Short answer. You can claim both. Pennsylvania runs its own credit, 10 percent of the increase in your Pennsylvania research over a base, or 20 percent for a small business, separate from the federal Section 41 credit, so the same in-state work earns both. The credit is not refundable, but Pennsylvania lets you sell unused credit for cash, and it is awarded by application against a statewide cap.
Key facts
| Claim both? | Yes, on the same Pennsylvania research |
|---|---|
| Federal rate | 20% regular / 14% ASC |
| Pennsylvania rate | 10% of the increase, or 20% for a small business |
| Pennsylvania refundable? | No, but unused credit can be sold for cash |
| Forms | Form 6765 (federal) + an annual application to the Department of Revenue (by December 1) |
Two credits on the same research
Pennsylvania computes its own credit on Pennsylvania expenses, but you apply for it; the federal credit is claimed on your return.
The federal Section 41 credit is claimed on Form 6765 with your federal return. The Pennsylvania credit is awarded through an annual application to the Department of Revenue, and the same research performed in Pennsylvania can support both.
Pennsylvania uses the federal Section 41(b) definition of qualified research expenses but applies its own rate to the increase in your Pennsylvania research, so the federal work is the basis for the state claim.
Federal Section 41 vs. Pennsylvania, factor by factor
Pennsylvania awards the credit by application against a cap, and lets companies sell what they cannot use.
| Factor | Federal Section 41 | Pennsylvania |
|---|---|---|
| What it is | Credit for increasing research activities | Pennsylvania research and development tax credit |
| Credit rate | 20% regular / 14% ASC | 10% of the increase over a base, or 20% for a qualified small business (assets under $5M) |
| Refundable | No - a QSB may offset up to $500,000 of payroll tax under Section 41(h) | No, but unused credit can be sold or assigned for cash |
| Carryforward | 20 years, with a 1-year carryback | 15 years, no carryback |
| Where research must occur | United States | Pennsylvania only |
| How you claim it | Form 6765 with the federal return | Apply to the Department of Revenue by December 1; awards are capped and prorated |
| Claim alongside the other? | Yes, on the same underlying QRE | Yes, on the same underlying QRE |
| Documentation | Four-part test and QRE substantiation (Treas. Reg. 1.41-4) | Uses the Section 41(b) definition, Pennsylvania research only |
Where Pennsylvania differs from federal
Two features set Pennsylvania apart from the federal credit.
Apply, and sell what you cannot use. The federal credit is claimed on your return; Pennsylvania requires an annual application by December 1 for the prior year's expenses, and because the program has a fixed statewide cap, awards are prorated. Unused credit can be sold or assigned to another taxpayer for cash, which is how unprofitable companies monetize it.
Higher rate for small business. A qualified small business with assets under $5 million earns 20 percent rather than 10 percent on the increase in Pennsylvania research. Only in-state research counts, and unused credit carries forward 15 years.
One evidence base for both
The records that prove the federal claim are what Pennsylvania relies on too.
Because Pennsylvania uses the federal Section 41(b) definition of qualified research expenses and requires the federal credit detail, the four-part test analysis and the wage, contractor, and supply records that substantiate your federal credit under Treas. Reg. 1.41-4 are the same records Pennsylvania relies on, limited to the in-state share.
R&D Binder documents the federal Section 41 four-part test that both credits stand on, with Pennsylvania handled as a state add-on from the same evidence. Whether your facts qualify, and which credits to claim, is a determination for your CPA.
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. § 41 (credit for increasing research activities) - Cornell Law School, Legal Information Institute
- IRS, About Form 6765 - Internal Revenue Service
- Treas. Reg. § 1.41-4 (recordkeeping and substantiation of qualified research) - Cornell Law School, Legal Information Institute
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.