Posted by on 07.10.17

Companies investing in creating new products in Illinois have been at a disadvantage since the valuable research and development (R&D) tax credit program expired in 2015. Now that has all changed.

Late last week, after the July Fourth holiday, the Illinois Legislature voted to override Gov. Bruce Rauner’s veto, paving the way to the state’s first operating budget in two years. As part of that budget, the state’s R&D tax credit program was reinstated through Dec. 21, 2021.

Why is this important? The Illinois R&D tax credit, which expired four times since it was instituted in 1990, provides a 6.5 percent credit on increases of in-state R&D spending. For example, if a company invested an average of $2 million per year in funding new product development and increased the spending another half-million, it could receive a $32,500 tax break on that additional investment.

Now that the R&D tax credit has been reinstated, the state is much better positioned to win back investment dollars, attract new businesses and retain essential manufacturing jobs. In fact, Illinois manufacturers currently benefit the most from the state’s tax credit. For example, back in 2011, when the state’s tax credit was in place, more than 60 percent of the $57 million in tax credits went to the manufacturing sector.

Some highlights of the Illinois R&D program include:

• