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”:
- 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,
- The research is undertaken to discover information that’s technological in nature (that is, it relies on physical, biological, engineering, or computer science principles),
- The research is intended for use in developing a new or improved business product or process, and
- 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.
State | Eligible taxpayers | Available credit* |
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Arizona | All 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. |
Arkansas | All 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. |
California | All entities. (Find more information here.) | The credit is equal to the sum of:
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. |
Connecticut | C 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. |
Delaware | Any 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 |
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:
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. |
Idaho | All entities. (Find more information here.) | The sum of:
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Illinois | All entities. | 6.5% of the excess of qualifying expenditures over the base amount. |
Indiana | All 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. |
Iowa | Businesses that:
| The sum of:
Taxpayers can opt for an alternative simplified credit that equals 4.55% of increased research expenses plus 6.5% of increased basic research expenses. |
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. |
Kentucky | All 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:
| Taxpayers with 100 or more employees: 5% of the excess of qualified research expenses over the base amount. |
Maine | All entities. (Find more information here.) | The sum of:
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. |
Maryland | All 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. |
Massachusetts | Corporations subject to the corporate excise tax. (Find more information here.) | The sum of:
The credit amount that can be claimed in a year is limited to:
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Michigan | All 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. |
Minnesota | All 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. |
Missouri | All 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).
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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).
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New Jersey | Corporations that file IRS Form 6765. (Find more information here.) | The sum of:
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New Mexico | All 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).
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New York | Approved 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 Dakota | All 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. |
Ohio | All entities. (Find more information here.) | 7% of the excess of qualified research expenses over the base amount. |
Pennsylvania | All 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 Island | All 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 Carolina | All 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. |
Texas | All 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. |
Utah | All entities. (Find more information here.) | The sum of:
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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. |
Virginia | All 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 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. |
Wisconsin | C 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.
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