A Practical Guide for the R&D Tax Credit: Available at Federal and State Level

The federal research credit provides a tax incentive for increasing qualified research activities, and many states offer their own research credits (or related incentives). Below is a clear overview of the federal credit—what qualifies, how to compute and claim it, coordination rules—and a rundown of selected state programs documented in the available sources.

Federal Research Credit

• Core rule: The research credit equals a percentage of (a) the excess of qualified research expenses (QREs) over a base amount, plus (b) certain basic research payments and energy research contributions (Internal Revenue Code (IRC) § 41) IRC § 41 and IRS Sec. 41 text (PDF).

• Qualified research expenses:

  • In‑house research expenses: wages for qualified services, supplies used in qualified research, and amounts paid for time‑sharing computers used in qualified research IRC § 41(b)(2) and Treas. Reg. § 1.41‑2.

  • Contract research expenses: generally 65% of amounts paid to others for qualified research (with higher percentages for certain consortia and eligible small business/university/Federal lab arrangements) IRC § 41(b)(3) and Treas. Reg. § 1.41‑2(e).

• Qualified research definition: Research must be treated as domestic research or experimental expenditures, aimed at discovering technological information for developing or improving a business component, and substantially involve a process of experimentation (subject to statutory exclusions like post‑commercial production, adaptation, duplication, surveys, internal‑use software, foreign research, social sciences, and funded research) IRC § 41(d).

• Documentation and eligibility details:

  • Wages for qualified services include actual conduct, direct supervision (first‑line), and direct support of qualified research IRC § 41(b)(2); Treas. Reg. § 1.41‑2(c)–(d).

  • Supplies and certain off‑premises time‑sharing computer costs may qualify; most lease costs and general utilities do not, except extraordinary utility costs attributable to research (e.g., high‑energy lab equipment) Treas. Reg. § 1.41‑2(b).

• Controlled groups / common control:

  • Members are treated as a single taxpayer for computing the group credit, and must allocate the credit proportionally to members’ shares of aggregate QREs/basic research payments/energy consortium payments IRC § 41(f)(1); Treas. Reg. § 1.41‑6.

  • Special pass‑through rules apply for S corporations, partnerships, trusts, and estates, including limitations for individuals receiving pass‑through credits Treas. Reg. § 1.41‑7; IRC § 41(g).

• Computation methods:

  • Regular method (incremental credit): 20% of the excess of current‑year QREs over the base amount (the fixed‑base percentage times average gross receipts for the prior 4 years, with a 50% minimum base) IRC § 41(a), (c).

  • Alternative Simplified Credit (ASC): At taxpayer election, 14% of QREs exceeding 50% of the average QREs for the prior 3 years (6% if there are no QREs in any of the 3 prior years). Election applies to current and subsequent years unless revoked with consent, and may be made on an amended return if no prior research credit was claimed for that year IRC § 41(c)(4); Treas. Reg. § 1.41‑9.

• Payroll tax credit election for qualified small businesses:

  • A qualified small business can elect to apply up to $500,000 of the research credit against the employer’s Social Security and Medicare taxes. The election is made on Form 6765 by the income tax return due date and then claimed via Form 8974 against quarterly employment taxes; unused amounts carry forward to subsequent quarters IRC § 41(h); IRC § 3111(f); Instructions for Form 6765 and About Form 8974.

• Section 280C coordination:

  • The domestic R&D deduction must be reduced by the federal research credit unless the taxpayer makes the § 280C reduced‑credit election on Form 6765 by the original return due date (including extensions). If the election is made, the credit is reduced by the product of the pre‑election credit and the maximum corporate rate; the election is irrevocable for the year IRC § 280C(c); Treas. Reg. § 1.280C‑4; Instructions for Form 6765.

• Filing, elections, and disclosures:

  • Use Form 6765 to compute the credit, make the ASC and § 280C elections, and (if applicable) elect the payroll tax credit for qualified small businesses. Controlled groups attach statements and allocate credits per regulations. Amended claims for research credit refunds must include specific information to be considered valid by the IRS Instructions for Form 6765; Treas. Reg. § 1.41‑6.

Selected State Research Credits (and Related Incentives)

The availability and design of state research credits vary widely. Below is a summary for states documented in the available sources.

California

• California has a research and development credit, referenced in the California Franchise Tax Board’s S corporation manual (Chapter 12.3). The manual outlines California‑specific computation and pass‑through treatment for S corporation shareholders, including separate corporate/shareholder rules when credits are allowed under both corporate and personal tax law (California FTB S Corporation Manual, Chapter 12.3) FTB S Corporation Manual—Chapter 12 (PDF).

