Virginia Research and Development Expenses Tax Credit

Who qualifies

• Must conduct qualified research within Virginia — research expenses for activities outside Virginia do not qualify
• Qualified research must meet the federal §41 four-part test: technological in nature, aimed at developing or improving a business component, involving genuine technical uncertainty, conducted through a process of experimentation
• Virginia QRE is calculated using federal §41 definitions applied to Virginia-located activities: wages, supplies, and 65% of contract research payments
• Available to C-corporations, S-corporations, partnerships, LLCs, and other pass-through entities — broader eligibility than most state R&D credits
• Pass-through entities may allocate credits to partners, members, or shareholders proportionally (or per written agreement), who then claim the credit on their individual Virginia returns
• Two calculation methods available each year — taxpayer elects the more favorable method: (1) volume credit (15–20% on first $300K QRE) or (2) incremental credit (10% of QRE above 50% of three-year average, same annual caps)
• Higher rate (20% volume / unchanged incremental cap) applies when research is conducted in cooperation with a Virginia college, university, or other institution of higher education
• Statewide annual cap of $15.77 million (FY2024+) — if total applications exceed the cap, all qualifying credits are prorated proportionally
• Separate September 1 application required — credit cannot be claimed on a tax return without prior Department of Taxation approval

What it covers

How to apply

1. 1

   Identify and document Virginia qualified research expenses

   Start from your federal §41 QRE computation and carve out only expenses for research conducted in Virginia. Wages for employees performing or directly supporting research at Virginia locations, Virginia-purchased supplies, and 65% of payments to Virginia-based contract researchers qualify. If researching with a Virginia university, document the formal research agreement — this triggers the 20% rate vs. 15%.

   ~8 hrs

2. 2

   Choose the volume or incremental credit method

   Model both methods: (1) Volume: 15% (or 20% with VA university) × min(Virginia QRE, $300,000). (2) Incremental: 10% × max(Virginia QRE − 50% of prior 3-year average Virginia QRE, 0), capped at $45,000/$60,000. For companies with <3 years of Virginia QRE history, the incremental rate is 5%. The volume credit is simpler and typically better for companies with stable or declining R&D; the incremental credit benefits high-growth R&D spenders. Both are capped at the same $45K/$60K ceiling.

   ~3 hrs

3. 3

   Submit application to Virginia Department of Taxation by September 1

   File the separate application package with the Virginia Department of Taxation. Applications must be received (not postmarked) by September 1. The application requires documentation of Virginia QRE, the elected calculation method, and evidence of any Virginia university partnership. The Department reviews all applications, determines if the aggregate exceeds the $15.77M statewide cap, and issues approval notices specifying the allowed credit amount.

   ~4 hrs

4. 4

   Receive credit approval and claim on Virginia return

   After receiving the Department's credit approval letter, claim the approved credit on your Virginia income tax return (Form 760 for individuals, Form 500 for C-corps, Form 770 for pass-throughs). The credit first offsets any Virginia income tax liability; any excess is refundable — you receive a Virginia tax refund for the amount exceeding your liability.

   ~2 hrs

5. 5

   Pass-through allocation (if applicable)

   If the applicant is a partnership, S-corp, or LLC, compute each partner's/member's/shareholder's share of the credit. Share proportionally by ownership interest unless a written agreement establishes a different allocation. Each individual partner then claims their allocated credit on their Virginia personal income tax return and receives a proportional refund if the credit exceeds their Virginia liability.

   ~3 hrs

Industry & certifications

NAICS codes: 325412, 541714, 541715, 336411, 541511, 541330, 541990, 334516

Deadline & timing

Unlike most state R&D credits that are claimed on the tax return, Virginia requires a separate application submitted to the Department of Taxation by September 1 following the tax year end. For calendar-year filers, the 2025 tax year application is due September 1, 2026. The Department reviews applications, allocates the statewide cap, and notifies applicants of their approved credit amount. The approved amount is then claimed on the Virginia income tax return. Fiscal-year filers use the September 1 date following the close of their fiscal year.

Programs that stack well

• Research & Development Tax Credit (Section 41)

Related programs