Indiana R&D Tax Credits

State and Federal Credits Available

15%

on first $1M of excess QREs

10%

on excess QREs over $1M

Years Carryforward

100%

Sales & Use Tax Exemption on qualified R&D equipment

The Indiana Research and Development Tax Credit, governed by Indiana Code § 6-3.1-4-1, incentivizes businesses to invest in qualified research activities within the state, providing offsets against state income tax liabilities administered by the Indiana Department of Revenue. This credit aligns closely with federal IRC § 41 guidelines while offering state-specific benefits, including tiered rates and a sales tax exemption on R&D equipment

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15%

on first $1M of excess QREs

10%

on excess QREs over $1M

Years Carryforward

100%

Sales & Use Tax Exemption on qualified R&D equipment

Key Highlights

Tiered credit rates: 15% on the first $1 million of qualified research expenses (QREs) exceeding the base amount, and 10% on amounts above $1 million
Alternative simplified credit (ASC) available: 10% of the portion of current QREs exceeding 50% of the average QREs from the prior three years (5% of current QREs if no QREs in any one of those years)
Nonrefundable but carries forward for 10 years; no annual cap on usage
100% exemption from sales and use tax on depreciable tangible personal property used directly in qualified research
Applies to in-state research only; available to C corporations, S corporations, partnerships, LLCs, trusts, and estates
Separate, targeted aerospace research credit available under IC 6-3.1-4-2.5 for certified aerospace advanced manufacturers, with rates up to 10% as determined by the Indiana Economic Development Corporation

Who Qualifies for the Indiana R&D Tax Credit

Eligibility mirrors federal IRC § 41 but requires activities and expenses to occur in Indiana. Businesses must perform qualified research to develop or improve products, processes, techniques, formulas, or software

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

How to Calculate the Indiana R&D Tax Credit

Calculations use only Indiana-sourced QREs. Indiana follows the federal IRC 41(c) base framework but substitutes Indiana QREs and Indiana gross receipts in the fixed-base percentage and average receipts calculations.

Regular Method

Determine total Indiana QREs for the tax year.
Compute the base amount: fixed-base percentage × average Indiana gross receipts for the prior four tax years (minimum 50% of current QREs; startups use a 3% fixed-base percentage for the first five years, phasing up to 16% by year 10).
Calculate excess QREs: current QREs - base amount.
Apply tiered rates to the excess: 15% on the first $1 million, 10% on any amount above $1 million.

Example Calculation

QREs = $2.5 million; Base = $800,000; Excess =$1.7 million

Credit = (15% × $1 million) + (10% × $700,000) = $150,000 + $70,000 =$220,000

Alternative Simplified Credit (ASC)

This method simplifies the base for businesses with fluctuating QREs.

Calculate the average Indiana QREs for the prior three tax years.
Base = 50% of that average.
Excess = current QREs - base.
Credit = 10% × excess. If the taxpayer had no Indiana QREs in any one of the prior three years, the credit is 5% of current year Indiana QREs (this applies when Indiana QREs are zero in any one of the prior three years).

Example Calculation

Current QREs = $2 million; Prior 3-year average = $1.2 million; Base = $600,000; Excess =$1.4 million

Credit = 10% × $1.4 million =$140,000

Fallback Example (No Prior QREs in One Year)

Current QREs =$2 million; No QREs in one prior year

Credit = 5% × $2 million =$100,000

Gross Receipts for Base Calculation

Use only Indiana gross receipts when computing the base amount. Indiana follows the federal IRC § 41(c) base rules, but substitutes Indiana gross receipts and Indiana QREs in the fixed-base percentage and average receipts calculations.

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Indiana-Specific Rules

Indiana's R&D credit features tiered incentives and exemptions tailored to support innovation in manufacturing, tech, and other sectors, with tens of millions of dollars in annual claims.

Tiered Rates for Scalability

The 15% rate on the first $1 million of excess QREs provides high immediate value for smaller or growing firms, while the 10% tier above ensures benefits scale for larger projects—ideal for Indiana's robust manufacturing base.

100% Sales & Use Tax Exemption

Businesses can claim a full exemption (or refund if tax was paid) on purchases of depreciable tangible personal property used in qualified research, such as lab equipment or prototypes. This adds significant cash flow benefits beyond the credit itself; apply via Form ST-105 for exemption certificates.

ASC for Fluctuating or Limited History

The 10% ASC uses a simple 50% prior-average base, benefiting businesses with variable expenses. If no QREs occurred in any one of the prior three years, a flat 5% of current QREs applies, providing a safety net for emerging operations.