Florida

• Florida corporate taxpayers report various credits on Schedule V of Form F‑1120, which includes a “Research and development tax credit.” Corporations claim the credit on the corporate income/franchise tax return using the listed line for research credit among other state credits Florida Corporate Return—Form F‑1120 (PDF) and Instructions for F‑1120 (PDF).

Iowa

• Iowa offers a Research Activities Credit, with forms IA 128 (corporate) and IA 128S (S corporation/shareholder). Iowa has published the current versions of these forms and the Department keeps an index of corporate tax forms where the research credit materials are posted IA 128 Research Activities Credit (PDF) and IA 128S Alternative Simplified Research Activities Credit (PDF); see also Iowa tax forms index Forms—Department of Revenue.

Kansas

• Kansas provides a Research and Development Credit claimed via Schedule K‑53 on the corporate return (Form K‑120). The Kansas corporate booklet lists the “Research and Development Credit (Enclose Schedule K‑53)” among nonrefundable credits and provides the filing mechanics (including allocation for combined reports) K‑120 Corporate Return (PDF).

Kentucky (related incentive)

• Kentucky offers a “Qualified Research Facility Tax Credit” for taxpayers that construct and equip new facilities or expand/remodel existing facilities in Kentucky for qualified research purposes—distinct from a traditional QRE‑based credit but serving as a research incentive for facility investment KY Tax Credits—Qualified Research Facility.

Maryland (context)

• Maryland’s corporate booklet lists numerous credits and explains the business credit claim process on Form 500CR; while the excerpted “New for 2023” page lists other credits, Maryland’s business credit process is centralized via Form 500CR and related guidance, and filers must follow electronic filing requirements or request waivers for certain credits Maryland Corporate Booklet (PDF).

Practical Tips for Coordinating Federal and State Credits

• Align definitions: States may depart from the federal definition of QREs. Verify each credit’s qualifying activities, expense categories (e.g., supplies, wages), and caps.

• Watch elections: The federal § 280C reduced‑credit election affects expense deductions; some states require separate elections or conform differently. Make the § 280C election on Form 6765 by the original federal return due date to avoid a reduction to the § 174/§ 174A deduction or capitalization IRC § 280C(c); Treas. Reg. § 1.280C‑4.

• Controlled groups and pass‑throughs: Coordinate group credit computations, allocations, and shareholder/partner limitations per federal rules; check state conformity for aggregation and allocation (especially for S corporations and partnerships) Treas. Reg. § 1.41‑6; Treas. Reg. § 1.41‑7.

• Payroll credit interplay: If you elect the federal payroll tax offset under § 41(h), ensure your employment tax filings (Form 8974 and quarterly returns) reflect the election properly; confirm whether any state employment tax regimes are affected (most state credits offset income tax, not payroll tax) IRC § 41(h); IRC § 3111(f); Instructions for Form 6765.

How to Claim the Federal Credit (and Coordinate States)

• Federal return: Complete Form 6765 to compute the credit, elect ASC or regular method, make the § 280C reduced credit election, and (if applicable) the payroll tax credit election. Attach controlled group statements and maintain documentation of QREs by component and activity Instructions for Form 6765; Treas. Reg. § 1.41‑6.

• State returns: Use each state’s designated forms (e.g., FL Form F‑1120 Schedule V, IA 128/128S, KS K‑53) and follow state filing instructions and deadlines per those returns Florida Form F‑1120 (PDF); Iowa IA 128/IA 128S; Kansas K‑120/Schedule K‑53 (PDF); Kentucky Qualified Research Facility Credit.

Conclusion

The federal research credit offers substantial benefits when properly documented and claimed, with clear rules for QREs, computation methods, payroll tax offsets, and controlled group allocations. Several states—such as California, Florida, Iowa, Kansas, and Kentucky—provide research credits or related incentives, each with distinct eligibility and filing requirements. Because state programs differ and change over time, always consult the current state return instructions and forms alongside the federal rules summarized above to optimize your combined benefit profile while maintaining strict compliance.

• Federal rules and elections: IRC § 41 • Treas. Reg. § 1.41‑2 • Treas. Reg. § 1.41‑6 • Treas. Reg. § 1.41‑7 • Treas. Reg. § 1.41‑9 • IRC § 280C • Treas. Reg. § 1.280C‑4 • IRC § 3111(f) • Instructions for Form 6765.

• State examples: California FTB S Corporation Manual—Chapter 12 (PDF); Florida Form F‑1120 (PDF) & Instructions (PDF); Iowa IA 128 / IA 128S; Kansas K‑120 / Schedule K‑53 (PDF); Kentucky Qualified Research Facility Tax Credit; Maryland Corporate Booklet (PDF).

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.