PA Tax Credits and Deductions for Manufacturers

Date June 5, 2024
Categories
Article Authors
Haley Nicolai

Manufacturing is a significant industry in Pennsylvania.  The state is ranked among the top ten in the country for manufacturing, boasting over 13,000 employers and more than 700,000 workers.  It is also home to some of the largest manufacturing companies, including Merck & Company, East Penn Manufacturing Company, and Boeing Defense, Space and Security, among others. Pennsylvania encourages manufacturing operations through various channels, including by offering certain programs and tax credits to taxpayers that incentivize them to conduct business in the state.

Some of the largest incentives include the following:

  • Manufacturing Tax Credit (MTC) program

  • Research & Development (R&D) tax credit

  • Qualified Manufacturing Innovation and Reinvestment Deduction (QMIRD) program
Manufacturing Tax Credit Program

The Manufacturing Tax Credit Program incentivizes manufacturing companies to create more jobs by offering tax credits to companies that increase their taxable payroll expenses by $1,000,000 annually through the addition of new full-time jobs. To qualify for the credit, the taxpayer must commit to retaining these jobs and payroll costs for at least five years. The tax credit is equal to 5% of the increase, for a minimum of $50,000, and may be used to offset 100% of the entities’ tax liability or 100% of the shareholders’ or partners’ tax liability if the company is a pass-through entity. To claim the credit, taxpayers must complete a Job Record spreadsheet and an application. Credits are issued on a first-come, first-served basis until the Commonwealth reaches the maximum credit payout of $4,000,000 per fiscal year. More information including eligibility and requirements along with the application can be found at https://dced.pa.gov/programs/manufacturing-tax-credit-mtc-program/.

Research & Development Tax Credit

To further economic growth in the state of Pennsylvania, the state offers tax credits to taxpayers who incurred expenses related to research and development within the state. This credit is equal to 10% of the qualified expenses. To qualify for the Pennsylvania Research and Development Tax Credit, taxpayers must be subject to corporate or personal income tax, have qualified research and development expenses, have a minimum of two years of research and development expenditures, and comply with all tax laws and regulations within the state. Qualified expenditures include wages, costs of supplies, rental costs of computers, and contract research expenses. In order for a project to qualify, the following four tests must be met:

  1. Elimination of uncertainty – taxpayer must describe how they attempted to eliminate uncertainty about the development or process improvement.

  2. Process of experimentation – taxpayer must describe the method of experimentation.

  3. Technological in nature – taxpayer must describe how the process relies on engineering, physics, chemistry, biology, or computer science.

  4. Qualified purpose – taxpayer must describe the new or improved product or process created.

The application period for this credit runs from August 1 through December 1 of the tax year and can be found in the taxpayer’s myPATH Portal.

Qualified Manufacturing Innovation and Reinvestment Deduction Program

The QMIRD program was established to provide a tax deduction to manufacturing businesses that are subject to Corporate Net Income Tax in the state of Pennsylvania. To be eligible for this deduction, an entity must be a manufacturer, registered to do business in Pennsylvania, an employer responsible for withholding and remitting individual payroll taxes, and comply with all state laws and regulations.  The company must also have new private capital investments exceeding $60 million used for new or refurbished manufacturing capacity within three years and be able to provide employment figures. If a taxpayer is eligible, they will receive a maximum deduction over ten tax years equal to 37.5% of the capital investment, with 7.5% being the maximum deduction in any one tax year, for investments of $100 million or less. For investments over $100 million, the manufacturer will be eligible for a maximum deduction of 25% over ten years with a maximum deduction in any one year of 5%. This deduction may not reduce the Pennsylvania tax liability by more than 50% and may not be carried forward. For additional guidelines and to apply please visit dced.pa.gov/singleapp.

Pennsylvania shows its commitment to the manufacturing industry through a range of incentive programs and tax credits aimed at prompting growth, fostering innovation, and generating employment opportunities within the state’s thriving manufacturing sector.  Pennsylvania has numerous additional programs to show its dedication to the manufacturing industry. Please contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com for more information or assistance with any of these available programs.

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