Utilizing R&D Tax Credits, Indiana is focused on the innovation of tomorrow.

Utilizing R&D Tax Credits, Indiana is focused on the innovation of tomorrow.

Posted by Robert Hancock on 02.26.20

Driven by a diverse and robust economy, Indiana is a state focused on innovation. Indiana is the orthopedics capital of the world and the world’s second-largest manufacturer in the automotive industry. Indiana is also leading the nation in manufacturing jobs creation and making a major impact on the global marketplace through a wide range of industries. Companies performing research and development (R&D) activities in the state of Indiana may be eligible to receive state R&D tax credits as well as Federal tax credits with certain qualifications.

The Indiana R&D credit is an outstanding opportunity for taxpayers to receive credit for qualified research expenses they are conducting within the state. This incentive is in addition to the federal R&D tax program, which Congress made permanent in 2015. The R&D tax credit encourages and rewards companies that bring new or improved products to market; as well as companies which improve the process. The R&D tax credit originally pertained to basic research expenses, such as those occurring in a laboratory setting. Subsequent modifications simplified the credit and made it available to a wider variety of businesses. The Indiana R&D tax credit reduces the income or franchise tax of those taxpayers who engage in qualified research activities in Indiana. Qualified research expenses (QREs) generally include wages, supplies and contract research costs. 

Indiana offers many business tax incentives, corporate tax credits and economic development programs for companies creating new jobs and investment in Indiana. The business tax structure is also very competitive. Indiana’s corporate income tax is decreasing from the current 6.5% to 4.9% by 2021. As the decrease is phased in, the rate will drop each year. Indiana has a flat state corporate tax rate on adjusted gross income and no gross receipts tax or inventory tax.

Industries in Indiana that can benefit from R&D Tax Credits

Indiana is one of only two states with specialized employment concentration in four of the five major life sciences sub-sectors: agricultural feedstock and chemicals; drugs and pharmaceuticals; medical devices and equipment; and bioscience-related distribution. Warsaw, Indiana, is known as “The Orthopedics Capital of the World.” By combining the state’s advanced manufacturing expertise with world class universities and research facilities, Indiana is helping lead the progression to create innovative new products and processes that will in turn improve the U.S. economy. Indiana is leading the nation in manufacturing job growth and is home to the second largest automotive industry in the nation. In 2016, the automotive industry directly employed more than 128,800 workers in Indiana. Indiana is leading a tech transformation in the Midwest with an impressive portfolio of global tech companies. With more than 14.7 million acres of farmland, Indiana is a leading producer of corn, soybeans, hogs, poultry, popcorn, and tomato products. With innovations in research and technology, Indiana is helping to fuel a revolution in precision agriculture transforming the Corn Belt to a new Tech Belt that is offering data and research-driven solutions aimed at closing the global food gap.

R&D Tax Credits

The state of Indiana offers two tax incentives targeted at encouraging investments in research and development. Taxpayers may receive a credit against their Indiana state income tax liability calculated as a percentage of qualified research expenses. In addition, taxpayers may be refunded sales tax paid on purchases of qualified research and development equipment. The Indiana Department of Revenue oversees these incentive programs. Select from the menu to learn about our Research Expense Credits and our Research and Development Sales Tax Exemption. The potential value of incentive amounts vary based upon the amount of the qualifying transaction. A taxpayer who qualifies for the exemption must claim the exemption in a manner prescribed by the Indiana Department of Revenue. The form used to claim the exemptions is available at www.in.gov/dor.

Research Expense Credits

A taxpayer may be eligible for a credit on qualified research expenses. The potential value of the credit is equal to the taxpayer’s qualified research expense for the taxable year, minus the base period amount up to $1 million, multiplied by 15 percent. A credit percentage of up to 10 percent is applied to any excess of qualified research expense over a base period amount greater than $1 million. Additionally, for Indiana qualified research expenses incurred after December 31, 2009, an alternative method of calculating the credit is available.

At the taxpayer’s election, the amount of the taxpayer’s research expense tax credit is equal to ten percent of the part of the taxpayer’s Indiana qualified research expense for the taxable year that exceeds fifty percent of the taxpayer’s average Indiana qualified research expense for the three taxable years preceding the taxable year for which the credit is being determined. If the taxpayer did not have Indiana qualified research expense in any one of the three taxable years preceding the taxable year for which the credit is being determined, the amount of the research expense tax credit is equal to five percent of the taxpayer’s Indiana qualified research expense for that taxable year. Credits awarded pursuant to the relevant statutory provisions may be carried forward for up to ten taxable years. For more details on the calculation of the credit, please refer to IC 6-3.1-4

Qualifying Criteria

An Indiana qualified research expense is defined as the sum of the following amounts, incurred by the taxpayer during the taxable year: wages paid to employees, supplies, services for qualified research or supervision of research activities. Qualified research expense is defined by Section 41(b) of the Internal Revenue Code as in effect on January 1, 2001. In prescribing what qualifies as a research expense, the Department of Revenue may consider the following:

  • The place where the services are performed 
  • The residence or business location of the person or persons performing the services 
  • The place where qualified research supplies are consumed
  • Other factors that the department deems relevant

Research & Development Sales Tax Exemption

There is a 100 percent sales tax exemption for qualified research and development equipment and property purchased. Taxpayers may file a claim for refund for sales tax paid on such a retail transaction should they not purchase it exempt from sales tax at the time of the actual transaction. 

Qualifying Criteria

Research and development equipment and property is defined as tangible personal property that has not previously been used in Indiana for any purpose and is acquired by the purchaser for the purpose of research and development activities devoted to experimental or laboratory research and development for new products, new uses of existing products, or improving or testing existing products.

Meeting the Four-Part Test

In order for an activity or project to qualify for the research credit, the taxpayer must show that it meets all of the requirements in Internal Revenue Code § 41(d). Similar to the federal R&D credit, in order to claim the Indiana R&D tax credit the research activity must satisfy a four-part test:

  1. Elimination of Uncertainty: You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process. In other words, something that has been changed solely for aesthetic purposes would not qualify.
  2. Process of Experimentation: You must demonstrate – through modeling, simulation, systematic trial and error or other methods that you’ve evaluated alternatives for achieving the desired result.
  3. Technological in Nature: The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  4. Qualified Purpose: The purpose of the research must be to create a new or improved product or process, resulting in increased performance, function, reliability or quality.

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for innovative businesses in Indiana. Given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving state tax credit opportunities.

Request a free assessment to determine qualifying R&D tax credit eligibility.(link)

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.

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