The Indiana research expense credit (REC) provides an incentive for increasing qualifying research activities that are done in Indiana. This credit is similar to the federal credit for research and experimental expenses paid in carrying on your trade or business in Indiana. S corporations and partnerships may pass through the credit to their shareholders and partners.
This year, Indiana passed HEA 1001, Section 121 making changes to IC 6-3.1-4-8. These changes go into effect January 1, 2019. Below is a list of the major changes to this section:
- Adds a new section whereby a taxpayer who claims a credit for Indiana qualified research expenses under this chapter for a taxable year must report to DOR whether it has determined a credit for those Indiana qualified research expenses under either IRC Sec. 41(a)(1) or (c)(4) and claimed the credit for those Indiana qualified research expenses under either of the aforementioned IRC sections.
- If a taxpayer claims an Indiana credit for those qualified research expenses under this chapter, and does not claim an Indiana credit for those qualified research expense for federal tax purposes, the taxpayer must disclose to DOR any reasons for not claiming the credit for those Indiana qualified research expenses for federal purposes for the taxable year. The disclosure under this subsection shall be made in the manner specified by DOR.
- For purposes of IC 6-3-4-6 and IC 6-8.1-5-2, a change to the federal credit under the above mentioned IRC sections shall be considered a modification.
- In addition, DOR may adopt rules including emergency rules.
Frequently Asked Questions
- What credit is available?
The Indiana research expense credit’s potential value is equal to the taxpayer’s qualified research expense for the tax year, minus the base period amount up to $1 million, multiplied by 15%. A credit percentage of up to 10% is applied to any excess of qualified research expense over a base period amount greater than $1 million. For the aerospace industry there is an alternative method of calculating this credit.
- Who is eligible?
Corporations and pass through entities (S corporations, partnerships, LLCs and LLPs. Trusts and estates can claim the credit against their own liabilities. However, beneficiaries of estates or trusts are NOT eligible except Grantor Trusts.
- What is a qualified research expense?
Qualified research expenses are defined under IRC §41(b), and must be incurred in an activity meeting the definition of "qualified research" as explained in the Indiana Research Expense Credit Handbook. Further, the qualified research expenses must be incurred in qualified research activities being conducted in Indiana.