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.

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

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.