Virginia’s R&D tax credits have expired. For taxable years beginning on or after January 1, 2025, Virginia businesses generally can no longer earn the state Research and Development Expenses Tax Credit or the Major Research and Development Expenses Tax Credit. (Virginia Code §58.1-439.12:08; Virginia Code §58.1-439.12:11)
That does not make the issue irrelevant.
Businesses may still need to claim or track already certified 2024 credits, use Major R&D Credit carryforwards, reconcile pass-through allocations, support prior-year filings, or evaluate whether the same activity qualifies for the federal R&D credit.
This guide explains how Virginia’s R&D credits worked, why they expired, what qualified, and what Virginia businesses should do now.
Key Takeaways
- Virginia offered two R&D tax credits for the last eligible tax year: the Research and Development Expenses Tax Credit – often called the Minor R&D Credit or RDC – and the Major Research and Development Expenses Tax Credit – often called the Major R&D Credit or MRD.
- The Minor R&D Credit generally applied to businesses with Virginia qualified research expenses of $5 million or less.
- The Major R&D Credit generally applied to businesses with Virginia qualified research expenses in excess of $5 million.
- The Minor Credit was refundable, which made it especially valuable for startups and growth-stage companies with little or no Virginia income tax liability.
- The Major Credit was non-refundable, but unused amounts could generally be carried forward for up to 10 years.
- Qualified activities had to satisfy the federal four-part test under IRC Section 41(d) and also meet Virginia-specific requirements.
- The last eligible tax year was 2024, because Virginia’s R&D credits applied only to taxable years beginning before January 1, 2025.
- The final application deadline for 2024 credits was September 1, 2025.
- A missed Virginia application deadline is not automatically fixed by amending a tax return.
- Virginia and federal R&D credits are separate, and businesses may still be able to claim the federal R&D credit for open years.
- Even though the Virginia credit is currently expired, businesses should still document R&D activity carefully, especially if the federal credit applies or Virginia restores the credit in a future legislative session.
What Was the Virginia R&D Tax Credit?
The Virginia R&D tax credit was a state incentive designed to reward businesses for conducting qualified research activities in Virginia. It mattered because it could reduce Virginia tax liability and, in some cases, generate a cash refund.
The goal was simple: encourage businesses to invest in innovation, technical development, and in-state research activity.
Virginia had two separate R&D credit programs:
- The Research and Development Expenses Tax Credit, commonly called the Minor R&D Credit or RDC
- The Major Research and Development Expenses Tax Credit, commonly called the Major R&D Credit or MRD
Both credits expired for taxable years beginning on or after January 1, 2025, unless Virginia law changes. (Virginia Code §58.1-439.12:08; Virginia Code §58.1-439.12:11)
Who This Guide Is For
This guide is for:
- Virginia businesses that developed or improved products, software, formulas, processes, or techniques in prior years
- Startups reviewing whether prior-year R&D activity may have produced a credit
- Manufacturers, software companies, engineering firms, contractors, and technical service providers
- Businesses that already received a Virginia R&D credit certification and need to understand how the credit works
- Businesses with Major R&D Credit carryforwards
- Pass-through owners trying to understand prior-year Virginia credit allocations
- Tax leaders reviewing whether federal R&D credit opportunities still exist
This guide is not for:
- Businesses looking for a currently active Virginia R&D credit for 2025 or 2026
- Companies hoping to file a fresh 2024 Virginia R&D application after the deadline
- Businesses doing only routine production or quality control
- Companies performing research fully funded by customers where they bore no financial risk
- Companies that missed the Virginia application deadline and assume an amended return automatically fixes the issue
What Were Virginia’s Two R&D Credits?
Virginia had two separate R&D credit programs, and which one applied depended mainly on your level of Virginia qualified research expenses.
Minor R&D Credit – Form RDC
The Minor R&D Credit was aimed at small and mid-sized businesses with Virginia qualified research expenses of $5 million or less.
