Are R&D Tax Credits Available in Delaware?

The state of Delaware has a Research and Development (R&D) Tax Credit very similar to the federal version including the definition of qualifying research. Below are some of the differences between the federal and Delaware research credits:

  • There are two ways to calculate the Delaware research credit.
    • The Delaware credit may be calculated by taking 10% of the excess of Delaware qualified R&D expenses for the taxable year over the taxpayer’s Delaware base amount.
    • The Delaware credit may also be calculated by taking 50% of Delaware’s apportioned share of the taxpayer’s federal R&D credit calculated using the Alternative Simplified method.
  • For taxpayers with average gross receipts under $20 million, the credit rate under the first calculation method is adjusted to 20%, and using the Alternative Simplified method allows 100% of Delaware’s apportioned share of the federal credit.
  • Qualified research must take place in Delaware.
  • Unused tax credits will be refundable, which means that unused tax credits will be paid to the taxpayer in the form of a tax refund.
  • Qualified taxpayers must submit an application to the Division of Revenue on or by September 15 after the end of the taxable year during which the qualified R&D expenses were made.

Delaware R&D Tax Credit Case Study

A company in Dover, Delaware with fewer than 50 employees had never before claimed the R&D Tax Credit. This project involved a multi-year study covering the tax years 2019 – 2021. The Company qualified for the federal R&D Tax Credit of $271,832 and an additional $114,562 of state R&D Tax Credit in Delaware.

FEDERAL
DELAWARE
Year
Total QREs
Credit
Total QREs
Credit
2021
$1,200,000
$127,166
$1,000,000
$52,986
2020
$850,000
$92,166
$700,000
$37,951
2019
  $500,000
$52,500
$450,000
$23,625
Total $2,550,000 $271,832 $2,150,000 $114,562


You can read more about this Delaware case study here.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

  • Technological in Nature
    Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

  • Permitted Purpose
    Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

  • Eliminate Uncertainty
    Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

  • Experimentation
    All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.

Research and Development Tax Insights

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