Are R&D Tax Credits Available in Kentucky?

Yes. The state of Kentucky provides the Research and Development (R&D) Tax Credit for businesses that invest in facilities used to pursue research and may qualify for a state income tax credit. Here is a summary:

  • The nonrefundable income tax credit is equal to five percent (5%) of the qualified cost for "construction of research facilities" for "qualified research" as defined in Internal Revenue Code Section 41.
  • "Construction of research facilities" means constructing, remodeling, and equipping facilities in Kentucky or expanding existing facilities in Kentucky for qualified research.
  • Includes only tangible, depreciable property, and does not include any amounts paid or incurred for replacement property.
  • Any unused credit may be carried forward for 10 years.
  • The tax credit was enacted in 2002 and currently applies to taxable years beginning on or after January 1, 2007.

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)

Kentucky R&D Tax Credit Case Study

A company constructed a new research facility in Lexington, Kentucky. The company designs and manufactures components for the automobile industry. In addition to the federal R&D Tax Credit it has traditionally claimed, the company claimed state R&D Tax Credits for the construction of a new research facility in 2014. This project involved a multi-year study covering the tax years 2011 - 2014.

The Company qualified for the federal R&D Tax Credits of $327,833 and an additional $210,000 in Kentucky state R&D Tax Credit.

FEDERAL
KENTUCKY
Year
Total QREs
Credit
Total QREs
Credit
2014
$1,300,000
$135,333
$4,200,000
$210,000
2013
900,000
91,100
NA
NA
2012
650,000
63,000
NA
NA
2011
450,000
38,500
NA
NA
Total $3,300,000 $327,833 $4,200,000 $210,000