Key features included:
- Credit rate of 15% of the first $300,000 in Virginia QREs over the base amount
- 20% rate if the research was conducted with a Virginia college or university
- Basic maximum credit of $45,000, or $60,000 with a university partnership
- Refundable treatment, meaning excess credit could be paid as cash
- Filed on Form RDC
- Statewide annual cap of $15.77 million for the 2024 credit year
Virginia also had a supplemental-credit mechanism if the statewide cap was not fully used. That could provide an additional benefit to approved taxpayers, but the basic per-taxpayer credit cap was generally $45,000, or $60,000 with qualifying Virginia university research. (2024 Form RDC)
The refundability was a major advantage. A startup with little or no Virginia tax liability could still potentially receive real cash value from the credit if it properly applied and was approved.
Major R&D Credit – Form MRD
The Major R&D Credit was built for larger research spenders with Virginia qualified research expenses in excess of $5 million.
Key features included:
- Credit rate of 10% of the first $1 million of adjusted Virginia QREs
- 5% of adjusted Virginia QREs above $1 million
- Maximum credit of $300,000, or $400,000 with a university partnership
- Non-refundable
- Could generally offset up to 75% of Virginia tax liability per year
- Unused credit could generally be carried forward for up to 10 years
- Filed on Form MRD
- Statewide annual cap of $16 million for the 2024 credit year
For taxpayers without Virginia qualified research expenses in any one of the three preceding taxable years, the Major Credit generally used a different calculation: 5% of current-year Virginia QREs. (Virginia Code §58.1-439.12:11)
Side-by-Side Comparison
| Feature | Minor Credit – RDC | Major Credit – MRD |
|---|---|---|
| Who qualified | Businesses with VA QREs of $5M or less | Businesses with VA QREs over $5M |
| Credit rate | 15% of first $300k in QREs over base; 20% with VA university | 10% of first $1M of adjusted QREs; 5% above $1M |
| Maximum credit | $45k standard; $60k with university partnership, before potential supplemental credit | $300k standard; $400k with university partnership |
| Refundable? | Yes | No |
| Annual tax liability offset | Refundable; excess may be paid as cash | Up to 75% of tax liability per year |
| Carryforward | Not the main feature because refundable | Up to 10 years |
| Statewide annual cap | $15.77M | $16M |
| Form used | Form RDC | Form MRD |
| Application deadline | September 1 of following year | September 1 of following year |
| Last eligible tax year | 2024 | 2024 |
What Qualified as R&D Under Virginia Law?
Virginia generally followed the federal R&D framework under IRC Section 41(d). That means an activity typically had to meet the federal four-part test to qualify. (Virginia Code §58.1-439.12:08)
The Four-Part Test
To qualify, research generally had to:
- Be intended to create a new or improved business component
- Be technological in nature
- Involve the elimination of technical uncertainty
- Substantially rely on a process of experimentation
If your work involved designing, testing, modeling, evaluating alternatives, or iterating to solve a technical challenge, it may have qualified.
The key word is technical.
A business does not qualify just because it tried something new, launched a product, customized something for a customer, or made a business process more efficient. The activity generally needs to involve uncertainty about capability, method, design, or technical performance.
Virginia-Specific Requirements
Virginia also imposed additional guardrails. In general, the work needed to:
- Be conducted in Virginia
- Involve expenses that qualified as Virginia QREs
- Be performed where the taxpayer bore the financial risk
That last point matters. If a customer fully funded the work and your company had no real economic risk, the activity may not have qualified. This is especially important for contractors, software developers, engineering firms, and businesses doing client-specific technical work.
What Counts as a Qualified Research Expense?
Qualified research expenses often included:
- Wages for employees directly performing qualified research
- Wages for employees directly supervising qualified research
- Wages for employees directly supporting qualified research
- Supplies used in qualified research
- Certain contract research expenses, depending on the facts
The strongest claims usually tie wages and project records directly to experimentation, technical challenges, and documented development efforts.
What Does Not Qualify?
Some activities are commonly mistaken for R&D but usually do not qualify.
These often include:
- Post-commercialization research
- Routine quality control testing
- Customer-specific adaptations that do not involve real technical uncertainty
- Funded research where the taxpayer does not bear financial risk
- Social science or market research
- Cosmetic or stylistic changes
- Simple data collection
- Routine debugging or maintenance
The decision rule is simple: if the work is routine, cosmetic, fully funded by someone else, or not tied to technical uncertainty, it is less likely to qualify.
