1Amending Title 12 (Commerce and Trade) of the Pennsylvania
2Consolidated Statutes, providing for a research and
3development tax credit; and repealing provisions of the Tax
4Reform Code of 1971 and the Fiscal Code relating to research
5and development tax credit.

6The General Assembly of the Commonwealth of Pennsylvania
7hereby enacts as follows:

8Section 1. Title 12 of the Pennsylvania Consolidated
9Statutes is amended by adding a chapter to read:

10CHAPTER 43

11RESEARCH AND DEVELOPMENT TAX CREDIT

12Sec.

134301. Scope of chapter.

144302. Definitions.

154303. Credit for research and development expenses.

164304. Carryover, carryback, refund and assignment of credit.

174305. Application of Internal Revenue Code.

184306. Determination of qualified research and development

1expenses.

24307. Time limitations.

34308. (Reserved).

44309. Limitation on credits.

54310. Pass-through entity.

64311. Report to General Assembly.

74312. Regulations.

8§ 4301. Scope of chapter.

9This chapter relates to research and development tax credits.

10§ 4302. Definitions.

11The following words and phrases when used in this chapter
12shall have the meanings given to them in this section unless the
13context clearly indicates otherwise:

14"Department." The Department of Revenue of the Commonwealth.

15"Gross receipts." Gross receipts for any taxable year shall
16consist only of gross receipts which are effectively connected
17with the conduct of a trade or business within this
18Commonwealth. The determination of whether gross receipts are
19effectively connected with the conduct of a trade or business
20within this Commonwealth shall be made by reference to the
21standard established in section 401(3)2(a)(16) and (17) of the
22act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code
23of 1971.

24"Internal Revenue Code." The Internal Revenue Code of 1986
25(Public Law 99-514, 26 U.S.C. § 1 et seq.).

26"Pass-through entity." A partnership as defined in section
27301(n.0) of the act of March 4, 1971 (P.L.6, No.2), known as the
28Tax Reform Code of 1971 or a Pennsylvania S corporation as
29defined in section 301(n.1) of the Tax Reform Code.

30"Pennsylvania base amount." Base amount as defined in

1section 41(c) of the Internal Revenue Code of 1986 (Public Law
299-514, 26 U.S.C. § 41(c)), except that references to "qualified
3research expense" shall mean "Pennsylvania qualified research
4and development expense" and references to "qualified research"
5shall mean "Pennsylvania qualified research and development."
6References to "fixed base percentage" shall mean the percentage
7which the Pennsylvania qualified research and development
8expense for the four taxable years immediately preceding the
9taxable year in which the expense is incurred is to the gross
10receipts for such years. The fixed base percentage for a
11taxpayer who has fewer than four but at least one taxable year
12shall be determined in the same manner using the number of
13immediately preceding taxable years to arrive at the percentage.

14"Pennsylvania qualified research and development." Qualified
15research and development as defined in section 41(d) of the
16Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
1741(d)) that is conducted in this Commonwealth.

18"Pennsylvania qualified research and development expense."
19Qualified research expenses as defined in section 41(b) of the
20Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
2141(d)) incurred for Pennsylvania qualified research and
22development.

23"Qualified tax liability." The liability for taxes imposed
24under Article III, IV or VI of the act of March 4, 1971 (P.L.6,
25No.2), known as the Tax Reform Code of 1971. The term shall not
26include any tax withheld by an employer from an employee under
27Article III of the Tax Reform Code of 1971.

28"Research and development tax credit." The credit provided
29under this chapter.

30"Secretary." The Secretary of Revenue of the Commonwealth.

1"Small business." A for-profit corporation, limited
2liability company, partnership or proprietorship with net book
3value of assets totaling, at the beginning or end of the taxable
4year for which Pennsylvania qualified research and development
5expense is incurred, as reported on the balance sheet, less than
6$5,000,000.

7"Taxpayer." An entity subject to tax under Article III, IV
8or VI of the act of March 4, 1971 (P.L.6, No.2), known as the
9Tax Reform Code of 1971. The term shall include the shareholder
10of a Pennsylvania S corporation that receives a research and
11development tax credit.

12"Tax Reform Code." The act of March 4, 1971 (P.L.6, No.2),
13known as the Tax Reform Code of 1971.

14§ 4303. Credit for research and development expenses.

15(a) Application.--A taxpayer who incurs Pennsylvania
16qualified research and development expense in a taxable year may
17apply for a research and development tax credit as provided
18under this chapter. By September 15, a taxpayer must submit an
19application to the department for Pennsylvania qualified
20research and development expense incurred in the taxable year
21that ended in the prior calendar year.

