Q: What is Louisiana's Research and Development (R&D) Credit?
A: The R&D tax credit provides a tax credit for companies that have paid or incurred qualified research expenses while conducting qualified research in Louisiana. You can receive a credit up to 30%, based on the size of the company. The Louisiana R&D Credit reduces income or franchise tax. Credits cannot be claimed on a return until they have been certified by Louisiana Economic Development.
Q: How do you claim the Louisiana R&D Credit?
A: The Louisiana R&D Credit is claimed on your Louisiana income tax return for the year you paid or incurred qualified research and development expenses or carry forward up to 5 years. Credits cannot be claimed on a return until they have been certified by Louisiana Economic Development.
Q: Does Louisiana conform to federal R&D Credit provisions?
A: Louisiana law generally conforms to the federal research credit as enacted under the Small Business Job Protection Act of 1996. However, Louisiana does make some modifications. "Basic research" and "qualified research" must be conducted in Louisiana to qualify.
Q: What is "qualified research" for Louisiana's R&D Credit?
A: Research activity is considered "qualified research" if it meets all of the following four requirements of Internal Revenue Code (IRC) §41(d)(1):
- Qualify as a business deduction under IRC §174.
- Be undertaken to discover information that is technological in nature.
- Be undertaken to discover information intended to be useful to develop a new or improved business component of the taxpayer.
- Substantially all activities involve a process of experimentation. "Substantially all" means 80% or more of the research activities involve a process of experimentation.
A qualified research activity must meet all four tests to be considered for the Louisiana R&D Credit. Apply the tests separately to each business component of the taxpayer.
Q: What research activities do not qualify for Louisiana's R&D Credit?
A: The following research activities are specifically excluded by statute:
- Research undertaken outside Louisiana.
- Research conducted in the social sciences, arts or humanities.
- Ordinary testing or inspection of materials or products for quality control.
- Market and consumer research.
- Research relating to style, taste, cosmetic or seasonal design.
- Advertising and promotional expenses.
- Management studies and efficiency surveys.
- Computer software for internal use of the taxpayer, unless it meets additional tests.
- Research to locate and evaluate mineral deposits, including oil and gas.
- Acquisition and improvement of land and of certain depreciable or depletable property used in research (including the annual depreciation deduction).
- Research conducted after the beginning of commercial production.
- Research related to adaptation of an existing business component.
- Research related to duplication of an existing business component from a physical inspection, plans, blueprints, detailed specifications, etc.
- Funded research — Any research funded by any grant, contract, or otherwise by another person (or governmental entity).
- Professional Service Firms, Custom Manufacturing and Custom Fabricating.
Q: My company, X2M, did not file the Federal R&D Tax Credit Form 6765; can we apply for the Louisiana R&D Credit?
A: Yes, however, X2M must submit a completed Verification Report.
Q: What are "qualified research expenses" (QRE) for Louisiana's R&D Credit?
A: Qualified research expenses generally include wages, supplies and contract research costs.
Wages — Qualified wages are for qualified services that directly relate to the research activities and are paid or incurred by the taxpayer. Qualified services include direct supervision, direct support or direct performance of qualified research. General or administrative wages generally do not qualify. For example, an allocated portion of the purchasing or receiving department's wages would not qualify because these are indirect costs and are incidental to research activity.
Supplies — Supplies include tangible property that is consumed directly by the research activity or that is utilized in the development of a prototype. The supplies must be used in the conduct of qualified research. Supplies do not include land, improvements to land or property subject to the allowance for depreciation. Utilities (phone and electricity), small tools and allocations of total shipping cost do not qualify as supply expenses.
Contract research — Contract research expenses are amounts paid to non-employees (outside consultants) to perform qualified research. The taxpayer must enter into written agreement prior to performance of the research and must bear the costs even if the research is unsuccessful. The consultant must perform the research within Louisiana. If the research is conducted within and outside of Louisiana, only the expenditures incurred within Louisiana qualify. Only 65% of the Louisiana expense qualifies for the credit.
Q: What is a business component?
A: The term "business component" means any product, process, computer software, technique, formula or invention which is to be (i) held for sale, lease or license or (ii) used by the taxpayer in a trade or business of the taxpayer.
Q: What is the definition of affiliates?
A: In order to determine the number of employees, the company must include the employees of affiliated companies. An affiliate is a company that shares more than 50% common ownership or other means of control with respect to another company.
Q: When may credits be claimed on a tax return?
A: Credits should NOT be claimed on a tax return until certified by LED. If credits are not certified by the return due date, the taxpayer should file and then amend the return upon receipt of any credits.
Q: How do you calculate the base amount for the increase in research and development tax credit?
A: If an applicant does not have prior year expenses in Louisiana no base calculation will be needed. The calculation will be based solely on the current year R&D expenses. The base calculation will be based on the average of previous tax years. The calculation will be adjusted in the event there are no previous expenses in a prior year.
No Previous Years
A company with less than 50 employees incurred $210,000 in tax year 2019 and had no prior year R&D expenditures. There would be no base year. The calculation would be 30% of current years expenditures.
$210,000 x 30%, the 2019 R&D tax credit would be $63,000 – OR –
1 Previous Year
A company with less than 50 employees incurred $210,000 in tax year 2019 and had $100,00 R&D expenditures in tax year 2018.
The base calculation would be prior year times the appropriate percentage ($100,000 x 50%) which would be $50,000. In order to calculate the incremental increase in expenditures the base calculation is subtracted from the current year. The R&D tax credit is 30% of the incremental increase.
$100,000 x 50% = $50,000 base calculation
$210,000 - $50,000 = $160,000 incremental increase
$160,000 x 30% = $48,000 2019 R&D tax credit
2 Previous Years
A company with less than 50 employees incurred $210,000 in tax year 2019 and had $100,00 R&D expenditures in tax year 2018 and $150,000 in tax year 2017.
The base calculation would be the average of the prior year’s times the appropriate percentage ($100,000 + 150,000/2 x 50%) which would be $62,500. In order to calculate the incremental increase in expenditures the base calculation is subtracted from the current year. The R&D tax credit is 30% of the incremental increase.
($100,000 + 150,000/2 x 50%) = $62,500 base calculation
$210,000 - $62,500= $147,500 incremental increase
$147,500 x 30% = $44,250 2019 R&D tax credit
3 previous years applies the same rationale with using the average of the 3 prior years.
The base calculation and credit percentages will vary based on the size of the company.
View Examples of Base Calculations.
Average of three previous tax years * 80% = Base Amount
CTY R&D expenditures — Base Amount = increase in LA R&D
Increase in LA R&D * (5% or 10%) = R&D Tax Credit
LQRE - 6765
Average of three previous tax years * 50% = Base Amount
CTY R&D expenditures — Base Amount = increase in LA R&D
Increase in LA R&D * (30%) = R&D Tax Credit
Q: Which tax credits are transferable/nonrefundable?
A: R&D tax credits issued to SBIR/STTR applicants are transferable. [R.S. 47:6015 (D)(2)]
Q: What is the process to transfer the R&D tax credits issued to SBIR/STTR applicants?
A: The transferable R&D tax credits issues to SBIR applicants are entered into the Louisiana Department of Revenue Tax Registry. Upon the certification of the tax credits, Form R-6135 Credit Utilization Form will be issued by LDR. The applicant must notify LDR within 10 business days of the transfer. All transferable credits must be transferred by the original due date of the return. Please refer to the Revenue Information Bulletin 14-005 that provides more information on transferable tax credits.