Other Unique Rules

Startup Fixed-Base Phase-In: 3% fixed-base percentage for the first five credit years under the regular method, increasing annually to 16% by year 10—based solely on Indiana gross receipts.
Pass-Through Treatment: Credits flow pro-rata to owners via Schedule K-1; trusts and estates can claim the credit on their own returns, but beneficiaries generally do not receive pass-through credits except in grantor trust situations. Unitary groups file combined returns for optimized allocation.
In-State Documentation: Must substantiate Indiana locations for activities, personnel, supplies, and contracts; retain records for four years to support audits.
No Refund Option: Fully nonrefundable; offsets tax imposed under IC 6-3 (Indiana income tax) only.
Election Rules: The ASC is elected annually at the taxpayer's option. For the separate aerospace alternative under IC 6-3.1-4-2.5, the election applies for the year made and all succeeding years unless revoked with Department of Revenue consent.

Tiered Rates for Scalability

100% Sales & Use Tax Exemption

ASC for Fluctuating or Limited History

Other Unique Rules

Startup Fixed-Base Phase-In: 3% fixed-base percentage for the first five credit years under the regular method, increasing annually to 16% by year 10—based solely on Indiana gross receipts.
Pass-Through Treatment: Credits flow pro-rata to owners via Schedule K-1; trusts and estates can claim the credit on their own returns, but beneficiaries generally do not receive pass-through credits except in grantor trust situations. Unitary groups file combined returns for optimized allocation.
In-State Documentation: Must substantiate Indiana locations for activities, personnel, supplies, and contracts; retain records for four years to support audits.
No Refund Option: Fully nonrefundable; offsets tax imposed under IC 6-3 (Indiana income tax) only.
Election Rules: The ASC is elected annually at the taxpayer's option. For the separate aerospace alternative under IC 6-3.1-4-2.5, the election applies for the year made and all succeeding years unless revoked with Department of Revenue consent.

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Indiana R&D Tax Credits Case Study

An Indiana-based manufacturing company recovered thousands in R&D tax credits to refuel growth.

$115,000

total state R&D tax credits earned

62%

of wages qualified for credits

$657,000

total R&D tax credits earned (federal + state combined)

Frequent Asked Questions

What is the Indiana R&D tax credit?

The Indiana Research Expense Tax Credit offers 15% on the first $1 million of incremental QREs over the base and 10% on excess above $1 million, aligning with IRC § 41 to encourage in-state innovation. Strike Tax helps businesses navigate eligibility and maximize claims.

What activities qualify for Indiana’s R&D tax credit?

Eligible activities include developing or improving products, processes, or software through experimentation to resolve technological uncertainty, such as prototyping in manufacturing or software algorithms—provided they occur in Indiana. Strike Tax verifies qualifying projects.

How much can my business save with Indiana’s R&D tax credit?

For $2 million in incremental QREs (with $800,000 base), you could save $220,000 ($150,000 at 15% + $70,000 at 10%), plus federal stacking and sales tax exemptions. Use Strike Tax’s R&D Credit Calculator for a personalized estimate.

Are Indiana R&D tax credits refundable or carryforward?

Credits are nonrefundable but may be carried forward for up to 10 years to offset future Indiana income tax liability. Strike Tax optimizes carryforward strategies for long-term value.

How do I apply for Indiana’s R&D tax credit?

File with Indiana income tax return using Schedule IN-REC.

What are the 2025 changes to R&D tax credits in Indiana?

As of the latest available guidance, Indiana’s REC structure and rates remain unchanged, with only technical amendments in 2024. Taxpayers should monitor future Department of Revenue or legislative updates. Strike Tax stays informed on any developments.

What is the sales and use tax exemption for Indiana R&D?

Indiana provides a 100% exemption on sales/use tax for depreciable tangible personal property (e.g., lab equipment) used directly in qualified research. Obtain exemption certificates via Form ST-105; refunds available if tax was paid upfront. This complements the credit for added savings.

How does the alternative simplified credit (ASC) work in Indiana?

The ASC calculates 10% of current QREs exceeding 50% of the prior three-year average. If no QREs occurred in any one of those years, it falls back to 5% of current QREs. It's elected annually, ideal for fluctuating expenses.

What is the separate aerospace research credit in Indiana?

Under IC 6-3.1-4-2.5, certified aerospace advanced manufacturers (e.g., Department of Defense contractors with at least 3,000 Indiana employees) may qualify for a separate credit up to 10% as determined by the Indiana Economic Development Corporation, using a 50% prior-average base.

Can pass-through entities claim Indiana R&D credits?

Yes, partnerships, LLCs, and S corporations pass credits pro-rata to owners via K-1. Trusts and estates can claim on their own returns, with limited pass-through to beneficiaries (e.g., grantor trusts only). Strike Tax ensures proper allocation for multi-owner structures.

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