Are R&D Tax Credits Available in Illinois?

Yes. The state of Illinois provides the Research Development (R&D) Tax Credit very similar to the federal research tax credit version, including the definition of qualifying research. Below are some of the differences between the federal and Illinois research credit.

  • Qualified research is defined in IRC sections 41(d) and 41(e) and includes the sum of the in-house research expenses, contract research expenses, and basic research payments paid or incurred by the business.
  • The Illinois credit is calculated by taking 6.5% of the qualifying expenses for increasing research activities in Illinois, which exceed a base amount. The Illinois research credit is not refundable.
  • The base amount is the average qualifying expenses in the 3 taxable years immediately preceding the taxable year for which the determination is being made.
  • Any unused research credit may be carried forward 5 years or until it has been fully utilized, whichever occurs first.
  • A partnership, S corporation, or LLC must distribute credits to its partners, shareholders, or members based on their distributive share of the entity’s income or, effective beginning with the 2023 tax year, a written agreement.
  • The Illinois research credit will sunset or expire on December 31, 2031.

Illinois R&D Tax Credit Case Study

A Chicago company manufactures components for farming equipment. The company claims research credits each year for the design and development activities of its engineers as well as the prototype supplies used in conducting research. This project involved a four year study with a three year look back.

The company qualified for the federal R&D Tax Credit of $582,563 and an additional $165,577 in Illinois state research credit. 

FEDERAL
ILLINOIS
Year
Total QREs
Credit
Total QREs
Credit
Year 4
$2,050,000
$200,083
$2,050,000
$52,542
Year 3
1,585,000
160,510
1,585,000
46,020
Year 2
1,305,000
140,070
1,305,000
45,240
Year 1
835,000
81,900
835,000
21,775
Total $5,775,000 $582,563 $5,775,000 $165,577

You can read more about this illinois tax credit 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.