Delaware Research Tax Credit Explained

Have you considered applying for the Delaware R&D tax credit? Thousands of qualified businesses fail to take advantage of the federal and state R&D tax credits. The reasons can vary, but mostly they believe they need to be profitable or invent an entirely new product to qualify. However, that is not the case.

You need the right information to determine whether your business qualifies for such credit. For this reason, this article will discuss Delaware research and development tax credits in more detail.

Delaware provides a research credit that you can calculate similarly to IRC § 41. Before 2019, the state had an R&D tax credit expenditure maximum of $5 million. But now, there’s no limit, meaning businesses can receive 100% of the promised credit. Furthermore, the tax benefit is now refundable.

Two Ways to Calculate Delaware R&D Tax Credit

The Delaware credit has two ways of computation. The first approach offers a credit equivalent to 10% of the company’s eligible Delaware QREs over the Delaware base amount. The federal ASC credit for the taxpayer under the second approach is calculated as a credit equal to 50% of the taxpayer’s allotted share. In accordance with Delaware law, any part of the credit that is not usable because of liability limitations will be refunded.

How to apply for a Research and Development Tax Credit in Delaware

Any taxpayer who wants to be eligible for the Delaware R&D tax credits must first receive approval from the Delaware Division of Revenue (DOR). Once the Delaware DOR authorizes the credit, the amount on Delaware Form 2071AC must be moved to the relevant line on Delaware Form 700. The taxpayer must also include both Delaware 700 and 2071AC forms with each granted annual income tax return.

Delaware is the only state in the US with a combination of refundable tax credits and a zero-expenditure cap. Please follow this link to read more about the Delaware research tax credit.

How to Calculate an R&D Tax Credit

Option 1:

The credit is 10% of the taxpayer’s overall Delaware QREs over the Delaware base amount for the taxable year, or 20% of the taxpayer’s overall Delaware base amount for a small firm with less than $20,000,000 in gross revenues.

Option 2:

50% of Delaware’s proportional part of the taxpayer’s federal R&D tax credit as determined under the Alternative Simplified Credit system.

Delaware’s R&D Tax Credit: Takeaway

Any R&D work in Delaware that qualifies for a federal tax credit can also get the Delaware credit. However, the Delaware research and development tax credit might not reach 50% of the federal credit amount. In other words, if a business gets $1 million in federal credit, it can also get an extra $500,000 in tax credit for the same R&D costs (only if all the expenditures are connected to Delaware-related activities). Companies that want to discover if they can apply for a tax credit can utilize the federal R&D tax credit rules (IRC 41).

FAQs (Frequently Asked Questions)

What kind of companies can apply in Delaware?

Partnerships, LLCs, S-Corporations, and C-Corporations.

What is the deadline for applying in Delaware?

September 15th.

What data do I need to calculate the credit in Delaware?

Claim period QREs (Qualified R&D Expenses)

What information do I need to provide?

Gross receipts and QREs for the past four years.

Is credit carryforward an option in Delaware?

Yes, any credits that exceed tax obligations are refundable.