Are R&D Tax Credits Available in Iowa?

Yes. The state of Iowa provides the Research Development (R&D) Tax Credit similar to the federal Tax Credit version in that it allows the credit to be calculated using either the Regular or Alternative Simplified Credit Method. Additionally, the definition of qualifying research is the same as defined in IRC Sec. 41. Below are some of the differences between the federal Tax Credit and the Iowa Tax Credit.

  • The Iowa Tax Credit is fully refundable after a company's tax liabilities are met.
  • Only expenses incurred in Iowa can be captured towards the Iowa research activities credit.
  • The Iowa regular credit is 6.5% of the lower of qualifying research expenditures that exceed a base amount or 50% of qualifying research expenditures.
  • Iowa's Alternative Simplified Credit is 4.55% of expenditures that occurred in Iowa for the past three years.
  • Companies that receive awards from the Iowa Economic Development Authority under the Enterprise Zone Program or the High-Quality Jobs Program can calculate a Supplemental Research Activities Credit. The Supplemental Credit is an additional 10% of a company's qualifying incremental research expense for gross revenues less than $20 million and 3% for a company with gross revenues over $20 million.
  • The Supplemental Research Activities Credit must be calculated using the same method that the Research Activities Tax credit was calculated.

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)

Iowa R&D Tax Credit Case Study

A Company that has a development and design facility in the automotive field in Iowa had previously taken the R&D Tax Credit, but had not done so in recent years. This project involved a three year study.

The Company qualified for the federal R&D Tax Credit of $305,063 and an additional $99,145 in refundable Iowa state R&D Tax Credit.

FEDERAL
IOWA
Year
Total QREs
Credit
Total QREs
Credit
Year 3
$2,387,778
$95,853
$2,387,778
$30,827
Year 2
2,258,977
75,843
2,258,977
24,646
Year 1
2,598,748
87,338
2,598,748
43,669
Total $7,245,503 $305,063 $7,245,503 $99,145


You can read more about this Iowa tax credit case study here.