Are R&D Tax Credits Available in Indiana?

Yes. The state of Indiana allows a taxpayer who incurs Indiana qualified research expenses (QREs) to claim a research tax credit. Indiana leverages from the federal section 41 rules regarding the calculation and qualification of qualified research activities with some modifications.

  • Applicable Indiana code section is Ind. Code Sec. 6-3.1-4-1.
  • Qualified Research Expenses ("QREs") are expenses applied to research conducted in Indiana.
  • For Expenses incurred on or after January 1, 2008, the credit amount is calculated using the following steps:
    • Step 1. Subtract the base amount from the Indiana QREs
    • Step 2. Multiply the lesser of $1 million or the result of Step 1 by 15%
    • Step 3. If the remainder of Step 1 exceeds $1 million, multiply the excess over $1 million by 10%
    • Step 4. The credit is equal to the sum of Step 2 and Step 3.

Alternative method of calculating R&D tax credit:

An alternative credit calculation method is available for the following taxpayers:

  • Taxpayers engaged in the production of civil and military jet propulsion systems
  • Taxpayers certified by the Indiana Economic Development Corporation as an aerospace advanced manufacturer
  • US Department of Defense contractors
  • Taxpayers who maintain manufacturing facilities in Indiana with at least 3,000 full time employees who are paid on average more than 400% of the hourly minimum wage

Under the alternative credit calculation method, the credit is calculated by taking a percentage (no more than 10%) of the taxpayer’s Indiana QREs less 50% of the average Indiana QREs for the three prior taxable years.

  • If the taxpayer did not have Indiana QREs in all three prior years, the credit amount is 5% of the taxpayer's QRE for the taxable year.
  • Tax years starting 2006, for taxpayers involved in the production of civil and military jet propulsion, the credit amount is a percentage determined by the Indiana Economic Development Corporation, which should not exceed 10%, multiplied by the taxpayer's Indiana QREs minus 50% of the taxpayer's average of the previous three years' QREs.
  • The Indiana research credit is nonrefundable. Indiana allows a 10-year carry forward period for any unused R&D tax credits.

Indiana R&D Tax Credit Case Study

An Indiana life sciences company with fewer than 100 employees had never before claimed the R&D Tax Credit. This project involved a multi-year study.

The Company qualified for the federal R&D Tax Credit of $312,666 and an additional $81,250 in Indiana state R&D Tax Credit.

FEDERAL
INDIANA
Year
Total QREs
Credit
Total QREs
Credit
2018
$1,012,550
$101,255
$1,012,550
$75,941
2019
955,200
95,520
955,200
71,640
2020
905,800
90,580
905,800
67,935
2021
895,700
89,570
895,700
67,178
Total $3,769,250 $376,925 $3,769,250 $282,694


You can read more about this Indiana 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.