Does Your Business Actually Qualify? Real Examples by Industry
Software and Technology Companies
Software development can qualify when teams are solving technical uncertainty.
Examples may include:
- Building a new platform architecture
- Improving database performance
- Creating proprietary algorithms
- Solving scalability issues
- Developing complex integrations
- Testing different technical approaches to improve speed, reliability, or security
A company writing simple brochure websites or making minor cosmetic changes usually has a weaker claim. A company building complex integrations, new infrastructure, or novel functionality has a much stronger one.
Defense Contractors and Engineering Firms
Engineering work may qualify when teams are developing prototypes, evaluating competing technical solutions, or testing performance under demanding specifications.
But funded contract research can be tricky. If the client bears the risk and pays regardless of success, eligibility may be limited.
This does not mean all client-funded work is automatically disqualified. It means the contract terms, payment structure, rights to the research, and economic risk need to be reviewed carefully.
Manufacturing and Industrial Companies
Manufacturers often overlook credits tied to process improvement.
Potentially qualifying activities may include:
- Designing new tooling
- Reducing defects through experimentation
- Testing production methods
- Developing improved materials
- Improving yield, durability, speed, or reliability through technical trials
Routine production runs and standard quality checks usually do not qualify. Pilot runs and iterative technical trials are much more likely to support a credit.
Agricultural Technology and Food Science
Ag-tech and food companies may qualify when they develop new formulations, improve shelf life, optimize production conditions, or test new agricultural systems.
Market preference testing is generally not enough. Technical formulation work and controlled experimentation are much more likely to qualify.
Architecture, Engineering, and Construction
AEC firms sometimes qualify when they solve non-routine engineering challenges, model alternatives, or develop technically complex systems for unique projects.
Basic drafting, standard design replication, and straightforward code compliance work usually are not enough on their own.
How Was the Virginia R&D Credit Calculated?
Virginia generally allowed different calculation approaches. The right method depended on your facts, historical records, and which method produced the better outcome.
Method 1: Regular Credit
For the Minor Credit, the regular credit was based on a percentage of qualified research expenses over a Virginia base amount.
The standard formula was:
- 15% of the first $300,000 in Virginia QREs over the base amount
- 20% if the research involved a Virginia college or university
Example
Suppose a business had:
- Virginia QREs of $400,000
- A Virginia base amount of $150,000
Its excess QREs would be $250,000.
At 15%, the potential Minor Credit would be:
$250,000 × 15% = $37,500
If the business qualified for the university rate, the result could be:
$250,000 × 20% = $50,000
Method 2: Alternative Simplified Method
Virginia also allowed an Alternative Simplified Method.
Under the simplified method, the credit generally equaled 10% of the difference between current-year Virginia QREs and 50% of the average Virginia QREs for the three immediately preceding taxable years.
If the taxpayer did not have Virginia QREs in any one of the three preceding taxable years, the credit generally equaled 5% of current-year Virginia QREs. (Virginia Code §58.1-439.12:08)
This method could be useful when historical base-period records were weak or when the simplified method produced a larger benefit.
This is not the same thing as the federal Alternative Simplified Credit. The Virginia method used its own state-law calculation and rate.
Major Credit Calculation
For the Major Credit, taxpayers with Virginia QREs over $5 million generally calculated adjusted research expenses by comparing current-year Virginia QREs to 50% of the average Virginia QREs from the prior three taxable years.
For 2024, the Major Credit generally equaled:
- 10% of the first $1 million of adjusted Virginia research expenses
- 5% of adjusted Virginia research expenses above $1 million
The credit was capped at $300,000, or $400,000 if the research was conducted with a Virginia college or university. (Virginia Code §58.1-439.12:11)
Why Refundability Mattered
The Minor Credit’s refundability made it unusually valuable in practice.
If a startup generated a $30,000 Minor Credit but had only $5,000 of Virginia tax liability, the excess was not necessarily lost. If properly approved, the difference could potentially be paid as a refund.
For an early-stage company, that cash flow impact could matter far more than a non-refundable state tax offset.
Can You Claim Both the Virginia and Federal R&D Credits?
Yes, in concept. Virginia and federal R&D credits are separate programs, which means the same underlying research expenses may support both credits if the facts meet each program’s rules.
