Iowa R&D Tax Credit

Iowa research and development tax credit for corporate and individual income tax has changed after the 2018 Iowa Tax Reform Bill. There are two modifications, which include new limitations on who can claim the credit and how the credit is calculated. For this reason, it is necessary to go over the new Iowa R&D tax credit in more detail. That way, you will know whether your company still qualifies for its benefits.

Iowa Research Tax Credit Explained

If a taxpayer complies with IRC § 41’s standards, the state of Iowa provides a refundable research activities credit. But to apply for the Iowa R&D tax credit, the taxpayer must also claim the federal credits on Form 6765.

Iowa research tax credit is roughly 6.5% of all increased research costs plus 6.5% of all basic research costs incurred in Iowa. You can also use an alternative simplified credit (ASC) calculation, which equals around 4.55% of the expenditures made in Iowa during the previous three QREs on average.

Qualifying Industries and Activities

The taxpayer must work in one of the industries listed below to apply.

Manufacturing

Manufacturing activities that qualify for Iowa tax credit include purifying, refining, packing meats, and combining different materials. Moreover, credit covers activities that follow the extraction process of quarrying or mining, like blending aggregate materials, sizing, washing, and crushing.

Life Sciences

The Iowa R&D tax credit also covers science fields that focus on the study of living things, such as agronomy, biochemistry, physiology, microbiology, zoology, biology, and botany.

Software Engineering

Your company can apply if it closely studies software development, operation, and maintenance.

Aviation & Aerospace

Your company qualifies if it is involved in the planning, creating, or manufacturing of spacecraft, rockets, missiles, and other aerospace-related gear and machines.

Industries and Activities That Do Not Qualify

• Agricultural cooperatives and agricultural production;

• Builders, contractors, and contractor-retailers working on both commercial and residential installations and repairs;

• Financial services, collection firms, property investment firms, or real estate;

• Publishing firms;

• Architecture;

• Wholesalers or retailers that provide transportation.

2018 Modifications: How Do They Affect You?

If a company has not yet claimed the credit for tax years before 2018 but qualifies under the new regulations, it should file a return and attach a copy of the new Iowa Form 128 or Iowa Form 128S. On the other hand, if a company has already claimed the credit for the tax year 2017 and is still qualified under the new rules, there is no need to take any additional action. In other words, there’s no need to fill out a new form.

If a firm has previously claimed the R&D Credit for a past tax year but no longer qualifies, it should file an updated return to add back the amount claimed. However, they should mind the due date to avoid getting a notice of assessment from the Department.

How to Calculate the Iowa Research and Development Tax Credit

Regular Method

6.% of the amount of qualifying research expenses that are over the base level. The base level is calculated using the allocation of research expenses for Iowa for the tax year. That said, the base amount must equal at least 50% of the QREs for the credit year.

Alternative Simplified Method

4.55% of the difference between the Iowa QREs for the current year and the average Iowa QREs for the previous three years.

Iowa Research and Development Tax Credit: Takeaway

Similar to the federal R&D tax credit, you can calculate the Iowa tax credit using either the Regular or Alternative Simplified Credit Method. However, only specific types of industries are eligible for the credit. They include manufacturing, life sciences, software engineering, and aviation and aerospace. Any R&D tax credit that exceeds tax liability might be repaid or applied to tax liabilities due the following year.

FAQs

What kind of companies can apply in Iowa?

Partnerships, LLCs, S-Corporations, C-Corporation

What is the deadline for applying in Iowa?

You must submit your application at the same time as the Iowa Tax Return.

What data do I need to calculate credit in Iowa?

Claim period federal QREs (Qualified R&D Expenses)

What information do I need to provide?

Iowa QREs for the claim period and Iowa QREs for the past three years.

Is credit carryforward an option in Iowa?

No.