate series from the federal ones. Where New York adopts the Internal Revenue Code as of a fixed date, federal changes after that date, including the section 174 and 174A deduction rules, may not apply for New York purposes, and the state deduction for research expenses may differ from the federal one.

Examinations are separate. The Department of Taxation and Finance can examine the state credit under its own procedures and limitation period whether or not the IRS examines the federal claim, and it will ask for the same things: the business components, the evidence for each part of the four-part test, the basis of the wage allocations and the location of the work. A single set of records, organised by business component with a location field, answers both.

Common questions

Can we claim the New York credit without claiming the federal credit? Yes, where the state computation stands on its own, although the definitions are federal and the workpapers are the same, so claiming one without the other is unusual.

Our researchers work remotely from several states. Which state's QREs are they? Wages are allocated by where the employee performs the research, so remote staff need location records as well as project time records. Work performed outside New York is outside the New York credit even if the employee is on New York payroll.

Can an amended return add the New York credit for a past year? Generally yes within the state refund period, which is noted above; elections that the state requires on the original return cannot be added later.

Does a state credit affect the federal payroll tax offset? No. The federal payroll tax election is independent of any state credit, and a qualified small business can use both.

Related pages

• State credits and the federal computation
• Federal cash benefit for start-ups
• Guide: R&D tax incentives for life sciences
• Startups and Scale-ups: United States track