For this month’s “What’s Happening in Your State?” series, we’re excited to talk about Iowa!
Iowa’s R&D tax credit has been around for quite some time, but recently underwent some changes as part of an extension state tax reform bill in 2018. The main updates in 2018 included how the credit is calculated and placed limits on who can claim the credit.
Requirements & Qualifications
Officially known as Research Activities Credit, Iowa’s R&D tax credit can offset both individual and corporate income tax, but a taxpayer must meet certain requirements to successfully claim the credit. First, unlike several other states, a company must claim and be allowed a federal R&D tax credit for the same taxable year. Secondly, a taxpayer must be in one of the following industries to qualify for the Iowa credit: manufacturing, life sciences, software engineering, and aviation/aerospace. There are also several industries that are specifically excluded, including, but not limited to: agricultural production or agricultural cooperatives, architects, and commercial and residential contractors engaged in installation and repair.
How is R&D Calculated in Iowa?
Similar to the federal R&D credit, Iowa offers two methods of calculating the R&D credit: 1) the regular credit and 2) the alternative simplified credit. The regular credit is 6.5% of qualifying research expenses that exceed the base amount or 50% of qualifying research expenses, whichever is lower. Iowa’s alternative simplified credit is 4.55% of the difference between the current year qualifying expenses and 50% of the average qualifying expenses for the three prior years.
The Iowa R&D can be used to offset the taxpayer’s income tax liability. Any research credit in excess of the tax liability may be refunded to the taxpayer or credited to the following year.
Interested in learning more about how your company may be able to take advantage of the R&D credit? Submit your information here!