That creates a meaningful stacking opportunity.
One caution: “stacking” means Virginia plus federal. It does not mean the same Virginia expenses can be used for multiple Virginia tax credits. Virginia law generally prohibited using the same R&D expenses as the basis for another Virginia credit. (Virginia Code §58.1-439.12:08; Virginia Code §58.1-439.12:11)
Combined Credit Example
Imagine a Virginia software company with significant qualified wages tied to new product development. If those wages support a federal R&D credit and also qualify for Virginia treatment, the business may benefit twice:
- A federal credit reducing federal tax
- A Virginia credit reducing state tax or generating a refund, depending on the program
But for current years, the Virginia side is the problem. Virginia’s R&D credits have expired for taxable years beginning on or after January 1, 2025. The federal R&D credit may still be available for open years, even if no current Virginia credit exists.
The key is documentation. You need support for the projects, uncertainty, experimentation, employee roles, and expenses.
What Happened to the Virginia R&D Credit After 2024?
Virginia’s R&D credits applied only to taxable years beginning before January 1, 2025.
That means the last eligible tax year was generally 2024.
As of now, Virginia does not have a current standalone R&D credit for 2025 or 2026 taxable years unless the law changes. Businesses should not assume a current-year Virginia R&D credit exists just because the federal R&D credit still exists. (Virginia Code §58.1-439.12:08; Virginia Code §58.1-439.12:11)
What Virginia Businesses Should Do Now That the State Credit Has Expired
If your company performed R&D in Virginia, the immediate question is no longer whether you can file a new 2024 Virginia R&D application. That deadline has passed.
The practical questions are different now.
1. Did You Already Receive a Virginia Credit Certification?
If you timely applied and received a Virginia credit certification, confirm how the credit was claimed on the return.
For the Minor Credit, that may involve confirming the refundable credit treatment.
For the Major Credit, that may involve confirming the amount used, the 75% tax liability limitation, and any carryforward.
2. Did You Claim the Credit Correctly on the Return?
A certified credit still has to be properly reported.
Businesses should confirm:
- The correct form was used
- The approved amount matches the Virginia certification
- Pass-through allocations were handled correctly
- Carryforwards were tracked correctly
- Refundable versus non-refundable treatment was applied correctly
3. Did You Miss the Virginia Application Deadline?
If you missed the Virginia application deadline, do not assume an amended return solves the problem.
The Virginia R&D credits generally required an application and approval process before the credit could be claimed. A normal amended income tax return usually does not replace a missed credit application.
That does not mean all review is pointless. A prior-year review may still be useful for:
- Already certified credits
- Return corrections
- Major Credit carryforwards
- Pass-through allocation issues
- Federal R&D credit opportunities
- Documentation planning if Virginia restores the credit in a future year
4. Should You Review the Federal R&D Credit?
Yes, if the activity is material.
Even though the Virginia credit expired, the federal R&D credit may still be available for open years. Many of the same projects that supported a Virginia claim may also support a federal claim.
That is especially relevant for:
- Software companies
- Manufacturers
- Engineering firms
- Product developers
- Technical contractors
- Companies improving internal systems, processes, or products
The federal credit has its own rules, documentation standards, and tax reporting requirements, but the expiration of the Virginia credit does not automatically kill the federal opportunity.
5. Should You Keep Documenting R&D in 2025 and 2026?
Yes.
Even without a current Virginia credit, businesses should still document R&D activity for at least three reasons:
- The federal R&D credit may still apply.
- Virginia could restore or replace the credit in a future legislative session.
- Good documentation is much easier to build during the project than years later during tax filing or audit review.
Can You Still Claim Missed Virginia Credits from Prior Years?
Possibly, but this is where businesses need to be careful.
For Virginia, the issue is not just whether the tax return year is still open. The R&D credit generally required a separate application process. If the application deadline was missed, an amended return may not be enough.
If you are reviewing prior years, separate the question into three parts:
- Was a timely Virginia R&D credit application filed?
- Was a credit certification issued?
- Was the certified credit properly claimed, refunded, allocated, or carried forward?
If the answer to the first two questions is no, the Virginia opportunity may be closed for that year.
