Short answer. Pennsylvania pays 20 percent to a small business with under $5 million in assets and 10 percent to everyone else, on research spending over a base. The credits are transferable, so a company with no Pennsylvania tax can sell them for cash, but a competitive annual cap prorates every award.
Key facts
| Rate (small business) | 20% (assets under $5M) |
|---|---|
| Rate (all others) | 10% |
| Base | Greater of 50% of current QRE or the 4-year average |
| Refundable | No, but credits are transferable (sellable) |
| Annual cap | $60M pool, prorated ($12M reserved for small business) |
20 percent or 10 percent
Your rate depends on the net book value of your assets.
A small business, meaning a for-profit entity with net book value of assets under $5 million, earns 20 percent. Most early-stage and growth-stage software companies fall here. Everyone at $5 million or more earns 10 percent. The credit at Act 7 of 1997 applies to Pennsylvania qualified research expenses above a base, where the base is the greater of 50 percent of the current year's Pennsylvania QRE or the average of the prior four years' Pennsylvania QRE.
The Pennsylvania qualified expense definition follows federal Section 41, limited to research conducted in Pennsylvania.
The competitive cap, and what it does to the rate
Pennsylvania's credit is unusual: it is competitive, so the rate on paper is not what you receive.
The state allocates a fixed annual pool, $60 million in recent years, with $12 million reserved for small business applicants. When the credits applied for exceed the pool, every award is prorated. For 2024, the pro-rata rate for non-small businesses was 41.1 percent, so a computed $100,000 credit became about $41,100 awarded. The small business set-aside historically prorates less severely.
Selling the credit
Pennsylvania lets you turn an unused credit into cash.
The credit is transferable. A company with a computed Pennsylvania credit but no Pennsylvania tax liability can sell it to another Pennsylvania taxpayer, typically at 85 to 95 percent of face value. The credit is computed on Form REV-545. For an early-stage company, the sale is what makes the credit worth claiming.
More on Pennsylvania's R&D credit
The full state overview, the federal Section 41 work it builds on, and related state guides:
Sources
Every claim on this page traces to a primary authority. Each source below is independent and verifiable.
- Pennsylvania Department of Revenue, Research and Development Tax Credit Program (Act 7 of 1997) - Pennsylvania Department of Revenue
- 26 U.S.C. ยง 41 (credit for increasing research activities) - Cornell Law School, Legal Information Institute
- IRS, About Form 6765 - Internal Revenue Service
Get documentation built to survive an exam
R&D Binder produces the federal Section 41 binder and the Pennsylvania state workpaper from one engagement, both built to survive an exam.