SENATE BILL

No. 670 Session of 2005

INTRODUCED BY WONDERLING, PICCOLA, WENGER, CORMAN, COSTA, ORIE, M. WHITE, RHOADES, ERICKSON, ARMSTRONG, C. WILLIAMS, BOSCOLA, WAUGH, GREENLEAF, GORDNER, RAFFERTY, KITCHEN, EARLL, PIPPY, THOMPSON AND D. WHITE, MAY 10, 2005 REFERRED TO FINANCE, MAY 10, 2005 AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An act relating to tax reform and State taxation by codifying and enumerating certain subjects of taxation and imposing taxes thereon; providing procedures for the payment, collection, administration and enforcement thereof; providing for tax credits in certain cases; conferring powers and imposing duties upon the Department of Revenue, certain employers, fiduciaries, individuals, persons, corporations and other entities; prescribing crimes, offenses and penalties," further providing for the definition of "small business," for credit for research and development expenses, for carryover, carryback, refund and assignment of credit, for time limitations, for limitation on credits and for termination.

The General Assembly of the Commonwealth of Pennsylvania hereby enacts as follows: Section 1 . The definition of "small business" in section 1702-B of the act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of 1971, added May 7, 1997 (P.L.85, No.7), is amended to read: Section 1702-B. Definitions.-The following words and phrases, when used in this article, shall have the meanings given to them in this section, except where the context clearly indicates a different meaning: "Small business." A for-profit corporation, limited liability company, partnership or proprietorship with net book value of assets totaling, at the beginning or end of the taxable year for which Pennsylvania qualified research and development expense is incurred, as reported on the balance sheet, less than five million dollars ($5,000,000).]

Section 2 . Section 1703-B of the act, added May 7, 1997 (P.L.85, No.7), is amended to read: Section 1703-B. Credit for Research and Development Expenses.

(a) A taxpayer who incurs Pennsylvania qualified research and development expense in a taxable year may [apply for] incur a research and development tax credit as provided in this article. [By September 15, a taxpayer must submit an application to the department for Pennsylvania qualified research and development expense incurred in the taxable year that ended in the prior calendar year.]

(b) A taxpayer that is qualified under subsection (a) shall receive a research and development tax credit for the taxable year in the amount of ten per cent of the excess of the taxpayer's total Pennsylvania qualified research and development expense for the taxable year over the taxpayer's Pennsylvaniabase amount. (c) [By December 15 of the calendar year following the close of the taxable year during which the Pennsylvania qualified research and development expense was incurred, the department shall notify the taxpayer of the amount of the taxpayer's research and development tax credit approved by the department.]

Section 3 . Section 1704-B of the act, amended December 23, 2003 (P.L.250, No.46), is amended to read: Section 1704-B. Carryover, Carryback, Refund and Assignment of Credit.

(a) If the taxpayer cannot use the entire amount of the research and development tax credit for the taxable year in which the research and development tax credit is first approved, then the excess may be carried over to succeeding taxable years and used as a credit against the qualified tax liability of the taxpayer for those taxable years. Each time that the research and development tax credit is carried over to a succeeding taxable year, it is to be reduced by the amount that was used as a credit during the immediately preceding taxable year. The research and development tax credit provided by this article may be carried over and applied to succeeding taxable years for no more than fifteen taxable years following the first taxable year for which the taxpayer was entitled to claim the credit.

(b) A research and development tax credit [approved by the department] for Pennsylvania qualified research and development expense in a taxable year first shall be applied against the taxpayer's qualified tax liability for the current taxable year as of the date on which the credit was approved before the research and development tax credit is applied against any tax liability under subsection (a).

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

(d) A taxpayer, upon application to and approval by the Department of Community and Economic Development, may sell or assign, in whole or in part, a research and development tax credit granted to the taxpayer under this article if no claim for allowance of the credit is filed within one year from the date the credit is approved by the department under section 1703-B. The Department of Community and Economic Development shall establish guidelines for the approval of applications under this subsection.

(e) The purchaser or assignee of a portion of a research and development tax credit under subsection (d) shall immediately claim the credit in the taxable year in which the purchase or assignment is made. The amount of the research and development credit that a purchaser or assignee may use against any one qualified tax liability may not exceed seventy-five per cent of such qualified tax liability for the taxable year. The purchaser or assignee may not carry over, carry back, obtain a refund of or assign the research and development tax credit. The purchaser or assignee shall notify the department of the seller or assignor of the research and development tax credit in compliance with procedures specified by the department.

Section 4 . Section 1707-B of the act, amended June 29, 2002 (P.L.559, No.89), is amended to read: Section 1707-B. Time Limitations.--[A taxpayer is not entitled to a research and development tax credit for Pennsylvania qualified research and development expenses incurred in taxable years ending after December 31, 2006.] The termination date in section 41(h) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 41(h)) does not apply to a taxpayer who is eligible for the research and development tax credit under this article for the taxable year in which the Pennsylvania qualified research and development expense is incurred.

Section 5 . Section 1709-B of the act, amended or added May 30 7, 1997 (P.L.85, No.7) and December 23, 2003 (P.L.250, No.46), is amended to read: [Section 1709-B. Limitation on Credits.

(a) The total amount of credits approved by the department shall not exceed thirty million dollars ($30,000,000) in any fiscal year. Of that amount, six million dollars ($6,000,000) shall be allocated exclusively for small businesses. However, if the total amounts allocated to either the group of applicants exclusive of small businesses or the group of small business applicants is not approved in any fiscal year, the unused portion will become available for use by the other group of qualifying taxpayers.

(b) If the total amount of research and development tax credits applied for by all taxpayers, exclusive of small businesses, exceeds the amount allocated for those credits, then the research and development tax credit to be received by each applicant shall be the product of the allocated amount multiplied by the quotient of the research and development tax credit applied for by the applicant divided by the total of all research and development credits applied for by all applicants, the algebraic equivalent of which is:

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

(c) If the total amount of research and development tax credits applied for by all small business taxpayers exceeds the amount allocated for those credits, then the research and development tax credit to be received by each small business applicant shall be the product of the allocated amount multiplied by the quotient of the research and development tax credit applied for by the small business applicant divided by the total of all research and development credits applied for by all small business applicants, the algebraic equivalent of which is:

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

Section 6 . Section 1712-B of the act, amended June 29, 2002 (P.L.559, No.89), is amended to read: [Section 1712-B. Termination.-The department shall not approve a research and development tax credit under this article for taxable years ending after December 31, 2006.]

Section 7 . The amendment of the definition of "small business" in section 1702-B of the act and the amendment of sections 1703-B, 1704-B, 1707-B, 1709-B and 1712-B of the act shall apply to fiscal years beginning on and after July 1, 2005.

Section 8 . This act shall take effect immediately.

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