Massachusetts R&D tax credit: How your business can benefit

If your business conducts research and development activities in Massachusetts, you may be eligible for the state’s R&D tax credit. This can help reduce your state tax liability and improve cash flow.

In this article, we’ll explain what exactly the R&D tax credit is, who is eligible for it, and what you need to do to claim it. So let’s jump straight in.

What is the Massachusetts R&D tax credit?

The Massachusetts R&D tax credit is a state incentive designed to encourage businesses to invest in research and development activities within the state. It allows eligible businesses to claim a credit of 10% based on their qualified research expenses (QREs) incurred in Massachusetts.

An alternative calculation method allows businesses to claim 5% of QREs exceeding a fixed-base percentage, similar to the federal alternative simplified method.

Qualified nonprofit organizations (such as universities and nonprofit science groups) can also claim a 15% credit for basic research.

What’s the difference between the Massachusetts R&D tax credit and the federal R&D tax credit?

The main difference is that the federal credit applies to research conducted anywhere in the US, while the Massachusetts credit is limited to expenses incurred within the state.

Other key differences include:

• Credit rate. Massachusetts offers a 10% base credit, while the federal credit rate can be up to 20% (regular method) or 14% (alternative simplified method).

• Payroll tax offset. Unlike the federal credit, Massachusetts does not allow small businesses to offset payroll taxes.

• Carryforward period. Massachusetts allows unused credits to be carried forward for up to 15 years, while the federal credit has a 20-year carryforward limit.

What are the benefits of the Massachusetts R&D tax credit?

Claiming the Massachusetts R&D tax credit offers your business several advantages, including:

• Reduced tax liability. The credit directly offsets your company’s corporate excise tax in Massachusetts, helping to lower your overall tax burden.

• Carryforward period. If the credit cannot be fully used in the current tax year, it can be carried forward for up to 15 years.

• Support for innovation. The credit can help your businesses reinvest in research and development, leading to new products, technologies, and market expansion.

• Improved cash flow. Tax savings free up funds that can be used for growth, hiring, or additional R&D efforts.

If your business is engaged in a research-driven industry — such as technology, software, or manufacturing — the credit provides a tangible financial benefit that rewards innovation.

Who is eligible for the Massachusetts R&D tax credit?

To qualify, your company must:

• Engage in activities that meet the IRS Section 41 definition of qualified research.

• Conduct research within Massachusetts.

• Perform research that is technological in nature and aims to develop new or improved products, processes, or software.

• Use a process of experimentation to resolve technological uncertainties.

• Incur qualified research expenses (QREs), including wages paid to R&D employees, supplies used in the research process, and contract research expenses.

How do you apply for the Massachusetts R&D tax credit?

To apply for the Massachusetts R&D tax credit, your business must follow these steps:

1. Identify your qualified research activities (QRAs)

First, review your internal projects and expenses to ensure they meet the eligibility criteria listed above.

2. Calculate the credit amount

As a for-profit business, there are two ways to calculate your credit amount:

10% of current-year QREs

Under this method, you can claim 10% of your QREs incurred in Massachusetts during the tax year.

For example, if your company spent $3 million on QREs, the credit calculation is simply:

$3m x 10% = $300k

Alternative incremental credit method (5% of excess QREs)

For businesses with a long history of R&D expenses, Massachusetts allows an alternative method where you can claim 5% of the QREs that exceed a base amount. This is somewhat similar to the federal alternative simplified credit (ASC) method.

To determine the base amount, calculate your average gross receipts over the past four years and apply a fixed-base percentage of 3%.

For instance, if your average is $50 million, your base amount would be:

$50m x 3% = $1.5m

Next, subtract this from your current-year QREs to determine your incremental QREs. For example, if your QREs are $3 million:

$3m - $1.5m = $1.5m

Finally, apply the 5% rate to calculate the final credit:

$1.5m x 5% = $75,000

3. File Schedule RC

Include Schedule RC (Research Credit) with your Massachusetts corporate or personal income tax return (depending on your business structure).

4. Apply any unused credits

If the income tax liability is insufficient, your business can carry forward your unused credits for up to 15 years.

5. Maintain proper documentation

Ensure that you keep detailed records of your R&D activities, expenses, and employee roles in case of an audit. Specifically, you should aim to:

• Maintain organized records. Keep thorough documentation of your projects, expenses, employee activities, and research methodologies.

• Track R&D expenses separately. If possible, maintain a separate ledger for R&D costs, making it easier to verify during an audit.

• Use time-tracking systems. If wages are part of your claim, ensure employees log the time spent on R&D projects.

• Retain supporting documents. To help validate your claim, keep supporting records such as contracts, invoices, prototypes, test results, and meeting notes.

Can you claim the federal R&D tax credit and the Massachusetts R&D tax credit together?

Yes, your business can claim both the federal and Massachusetts R&D tax credits. However, you must ensure that expenses claimed at the federal level are adjusted accordingly when calculating the state credit.

Massachusetts also provides an alternative calculation method similar to the federal alternative simplified method, making it easier for your business to determine your credit amount.

To learn more about claiming the federal R&D tax credit, check out our in-depth guide below:

Tax and Compliance —

6 min

How to claim the R&D tax credit in the US

The research and development (R&D) tax credit is a highly useful relief for many US businesses. Learn how to claim it in our in-depth guide.

Is the Massachusetts R&D tax credit worth it?

If your business engages in any kind of innovative research, the Massachusetts R&D tax credit can potentially provide a major financial advantage. However, to make the process efficient and simple, you need to keep full track of the compensation you’re paying to the employees who are contributing to your QRAs.

As a fully automated payroll system, Remote Payroll can provide you with this information quickly and accurately, making it more simple to calculate your eligible costs. Our system also enables your people to track their hours, improving the accuracy and validity of your claims.

To learn more about how we can help — and how we can simplify your entire payroll management system — speak to one of our friendly experts today.

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