State R&D Tax Credits
Not only can you qualify for an R&D tax credit at the federal level, but you may also be eligible to capture a benefit at the state level as well. Many states provide benefits that follow the same guidelines and regulations as the federal credit. Still, it is crucial to understand how states can vary in their approach to ensure that your company captures the maximum credit available.
The Three I’s: Illinois, Indiana & Iowa
Illinois Extends the R&D Credit Through 2026: In August, Governor Pritzker signed SB 1591 and extended the Illinois R&D tax credit for an additional five years, allowing business owners to plan for future investment in research and development activities and growth.
The Calculation: The credit, which is non-refundable, is equal to 6.5 percent of the qualifying expenses within Illinois, which exceeds a base amount. The base amount is equal to the average qualifying expenses in the three years immediately preceding the year the credit is applied for.
Additional Areas for Opportunity:The signing of SB 1591 also created an apprenticeship tax credit for companies investing in Related Technical Instruction (RTI) for apprentices. Scheduled to go into effect on January 1, 2020, this tax credit will allow companies to claim a $3,500 income tax credit to help offset educational costs paid to a community college on behalf of an apprentice. This credit allows companies to invest in their current employee development while also growing their R&D capabilities in-house.
Overview: Indiana offers two types of R&D tax credits. Companies may receive a credit against their Indiana income tax liability and receive a refund on sales tax paid on purchases of qualified research equipment.
Research & Expense Credit: The potential value of the credit is equal to the taxpayer’s qualified research expense for the taxable year, minus the base period amount up to one million dollars, multiplied by 15 percent. A credit percentage of up to 10 percent is applied to any excess of qualified research expense over a base period amount greater than one million dollars. For qualifying expenses incurred after December 31, 2009, companies can also use an alternative method to calculate the credit, similar to the Alternative Simplified Credit outlined in the federal regulations. If the company elects this method, the credit is equal to 10 percent of qualifying expenses that exceed 50 percent of the average qualifying expenses for the three prior taxable years. Suppose the company did not have qualifying expenses in any one of those three prior years. In that case, the credit amount is equal to 5 percent of the company's qualifying expenses.
R&D Sales Tax Exemption: There is a 100 percent sales tax exemption for qualified research and development equipment and property purchased. Research and development equipment and property is defined as "tangible personal property that has not previously been used in Indiana for any purpose and is acquired by the purchaser for the purpose of research and development activities devoted to experimental or laboratory research and development for new products, new uses of existing products, or improving or testing existing products." (IC 6-2.5-5-40). The definitions for qualified equipment and research and development activity can be complex, so it is important to consult your tax provider for guidance before claiming the exemption.
Who Qualifies: According to the Iowa Department of Revenue, businesses must be engaged in manufacturing, life sciences, software engineering, or aviation and aerospace to capture an R&D benefit.
The Calculation: The Iowa R&D tax credit is fully refundable after a company's tax liabilities are met and can be used as a credit on subsequent return. There are two credit calculation methods: the Regular Credit and the Alternative Simplified Credit. The regular credit is equal to 6.5 percent of qualifying expenses within Iowa, which exceeds the lower of a base amount or 50 percent of the qualifying expenses. The Alternative Simplified Credit is equal to 4.55 percent of the difference between qualifying expenses for the current year and 50 percent of the average of qualifying expenses for the prior three years.
Additional Areas for Opportunity: Companies that receive awards from the Iowa Economic Development Authority under the High-Quality Jobs Program can also capture a Supplemental Research Activities Credit. This supplemental credit cannot exceed 10 percent of a company's qualifying expenses, with gross revenues less than $20 million and 3 percent for a company with gross revenues over $20 million. This supplemental credit must be calculated using the same method chosen for the R&D credit.
Contact an A&M Taxand specialist if you would like to understand better how state and local incentives can work hand in hand with the federal R&D credit and maximize your company's benefit.