Iowa R&D Tax Credits

The state of Iowa offers a refundable Research Activities Credit, so long as the taxpayer meets the requirements of IRC § 41. The Iowa refundable credit is roughly 6.5% of increased research expenses plus 6.5% of basic research expenses conducted in Iowa.  There is also an alternative simplified credit (ASC) calculation method which is worth roughly 4.55% of the expenditures occurred in Iowa over the average of the prior three-year QREs. Additionally, the taxpayer must claim the federal credits on Form 6765 in order to claim Iowa R&D credits.

Learn more about Iowa's R&D Tax Credit law here.

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R&D Tax Credit Available:

Yes

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Eligible Entities:

C-Corporations, S-Corporations, LLCs, Partnerships

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Deadline for Tax Filing:

Due with Iowa Tax Return

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Data Required to Compute Credit:

Claim Period Federal Qualified R&D Expenses (QREs)

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What Information is needed?

Claim Period IA QREs

IA QREs for Prior 3 Years

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Credit Carryforward:

None

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The R&D tax credit equals:

• Regular Method: 6.5% of the excess of qualified research expenses during the tax year over a computed base amount of expenditures using Iowa's apportioned share of research expenses.
• Alternative Simplified Method: 4.55% of the difference between the current year Iowa QREs and 50% of the average of the prior 3 years Iowa QREs.

The Base Amount shall not be less than 50% of the QREs for the credit year.

The law underwent changes in 2018 leading to two modifications, specifically:

1. a clarification of how the credit is calculated; and
2. limitations on who may claim the credit.

If a business had not yet claimed the credit for tax years prior to 2018 but is eligible under the new limitations, the business should complete a return and include a copy of the new Iowa Form 128 or Iowa Form 128S. If a business has already claimed the credit for tax year 2017 and is still eligible under the new limitations, no further action is needed. There is no need to complete an updated 2017 form.

If a business already filed a credit claim for a prior tax year and is no longer eligible, the business should file an amended return to add back the amount of the Research Activities Credit claimed. The business should file an amended return by October 31, 2018, in order to avoid receiving a notice of assessment from the Department. Penalties and interest through October 31, 2018 will be waived for a taxpayer who files an amended 2017 return to add back a Research Activities Credit and files a Penalty Waiver Request. The waiver will only apply to adjustments attributable to the Research Activities Credit.

Specific Items to Note:

Any R&D tax credit in excess of tax liability can either be refunded or credited to tax liabilities due in the subsequent year.

Taxpayer must be engaged in one of the following industries:

• Manufacturing - Activities commonly understood within the ordinary meaning of the term and includes refining, purifying, combining of different materials, packing of meats, 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 agricultural science, biology, botany, zoology, microbiology, physiology, biochemistry, and related subjects.
  
• Software Engineering - The detailed study of the design, development, operation, and maintenance of software.
  
• Aviation & Aerospace - The design, development or production of aircraft, rockets, missiles, spacecraft and other machinery and equipment that operates in aerospace.

The taxpayer cannot be engaged in any of the following industries:

• Agricultural production or agricultural cooperatives;
• Contractors, subcontractors, builders, or contractor-retailers engaged in commercial and residential installation/repair;
• Financial services, collection agencies, real estate, or investment companies;
• Publishing companies;
• Retailer transportation companies or wholesalers; or‍
• Architecture.