22(b) Amount.--

23(1) Except as provided under paragraph (2), a taxpayer
24that is qualified under subsection (a) shall receive a
25research and development tax credit for the taxable year in
26the amount of 10% of the excess of the taxpayer's total
27Pennsylvania qualified research and development expense for
28the taxable year over the taxpayer's Pennsylvania base
29amount.

30(2) A taxpayer that is a small business and is qualified

1under subsection (a) shall receive a research and development
2tax credit for the taxable year in the amount of 20% of the
3excess of the taxpayer's total Pennsylvania qualified
4research and development expense for the taxable year over
5the taxpayer's Pennsylvania base amount.

6(c) Notification.--By December 15 of the calendar year
7following the close of the taxable year during which the
8Pennsylvania qualified research and development expense was
9incurred, the department shall notify the taxpayer of the amount
10of the taxpayer's research and development tax credit approved
11by the department.

12§ 4304. Carryover, carryback, refund and assignment of credit.

13(a) Carryover.--

14(1) If a taxpayer cannot use the entire amount of the
15research and development tax credit for the taxable year in
16which the research and development tax credit is first
17approved, then the excess may be carried over to succeeding
18taxable years and used as a credit against the qualified tax
19liability of the taxpayer for those taxable years.

20(2) Each time that the research and development tax
21credit is carried over to a succeeding taxable year, it shall
22be reduced by the amount that was used as a credit during the
23immediately preceding taxable year.

24(3) The research and development tax credit may be
25carried over and applied to succeeding taxable years for no
26more than 15 taxable years following the first taxable year
27for which the taxpayer was entitled to claim the credit.

28(b) Application.--A research and development tax credit
29approved by the department for Pennsylvania qualified research
30and development expense in a taxable year first shall be applied

1against the taxpayer's qualified tax liability for the current
2taxable year as of the date on which the credit was approved
3before the research and development tax credit is applied
4against any tax liability under subsection (a).

5(c) Carry back or refund.--A taxpayer is not entitled to
6carry back or obtain a refund of an unused research and
7development tax credit.

8(d) Sale or assignment.--

9(1) A taxpayer, upon application to and approval by the
10Department of Community and Economic Development, may sell or
11assign, in whole or in part, a research and development tax
12credit granted to the taxpayer under this chapter.

13(2) The Department of Community and Economic Development
14shall establish guidelines for the approval of applications
15under this subsection.

16(e) Claim.--

17(1) The purchaser or assignee of a portion of a research
18and development tax credit under subsection (d) shall
19immediately claim the credit in the taxable year in which the
20purchase or assignment is made.

21(2) The amount of the research and development credit
22that a purchaser or assignee may use against any one
23qualified tax liability may not exceed 75% of the qualified
24tax liability for the taxable year.

25(3) The purchaser or assignee may not carry over, carry
26back, obtain a refund of or assign the research and
27development tax credit.

28(4) The purchaser or assignee shall notify the
29department of the seller or assignor of the research and
30development tax credit in compliance with procedures

1specified by the department.

2§ 4305. Application of Internal Revenue Code.

3The provisions of section 41 of the Internal Revenue Code and
4the regulations promulgated regarding those provisions shall
5apply to the department's interpretation and administration of
6the research and development tax credit. References to the
7Internal Revenue Code shall mean the sections of the Internal
8Revenue Code as existing on any date of interpretation of this
9chapter, except that if those sections of the Internal Revenue
10Code referenced in this chapter are repealed or terminated,
11references to the Internal Revenue Code shall mean those
12sections last having full force and effect. If after repeal or
13termination the Internal Revenue Code sections are revised or
14reenacted, references in this chapter to Internal Revenue Code
15sections shall mean those revised or reenacted sections.

16§ 4306. Determination of qualified research and development
17expenses.

18In prescribing standards for determining which qualified
19research and development expenses are considered Pennsylvania
20qualified research and development expenses for purposes of
21computing the research and development tax credit, the
22department may consider:

23(1) The location where the services are performed.

24(2) The residence or business location of the person or
25persons performing the service.

26(3) The location where qualified research and
27development supplies are consumed.

28(4) Other factors that the department determines are
29relevant for the determination.

30§ 4307. Time limitations.

1The termination date in section 41(h) of the Internal Revenue
2Code shall not apply to a taxpayer who is eligible for the
3research and development tax credit for the taxable year in
4which the Pennsylvania qualified research and development
5expense is incurred.

6§ 4308. (Reserved.)

7§ 4309. Limitation on credits.

8(a) Total.--The total amount of credits approved by the
9department shall not exceed $100,000,000 in any fiscal year. Of
10that amount, $15,000,000 shall be allocated exclusively for
11small businesses, except that if the total amounts allocated to
12either the group of applicants exclusive of small businesses or
13the group of small business applicants is not approved in any
14fiscal year, the unused portion shall become available for use
15by the other group of qualifying taxpayers.

