The federal tax credit for research and development (R&D) offers many businesses that increase their research activities a valuable opportunity to increase their cash flow. Still, you shouldn’t stop there if you qualify. You also might be eligible for state tax credits for increasing your research activities.

More than three dozen states offer R&D tax credits. Most of them shadow the federal credit when it comes to the basic requirements. That means you likely qualify if you can satisfy the IRS’s four-part test “qualified research activities”:

  1. The research is performed to eliminate technical uncertainty about the development or improvement of a product or process, including computer software, techniques, formulas, and inventions,
  2. The research is undertaken to discover information that’s technological in nature (that is, it relies on physical, biological, engineering, or computer science principles),
  3. The research is intended for use in developing a new or improved business product or process, and
  4. Substantially all of the research activities — generally, at least 80 percent — are elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.

If you’ve conducted such research in a state with an R&D tax credit, you generally can apply a percentage of your qualified research expenditures  incurred in the state against your state tax liability on a dollar-for-dollar basis.

Here’s an overview of state R&D credits currently available.

*Calculation of the “base amount” varies by state but generally is based on your qualified research expenses in an earlier base period; the base period may be the same used to calculate the federal R&D credit or a different period specific to the state. Remember — the credit is intended to incentivize businesses to increase their research activities.

StateEligible taxpayersAvailable credit*
ArizonaAll entities. (Find more information here.)24% of the first $2.5 million in qualifying expenses plus 15% of the qualifying expenses in excess of $2.5 million. Qualifying expenses means the excess of qualified research expenses over the base amount, plus the basic research expenses.
ArkansasAll entities. (Find more information here.)

20% of the excess of qualified in-house research expenditures over the base amount. Qualified expenditures include only taxable wages and the usual fringe benefits, specific to research activities.

 

Businesses in certain sectors may qualify for the “targeted business R&D tax incentive program,” which provides a tax credit for 33% of qualified R&D salaries each year for five years.
CaliforniaAll entities. (Find more information here.)The credit is equal to the sum of:
  • 15% of qualified expenses that exceed a base amount, and
  • 24% of the basic research payments.

Taxpayers can elect an alternative incremental credit, on a timely filed original return. The alternative method uses a rate of 1.49%, 1.98%, or 2.48% and therefore produces a smaller credit.

Colorado

All entities in locations designated as state enterprise zones.

(Find more information here.)
3% of the excess of research and development expenses over the base amount. Taxpayers must claim 25% of the credit each year for four years.
ConnecticutC corporations. (Find more information here.)

20% of the excess of the research and experimental expenditures over the base amount. Taxpayers may claim the credit against up to 60% of the tax due in income year 2022, and up to 70% of the tax due in income thereafter. Connecticut also has an alternative non-incremental method for calculating the credit.

A qualified small business (generally, a business whose gross income for the previous income year doesn’t exceed $100 million) is entitled to a tentative tax credit equal to 6% of its research and development expenses.

DelawareAny company that has a tax liability in Delaware. (Find more information here.)

10% of the excess of the qualified research and development expenses over the base amount, or 50% of the amount of taxpayer’s federal R&D credit (calculated using the alternative simplified credit method) that’s attributable to Delaware activities. 

 

Small businesses (businesses with average annual gross receipts that don’t exceed $20 million) can claim 20% of the excess of the qualified research and development expenses over the base amount, or

100% of the amount of taxpayer’s federal R&D credit (calculated using the alternative simplified credit method) that’s attributable to Delaware activities.

Florida

C corporations that 1) claim and are allowed the federal R&D credit against federal income tax, and 2) are in one of the following targeted industries:

  • Aviation and Aerospace
  • Cloud Information Technology
  • Homeland Security and Defense
  • Information Technology
  • Life Sciences
  • Manufacturing
  • Marine Sciences
  • Materials Science
  • Nanotechnology

Partnerships, limited liability companies taxed as partnerships, and disregarded single member limited liability companies cannot apply for the credit. However, each corporate partner of a partnership may apply separately for the credit based on the corporation’s separate research expenses, including allocated partnership research expenses, if the corporate partner is also a qualified target industry business. (Find more information here.)

10% of the excess of qualifying research expenses over the base amount, up to 50% of tax liability after all other tax credits are applied. The maximum tax credit for a business enterprise that has not been in existence for at least four taxable years immediately preceding the taxable year is reduced by 25% for each taxable year for which the business, or a predecessor corporation, didn’t exist.
Georgia

All entities not in retail and that qualify for the federal R&D credit.

(Find more information here.)

10% of the excess qualifying research expenses over the base amount. Taxpayers may claim the credit against up to 50% of tax liability each year, after applying other credits.
Hawaii

Qualified high technology businesses (businesses that conduct more than 50% of their activities in “qualified research” as defined by Sec. 41(d) of the Internal Revenue Code) that claim the federal R&D credit. Scheduled to expire after 2024. (Find more information here.)

Generally, 20% of federal qualified research expenses attributable to Hawaii.
IdahoAll entities. (Find more information here.)

