Iowa R&D Tax Credit
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R&D tax credits for Iowa
The Iowa R&D Tax Credit is a state tax credit available to businesses for qualifying research and development (R&D) expenses. The credit is 6.5% lower than the federal credit, but companies can still claim it on their Iowa state tax return. Businesses must have incurred R&D expenses in the current or prior tax year to be eligible. The credit is available for both new and existing businesses.
There are two types of R&D activities that qualify for the credit: basic research and applied research. Basic research is defined as original scientific or technological experimentation and inquiry.
Applied research is defined as research to gain knowledge or understanding to determine how a specific goal could be achieved. Eligible expenses include wages paid to employees conducting R&D activities, costs of supplies used in R&D activities, and contract research expenses.
Businesses must complete Form 44-016 and attach it to their Iowa state tax return to claim the credit. The credit can be carried forward for up to 20 years. If a business is acquired or merges with another company, the credit may be transferred to the new owner.
What Is The Iowa R&D Tax Credit?
Suppose your company has received awards from IEDA or Iowa Economic Development Authority under its High-Quality Programs or Enterprise Zone Program. In that case, your tax credit will calculate the SRAC or Supplement Research Activities Credit which provides a 10% additional incremental research cost for your gross profit ranging below $20 million and 3% of companies gross profit, that’s over $20 million.
This Supplemental Research Activities Credit will then be included in the base computation of your R&D Tax Credit. However, the credit is only refundable if the business has met the current or prior tax year requirements. The credit is also available for both new and existing businesses in Iowa.
Who Is Eligible For R&D Tax Incentive?
To be eligible, your project or activity must have been conducted in Iowa and must fall under either basic research or applied research as defined by the Internal Revenue Service (IRS). If you’re unsure whether your project qualifies, you can check with an accountant or tax advisor. The credit is available for both new and existing businesses.
Can Universities Claim R&D Tax Credits?
Universities are considered separate legal entities from the businesses they conduct research for, so they cannot claim the credit directly. However, if a business contracts with a university to conduct research, the company may be able to claim the credit for the expenses incurred.
When Can I Claim R&D Tax Credits?
You can claim the credit on your Iowa state tax return for the current or prior tax year. You must complete Form 44-016 and attach it to your return to claim the credit.If you sell or merge your business, the new owner may transfer the credit. Iowa’s ASC is 4.55% of the cost three years before your business’ tax filing.
To receive the total value of your research and development tax credit, you first need to calculate your base credit. The base credit is 6.5% of your total qualifying expenses, which include:
- Wages paid to employees conducting R&D activities
- Costs of supplies used in R&D activities
- Contract research expenses
The credit is then multiplied by your state’s tax rate, 4.55%, to arrive at your total credit. So, if your total qualifying expenses were $100,000, your credit would be $6,500 (($100,000 x 6.5%) x 4.55%).
The credit can be carried forward for up to 20 years, so if you don’t use it all in the year you incurred the expenses, you can carry it over to future tax years.