The federal R&D credit is different. If the federal year is still open and the activity qualifies, there may still be an opportunity to review or amend the federal return.
Common Mistakes to Avoid
- Assuming only labs or scientists qualify
- Excluding software development without reviewing technical uncertainty
- Treating all client work as disqualified without analyzing financial risk
- Claiming routine quality control as R&D
- Missing the distinction between refundable and non-refundable credits
- Ignoring university partnership enhancements
- Assuming an amended Virginia return fixes a missed application deadline
- Forgetting to track Major Credit carryforwards
- Claiming “innovation” without documenting technical uncertainty
- Waiting too long to gather project records
The businesses that capture these credits usually start with facts, not assumptions.
FAQ: Virginia R&D Tax Credit
Does Software Development for Clients Count as Qualifying R&D?
It can.
If the work involved technical uncertainty and a real process of experimentation, software development may qualify. The biggest issue is often whether the research was funded by the client and whether your company bore financial risk.
Client work is not automatically disqualified. But the contract terms matter.
Can a Startup With No Virginia Tax Liability Benefit from the Minor R&D Credit?
For the years when the Minor Credit was available, yes.
That was one of the most valuable features of the Minor Credit. Because it was refundable, an eligible startup could potentially receive cash even with little or no Virginia income tax liability.
But the credit had to be timely applied for and approved. For 2024 credits, the application deadline was September 1, 2025. (2024 Form RDC)
What Is the Difference Between Claiming the Credit at the Entity Level and Passing It Through to Owners?
That depends on the business structure and how the credit is claimed under Virginia rules.
For C corporations, the credit generally belongs to the corporation.
For pass-through entities, the credit may need to be allocated to owners, partners, members, or shareholders. That creates additional reporting and allocation issues, especially if ownership changed during the year or the Virginia credit does not match the federal tax allocations.
Are Virginia’s R&D Credits Gone for Good?
Not necessarily.
They are currently expired for taxable years beginning on or after January 1, 2025, but future legislation could revive, extend, or replace them.
Businesses should not rely on a future credit until the law changes. But companies with meaningful technical development activity should still keep good records.
How Does the University Partnership Bonus Work?
Virginia offered enhanced benefits when qualified research was conducted with a Virginia college or university.
For the Minor Credit, that could increase the rate from 15% to 20%.
For the Major Credit, that could increase the maximum credit cap from $300,000 to $400,000.
The benefit could be valuable, but the relationship needed to involve qualifying research. Simply hiring students, donating to a university, or having a loose academic connection was not enough.
If I Claim the Federal R&D Credit, Does That Reduce My Virginia Credit?
Not automatically.
Virginia and federal R&D credits were separate programs. The same underlying research expenses could potentially support both credits if each program’s rules were satisfied.
For current years, though, the more important issue is that Virginia’s standalone R&D credits have expired. The federal credit may still exist even when no current Virginia credit is available.
Can I Use the Same Expenses for Another Virginia Credit?
Generally, no.
Virginia law generally prohibited using the same expenses as the basis for both the Virginia R&D credit and another Virginia tax credit. That is separate from federal-state stacking. The same activity may support both a federal R&D credit and a Virginia R&D credit, but the same Virginia expenses generally could not be double-counted for multiple Virginia credits.
Final Thoughts
The Virginia R&D tax credit was one of the more valuable state-level incentives for innovation-driven businesses, especially because the Minor Credit offered refundability.
But the state credit is no longer a current-year planning tool. The last eligible tax year was 2024, and the 2024 application deadline has passed.
That does not mean R&D tax planning is irrelevant.
If your business develops software, improves manufacturing processes, solves engineering problems, or invests in technical innovation, you should still be reviewing R&D activity. The federal credit may still be available, previously certified Virginia credits may need to be claimed or tracked correctly, and good documentation will matter if Virginia restores the credit in the future.
If you only do three things, do these:
- Confirm whether any prior Virginia R&D credit was timely applied for and certified
- Review whether already certified credits were properly claimed, refunded, allocated, or carried forward
- Evaluate whether the same projects support a federal R&D credit claim
For Virginia businesses, the state R&D credit may be expired for now. But the underlying tax issue has not disappeared. Reach out if you need any CPA assistance for your VA business.