The sum of:

  • 5% of the excess of qualified research expenses over the base amount, and
  • 5% of the basic research payments.
IllinoisAll entities.6.5% of the excess of qualifying expenditures over the base amount.
IndianaAll entities. (Find more information here.)

15% of the excess of qualified research expenses over the base amount, up to $1 million. 10% of any excess greater than $1 million.

Alternatively, the taxpayer can elect a credit equal to 10% of the part of the taxpayer’s qualified research expenses for the taxable year that exceeds 50% of the taxpayer’s average qualified research expenses for the preceding three taxable years.

Iowa

Businesses that: 

  1. Claim and are allowed the federal R&D credit, and
  2. Are engaged in one of the following industries:
    • Manufacturing - Activities commonly understood within the ordinary meaning of the term, including refining, purifying, combining of different materials; packing of meats; and activities subsequent to the extractive process of quarrying or mining, such as crushing, washing, sizing, or blending of aggregate materials.
    • Life Sciences - The sciences concerned with the study of living organisms, including agriscience, biology, botany, zoology, microbiology, physiology, biochemistry, and related subjects.
    • Software Engineering - The detailed study of the design, development, operation, and maintenance of software.
    • Aviation and Aerospace - The design, development, or production of aircraft, rockets, missiles, spacecraft, and other machinery and equipment that operates in aerospace.

The sum of:

  • 6.5% of the excess of qualified research expenses over the base amount, and
  • 6.5% of the basic research payments.

Taxpayers can opt for an alternative simplified credit that equals 4.55% of increased research expenses plus 6.5% of increased basic research expenses.

For tax years that begin in 2023 and thereafter, Iowa taxpayers that elected or were required to use the alternative simplified credit for federal tax purposes must also use this method for their state tax calculation for the same tax year.

Supplemental credits are available for qualifying business under the Enterprise Zone Program or the High-Quality Jobs Program.

Kansas

As of Jan. 1, 2023, all entities. (Find more information here.)

As of Jan. 1, 2023, 10% of the excess qualified research and development expenses over the base amount. Taxpayers can claim up to 25% of the credit in any one tax year.
KentuckyAll entities constructing, remodeling, and equipping facilities in Kentucky or expanding existing facilities in Kentucky for “qualified research,” as defined in Sec. 41 of the Internal Revenue Code. (Find more information here.)5% of the qualified costs of construction of research facilities.
Louisiana

All entities except:

  • Professional services firms that don’t have a pending or issued U.S. patent related to the qualified research expenses claimed, or
  • Businesses primarily engaged in custom manufacturing and custom fabricating that don’t have a pending or issued U.S. patent related to the qualified research expenses claimed.
Taxpayers must obtain pre-approval from the state Department of Economic Development before claiming the credit. (Find more information here.)

Taxpayers with 100 or more employees: 5% of the excess of qualified research expenses over the base amount.

Taxpayers with 50-99 employees: 10% of the excess of qualified research expenses over the base amount. 

Taxpayers with fewer than 50 employees: 30% of the excess of qualified research expenses over the base amount.  

MaineAll entities. (Find more information here.)

The sum of:

  • 5% of the excess qualified research expenses over the base amount, and
  • 7.5% of the basic research payments.

The credit is limited to 100% of the first $25,000 in tax liability plus 75% of the tax liability in excess of $25,000.

MarylandAll entities. (Find more information here.)

10% of qualified research expenses over the base amount. A single applicant may not receive a tax credit exceeding $250,000.  

Taxpayers can also claim a basic R&D credit for 3% of qualified research expenses that don’t exceed the basic amount.

MassachusettsCorporations subject to the corporate excise tax. (Find more information here.)

The sum of:

  • 10% of the excess of qualified research expenses over the base amount, and
  • 15% of the basic research payments.
Massachusetts also provides an alternative simplified method. A taxpayer can elect a credit equal to 10% of the part of the taxpayer’s qualified research expenses for the taxable year that exceeds 50% of the taxpayer’s average qualified research expenses for the preceding three taxable years.

The credit amount that can be claimed in a year is limited to:
  • The first $25,000 of corporate excise tax due, plus
  • 75% of any excise tax due in excess of $25,000.
The credit can’t reduce the taxpayer’s tax to below the minimum tax of $456.
MichiganAll entities. (Find more information here.)1.90% of research and development expenses. The credit is combined with other credits, and the total combined credit allowed can’t exceed 75% of the tax liability before credits are applied.
MinnesotaAll entities. (Find more information here.)10% of the excess of qualifying expenses over the base amount up to $2 million; 4% for the excess above $2 million.
MissouriAll entities.

On or after January 1, 2023, Missouri’s Director of Economic Development may authorize a taxpayer to receive a tax credit against the corporate income tax or financial institutions tax equal to 15% of the excess qualified research expenses over the base amount (20% if such expenses relate to research conducted in conjunction with a public or private Missouri college or university).  


A taxpayer’s credit can’t exceed 200% of its average qualified research expenses incurred in the three immediately preceding tax years.