16(b) Allocation for taxpayers.--If the total amount of
17research and development tax credits applied for by all
18taxpayers, except for small businesses, exceeds the amount
19allocated for those credits, the research and development tax
20credit to be received by each applicant shall be the product of
21the allocated amount multiplied by the quotient of the research
22and development tax credit applied for by the applicant divided
23by the total of all research and development credits applied for
24by all applicants, the algebraic equivalent of which is:

25taxpayer's research and development tax credit = amount
26allocated for those credits X (research and development tax
27credit applied for by the applicant/total of all research and
28development tax credits applied for by all applicants).

29(c) Allocation for small business taxpayers.--If the total
30amount of research and development tax credits applied for by

1all small business taxpayers exceeds the amount allocated for
2those credits, the research and development tax credit to be
3received by each small business applicant shall be the product
4of the allocated amount multiplied by the quotient of the
5research and development tax credit applied for by the small
6business applicant divided by the total of all research and
7development credits applied for by all small business
8applicants, the algebraic equivalent of which is:

9taxpayer's research and development tax credit = amount
10allocated for those credits X (research and development tax
11credit applied for by the small business/total of all
12research and development tax credits applied for by all small
13business applicants).

14§ 4310. Pass-through entity.

15(a) Election.--If a pass-through entity has any unused tax
16credit under section 4304 (relating to carryover, carryback,
17refund and assignment of credit), the entity may elect in
18writing according to the department's procedures, to transfer
19all or a portion of the credit to shareholders, members or
20partners in proportion to the share of the entity's distributive
21income to which the shareholder, member or partner is entitled.

22(b) Additional credit.--The credit provided under subsection
23(a) shall be in addition to any research and development tax
24credit to which a shareholder, member or partner of a pass-
25through entity is otherwise entitled under this chapter, except
26that a pass-through entity and a shareholder, member or partner
27of a pass-through entity may not claim a credit under this
28chapter for the same qualified research and development expense.

29(c) Claim.--A shareholder, member or partner of a pass-
30through entity to whom credit is transferred under subsection

1(a) must immediately claim the credit in the taxable year in
2which the transfer is made. The shareholder, member or partner
3may not carry forward, carry back, obtain a refund of or sell or
4assign the credit.

5§ 4311. Report to General Assembly.

6The secretary shall submit an annual report to the General
7Assembly indicating the effectiveness of the credit provided
8under this chapter no later than March 15 following the year in
9which the credits were approved. The report shall include the
10names of all taxpayers utilizing the credit as of the date of
11the report and the amount of credits approved and utilized by
12each taxpayer. Notwithstanding any law providing for the
13confidentiality of tax records, the information contained in the
14report shall be public information. The report may also include
15any recommendations for changes in the calculation or
16administration of the credit.

17§ 4312. Regulations.

18The secretary shall promulgate regulations necessary for the
19implementation and administration of this chapter.

20Section 2. Repeals are as follows:

21(1) The General Assembly declares that the repeal under
22paragraph (2) is necessary to effectuate the addition of 12
23Pa.C.S. Ch. 43.

24(2) Article XVII-B of the act of March 4, 1971 (P.L.6,
25No.2), known as the Tax Reform Code of 1971, is repealed.

26Section 3. The addition of 12 Pa.C.S. Ch. 43 is a
27continuation of Article XVII-B of the act of March 4, 1971
28(P.L.6, No.2), known as the Tax Reform Code of 1971. The
29following apply:

30(1) Except as otherwise provided in 12 Pa.C.S. Ch. 43,

1all activities initiated under Article XVII-B of the Tax
2Reform Code of 1971 shall continue and remain in full force
3and effect and may be completed under 12 Pa.C.S. Ch. 43.
4Orders, regulations, rules and decisions which were made
5under Article XVII-B of the Tax Reform Code of 1971, and
6which are in effect on the effective date of section 2(2) of
7this act shall remain in full force and effect until revoked,
8vacated or modified under 12 Pa.C.S. Ch. 43. Contracts,
9obligations and collective bargaining agreements entered into
10under Article XVII-B of the Tax Reform Code of 1971 are not
11affected nor impaired by the repeal of Article XVII-B of the
12Tax Reform Code of 1971.

13(2) Except as set forth in paragraph (3), any difference
14in language between 12 Pa.C.S. Ch. 43 and Article XVII-B of
15of the Tax Reform Code of 1971 is intended only to conform to
16the style of the Pennsylvania Consolidated Statutes and is
17not intended to change or affect the legislative intent,
18judicial construction or administration and implementation of
19Article XVII-B of the Tax Reform Code of 1971.

20(3) Paragraph (2) does not apply to the addition of 12
21Pa.C.S. §§ 4308 and 4309(a).

22Section 4. This act shall take effect in 60 days.