Research and Development Tax Credit

A company must submit the completed Research and Development application and fee. Based on your application type additional information must be provided:

1. Less than 50 Employees

• Detailed narrative of the research and development conducted
• Breakdown of cost by expenditure category (wages, supplies, contracted research, etc.)
• Breakdown of cost by each activity (business component)
• W-2’s for wages listed on the application
• 1099’s and/or invoices for contracted research
• Financial Statements for the tax year within which you’re applying (compiled or reviewed)
• Tax returns for the tax year within which you’re applying

2. Small Business Innovation Research Grant (SBIR/STTR)

• SBIR/STTR grant
• Listing of disbursements received
• Bank statements indicating distribution of funds

3. Increase in Louisiana Research and Development (50+ Employees)

• Federal Form 6765 for current tax year and the three previous years

1. Application is presented to the Louisiana Economic Development review panel.

2. Notification of the decision is sent via email.

3. Louisiana Department of Revenue is notified of the credits certified.

Q: My Company, XYZ, conducted research and development with a team of four spending 100% of their time on research and development – two were scientists, one was a lab supervisor and the other was the VP of Operations. Will the wages for these individuals qualify for the Research and Development Tax Credit Program?
A: Not all will qualify. According to Section 41 (b)(2)(B) wages of individuals who are engaging in qualified research, directly supervising qualified research or directly supporting qualified research will be eligible. The term “direct supervision” means the immediate supervision (first-line management) of qualified research. “Direct supervision” does not include supervision by a higher-level manager to whom first-line managers report, even if that manager is a “qualified research scientist.”

Q: My Company, XYZ, was hired by the Capital Area School Board to construct a new building for Capitol City High School. The school board provided the project parameters to Company XYZ. Will the company be able to claim these activities as qualified research?
A: No, these activities would not meet the federal four-part test. In order for an activity to qualify for the research credit, the taxpayer must show that it meets all requirements as described in Section 41(d). Under Section 41(d), the term “qualified research” means research:

1. With respect to which expenditures may be treated as expenses under section 174
2. Which is undertaken for the purpose of discovering information technological in nature
3. The application of which is intended to be useful in the development of a new or improved business component of the taxpayer
4. Substantially all of the activities of which constitutes elements of a process of experimentation for a qualified purpose

To be considered “qualified research,” the taxpayer must be able to establish that the research activity being performed meets all four of the above tests. These tests must be applied separately to each business component of the taxpayer. The activities do not identify any new business component or process. The knowledge is readily available in the industry. The projects are for the determination of the optimal design to meet client project parameters, which is not considered qualified research.

Q: My company, Spectrum Chemical, is located in New Orleans and employs 116 employees. The company will be eligible for the Research and Development Tax Credit for the increase in research and development expenses for tax year 2011. Spectrum began research and development in tax year 2009; can the company use the previous two years’ average for the base calculation?
A: NO. The company would still take the three previous years’ average and enter “0” for tax year 2008.

Q: My company, Beta Manufacturing, was hired to create a high-pressured valve for ABC Company. The high-pressured valve was a new product to the market and Beta will maintain the rights to produce the valve. Will Beta be able to claim these activities as qualified research?
A: Beta will be able to claim these activities as qualified research if: 1. The activities meet the Section 41 four-part test 2. They have maintained substantial rights to the product and the company was at economic risk. If Beta was paid on a Time-and-Materials contract, then the company was paid to conduct the research and development and therefore would be considered funded research and ineligible for the tax credit. If Beta was paid on a fixed-fee basis, then there was some economic risk, and these activities could be considered qualified research.  

Frequently Asked Questions related to the Research & Development Tax Credit:

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 40%, based on the size of the company. The Louisiana R&D Credit reduces income or franchise tax. You claim the credit on the return for the taxable year you incurred the qualified expenses.

Q: How do you claim the Louisiana R&D Credit?
A: You claim the Louisiana R&D Credit on your Louisiana income tax return for the year you paid or incurred qualified research and development expenses in Louisiana.

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. The more common modifications are:

1. “Basic research” and “qualified research” must be conducted in Louisiana to qualify.
2. For taxable years beginning on or after Jan.1, 2009, the credit is refundable and cannot be carried back or forward.

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:

1. Research undertaken outside Louisiana.
2. Research conducted in the social sciences, arts or humanities.
3. Ordinary testing or inspection of materials or products for quality control.
4. Market and consumer research.
5. Research relating to style, taste, cosmetic or seasonal design.
6. Advertising and promotional expenses.
7. Management studies and efficiency surveys.
8. Computer software for internal use of the taxpayer, unless it meets additional tests.
9. Research to locate and evaluate mineral deposits, including oil and gas.
10. Acquisition and improvement of land and of certain depreciable or depletable property used in research (including the annual depreciation deduction).
11. Research conducted after the beginning of commercial production.
12. Research related to adaptation of an existing business component.
13. Research related to duplication of an existing business component from a physical inspection, plans, blueprints, detailed specifications, etc.
14. Funded research – Any research funded by any grant, contract, or otherwise by another person (or governmental entity).

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: How do I receive my refund?
A: Louisiana Economic Development does not process tax refunds. The company must amend the tax return, and once all tax liabilities have been satisfied, Louisiana Department of Revenue will issue the refund. To check the status of tax refunds, please call 225.219.0102.

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 (50+ employees)?
A: The base calculation is 70% of the average of the three previous years’ Louisiana research and development expenditures. The base is then subtracted from the current year’s expenditures to reach the increase in research and development expenditures which is then multiplied by credit percentage (8% or 20% based on company size). Examples of calculations can be found here.

Formula:
Average of three previous tax years * 70% = Base Amount
CTY R&D expenditures – Base Amount = increase in LA R&D
Increase in LA R&D * (8% or 20%) = R&D Tax Credit

Q: Which tax credits are transferable/nonrefundable and what is the process?
A: Tax credits issued for tax years 2003 - 2008 are transferable/nonrefundable and can be carried forward for 10 years or the credits can be sold for no less than $0.75 per credit. In order to transfer the credits, the owner must complete a sale of credits application, a signed purchase agreement (signed by both the seller and owner). Upon approval, a new certification letter will be issued to the original owner of the credits.