The credit amount is limited to $300,000 for a single taxpayer per year.

Nebraska

All entities. (Find more information here.)

15% of the federal R&D credit attributable to Nebraska research activities (35% for expenditures in research and experimental activities on the campus of a college or university in Nebraska, or at a facility in Nebraska owned by a college or university).
New Hampshire

Manufacturers. (Find more information here.)

10% of the excess of the qualified research expenses over the base amount. “Qualified research expenses” means wages paid to employees for services rendered in New Hampshire that qualify and are reported as the federal R&D credit by the business (i.e., the wage amounts attributable to New Hampshire that make up lines 5 or 24, of the business's federal Form 6765).


The credit amount is limited to $50,000 for a single taxpayer per year.

New JerseyCorporations that file IRS Form 6765. (Find more information here.)

The sum of:

  • 10% of excess qualified research expenditures over the base amount, and
  • 10% of the basic research payments.
New MexicoAll entities. (Find more information here.)

Taxpayers conducting qualified research at a qualified facility and making qualified expenditures of no more than $5 million in New Mexico are eligible to claim the basic technology jobs and research and development tax credit of 5% (10% for expenditures in facilities located in rural New Mexico).


Taxpayers also may apply for an additional tax credit of 5% (10% for taxpayers located in rural New Mexico). To qualify, the taxpayer must increase the annual payroll expense $75,000 for every $1 million in qualified expenditures claimed.

New YorkApproved participants in the Excelsior Jobs Program.

50% of the portion of the federal R&D credit that relates to expenditures in New York, up to 6% of research expenditures attributable to New York activities.  

For a qualified green project (a project that makes products or develops technologies that are primarily aimed at reducing greenhouse gas emissions or supporting the use of clean energy) or a green CHIPS project (semiconductor manufacturing and supply chain projects), a credit of 50% of the portion of the federal R&D credit that relates to expenditures in New York, up to 8% of research expenditures attributable to New York activities.

North DakotaAll entities. (Find more information here.)

25% for the first $100,000 of excess qualified research expenses over the base amount; 8% for excess expenses over $100,000.

Taxpayers may elect to use an alternative simplified method to calculate the credit. The alternative credit generally is 17.5% of the first $100,000 of excess expenses, plus 5.6% of the excess expenses over $100,000.

OhioAll entities. (Find more information here.)7% of the excess of qualified research expenses over the base amount.
PennsylvaniaAll entities. (Find more information here.)10% of the excess of qualified research and development expenses over the base amount (20% for qualified small businesses).
Rhode IslandAll entities. (Find more information here.)

22.5% of the first $111,111 in excess qualified research expenditures over the base amount; 16.9% thereafter.

The credit can’t reduce a taxpayer’s liability by more than 50% each year. For corporations, it can’t reduce the tax liability below the applicable minimum.

South CarolinaAll entities that claim the federal R&D credit. (Find more information here.)5% of the excess of qualified research expenses over the base amount. The credit taken in a single year can’t exceed 50% of the taxpayer's tax liability after all other credits are applied.
TexasAll entities. (Find more information here.)5% of the excess of qualified research expenses over the base amount (6.25% for research with a public or private institution of higher education). Credits are only allowed to offset up to 50% of franchise tax due in a single period.
UtahAll entities. (Find more information here.)

The sum of:

  • 5% of the excess of qualified research expenses over the base amount, and
  • 5% of the excess of the basic research payments over a base amount; and
  • 7.5% of the qualified research expenses in Utah for the current taxable year.
Vermont

All entities that claim the federal R&D credit. (Find more information here.)

27% of the federal R&D credit for qualified research expenditures attributable to Vermont.
VirginiaAll entities. (Find more information here.)

15% of the first $300,000 in the excess of qualified expenses of the base amount (20% if the research was conducted in conjunction with a Virginia public or private college or university).


Taxpayers may elect an alternative simplified credit equal to 10% of the excess of qualified research expense over
50% of the average Virginia qualified research and development expenses paid or incurred the preceding three taxable years.

Taxpayers that use this method may claim up to $45,000 of credits for a taxable
year, or $60,000 of credits for a taxable year if the research was conducted in conjunction with a Virginia public or private college or university.


Taxpayers also may qualify for a
separate credit for “Major research and development expenses” that exceed $5 million in a taxable year. The credit is 10% of the excess of qualified research expenses over the base amount.
WisconsinC corporations and publicly traded partnerships and LLCs taxed as C corporations. Partnerships and S corporations, including LLCs treated as partnerships or S corporations, can’t claim the credit, but the eligibility for claiming the credit and the computation of the credit is based on the amount the entity pays for qualified research activities. The credit computed by those business entities can pass through and be claimed by the partners, members, or shareholders. (Find more information here.)

5.75% of the excess of qualified research expenses over the base amount.


11.5% for research activities related to internal combustion engines for vehicles or certain energy-efficiency products.

Barbara C. Neff has been writing about a variety of legal and other topics since 2001. She has a law degree and a master's degree in journalism.
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