Are R&D Tax Credits Available in Delaware?

The state of Delaware provides the 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 Pennsylvania research credits:

  • There are two ways to calculate credit. First, use 10% of the excess of the taxpayer's total Delaware qualified R&D expenses for the taxable year over the taxpayer's Delaware base amount. Second, 50% of Delaware’s apportioned share of the credit if using the federal Alternative Simplified method.
  • For taxpayers with average gross receipts under $20 million, the credit rate is adjusted to 10%, and using the Alternative Simplified method allows 100% of Delaware’s apportioned share of the federal credit.
  • Qualified research must take place in Delaware.
  • Excess Delaware research credits can be carried forward for fifteen years and are refundable.
  • Qualified taxpayers must submit an application to the Division of Revenue by September 15 for research expenses incurred in the taxable year that ended in the prior calendar year.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

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.