Key figures
Pennsylvania advisory
2026, with sources
The R&D credit, and selling it
Pennsylvania’s R&D credit is 10% of the increase in qualified research expenses incurred in Pennsylvania over a base amount, or 20% for a “small” business, defined as one with net book value of assets under $5 million. The program is capped at $60 million a year, with $12 million set aside for small businesses; when requests exceed the cap, awards are prorated, and in recent years total awards have come in well under total requests.
Applications open August 1 and are due December 1, through myPATH, for research in the tax year ending in the prior calendar year. The Department notifies awards by May 1. A company that can’t use its credit applies to DCED to sell or assign it, which is how a loss-making startup turns the credit into cash. Applicants must be in tax compliance; noncompliant applicants receive nothing.
Founders and stock
Pennsylvania does not conform to the federal QSBS exclusion under §1202. A Pennsylvania resident selling founder stock that is fully tax-free federally still reports the gain on the Pennsylvania return at 3.07%. The difference is large enough that it shows up in founders’ planning around an exit.
An example: a Pittsburgh-based founder sells stock with a $5 million gain that qualifies for the full federal exclusion. Federally, the gain is excluded; for Pennsylvania, it is taxable, at 3.07%, about $153,500, before any local tax that applies.
Where founders go wrong
Pennsylvania’s state taxes are moderate; its complexity is local. Most mistakes come from the local earned income tax and from SaaS being taxable.
- Missing local earned income tax for a remote employee because the company has no Pennsylvania office.
- Not collecting sales tax on SaaS sold to Pennsylvania customers.
- Forgetting 3.07% withholding on payments over $5,000 to nonresident contractors for Pennsylvania work.
- Assuming NOLs fully offset the first profitable year.
- Skipping the $7 annual report, which leads to administrative dissolution from 2027.
The federal baseline
This page covers what Pennsylvania adds. The federal rules underneath it apply here too.
Common questions
Can a pre-profit startup get anything from the Pennsylvania R&D credit?
Yes, and that is what makes it useful to a startup. A company that is awarded a Pennsylvania R&D credit and can’t use it can apply to DCED for approval to sell or assign it to another taxpayer. The credit is 10% of the increase in Pennsylvania research spending over a base, or 20% for a small business with less than $5 million of net book assets, and the application is due by December 1.
Does Pennsylvania follow the federal QSBS exclusion?
No. Pennsylvania’s personal income tax does not follow the federal §1202 exclusion, so a Pennsylvania-resident founder who sells qualified small business stock can owe Pennsylvania’s 3.07% (plus any local earned income or net profits tax that applies to that kind of income) on gain that is federally tax-free.
Advisory next door
- DEDelaware advisoryFor most startups Delaware is a corporate-law choice with three running costs: the franchise tax, the annual report and a registered agent. The planning questions are the franchise tax method, unclaimed property, and the R&D credit for any work done in Delaware.
- MDMaryland advisoryMaryland’s R&D credit is 10% over a base and refundable for small businesses. Biotech investors get a refundable credit, and FAMLI adds a payroll cost from January 2027.
- NJNew Jersey advisoryNew Jersey lets startups sell their losses and R&D credits for cash, gives angel investors a 35% refundable credit, and follows federal QSBS from 2026.
- NYNew York advisoryNew York’s incentives are refundable but by application, through Empire State Development. The 2026 budget kept the 7.25% cliff rate, decoupled from R&E expensing, and left QSBS alone.
- OHOhio advisoryOhio’s 7% R&D credit offsets only the CAT, which most startups no longer owe; the advice that matters is about cities, remote hires and the state-run workers’ comp fund.
- WVWest Virginia advisoryWest Virginia’s income tax keeps falling, its R&D credit requires certification before the work, and its 14-day new-hire rule, covering contractors too, catches out-of-state employers.
Founder guides on this
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- EquityStock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- SAFEsHow to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
More of the Pennsylvania guide
- AccountingAccounting and state tax in PennsylvaniaCorporate tax, conformity to federal rules, apportionment and what it does to your books
- ReceivablesReceivables and sales tax in PennsylvaniaSales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesPayables and contractors in PennsylvaniaPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollPayroll taxes and employer rules in PennsylvaniaWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceCompliance and filings in PennsylvaniaRegistering to do business, annual reports, franchise tax and the filing calendar
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.