4 Biggest Tech Hubs in the US with R&D Credits

7 minute read

Starting a new tech company can be a large undertaking and deciding where the business will be located can have significant consequences on future tax liability and exposure the company may face. Companies that conduct a significant amount of research and development (R&D) for their operations should determine how they can benefit from various R&D tax credit incentives.

Along with the federal R&D tax credit, most states offer their own R&D tax credits that businesses can utilize for “qualifying research activities.” What constitutes a qualifying research activity is different in each state, but states often base their regulations on federal regulations. Notably, most states’ R&D tax credits are only applicable for qualifying activities that occur within said state. However, exceptions may apply depending on the business’ circumstances and the state’s specific regulations.

Here are four of the best states for businesses to take advantage of the R&D tax credit benefits:

1. California

When people think of the best tech hubs in the United States, California is almost instinctively the first location to come to mind. Since Silicon Valley hosts some of the largest tech companies in the world—including Facebook, Google, Intel, Apple, etc.—California is a natural fit for most tech companies. One notable drawback is that California, especially the Los Angeles area, can be an expensive place to establish a physical headquarters.

California’s R&D tax credit (RDC) consists of two distinct credits: the Qualified Research Credit and the Basic Research Credit. The RDC as a whole is equal to 15% of the excess of “qualified research expenses” over a computed base amount, plus 24% of “basic research payments” over a computed base amount. As the name suggests, the Qualified Research Credit portion is available for certain types of research activities California lists as qualified activities. The Basic Research Credit is available for specific types of research activities completed by selected third-party entities on behalf of the company.

2. Texas

With a low cost of living, no state income tax, and an abundance of space to build a physical headquarters, Texas has increasingly become a popular state for tech startups to create a home base. Many of the large tech companies you see in Silicon Valley have a significant presence in Texas as well—specifically in Austin. Oracle, Tesla, and Hewlett-Packard are just a few of the tech companies that recently elected to move to Texas.

In Texas, companies are able to claim either a Franchise Tax Credit or a Sales Tax Exemption for certain qualifying research expenses that occurred within the state. The R&D credit amount is equal to 5% of the difference between the company’s qualified research expenses for the tax year and the 50% average of qualified research expenses for the three immediate prior tax years. If a company does not have qualified research expenses within any of the three prior tax years, a company can still utilize the R&D tax credit at a reduced rate of 2.5% of that year’s qualified research expenses.

In late 2021 Texas heavily amended the rules and regulations surrounding the R&D tax credit. Now, the R&D tax credit does not apply to any research done towards internal-use software developed by companies. The new rules provide specific guidance on what software is and is not considered internal use. Companies in Texas or considering creating their home base in Texas should review the new rules in-depth to properly assess tax liability.

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3. New York

Similar to California, New York boasts several key industry players in the tech scene. While the cost of living and the average salary in New York are high, the state offers several incentives that a tech startup should consider when determining whether to form in New York. For example, New York’s R&D tax credit, the Excelsior Research and Development Tax Credit, is equal to 50% of a company’s federal R&D credit, subject to a limit of up to 8% of R&D costs that occurred in the state. New York also offers the Life Sciences R&D tax credit, available to new businesses that are certified as a qualified life sciences company. The credit equals either:

  1. 15% of the company’s R&D expenditures in New York State for a company that employs 10 or more persons; or
  2. 20% of the company’s R&D expenditures in New York State for a company that employs fewer than 10 persons.

4. Massachusetts

Although not as iconic as New York or California, Massachusetts should not be overlooked. On the contrary, Massachusetts offers significant benefits to new and young businesses. Massachusetts continues to have a large tech company presence, with major companies like TripAdvisor, WayFair, and Chewy headquartered in the state.

The Massachusetts R&D tax credit closely mirrors the federal R&D tax credit, and the credit is only available to research conducted in Massachusetts. The available credit equals 10% of the difference between the current tax year’s qualified research expenses and a calculated base amount, plus 15% of the basic research payments in Massachusetts for the tax year. The credit cannot exceed the first $25,000 of corporate excise tax due, plus 75% of any excise tax due above $25,000.

Next Steps

Choosing where to headquarter a tech startup is a great opportunity to set your company up for success by lowering tax exposure and taking advantage of state and local tax benefits. Knowing which states provide significant advantages for your tech startup, especially in regard to utilizing R&D tax credits, brings the company closer to achieving its goals. Calculate your R&D tax credit quickly and easily using Corvee.

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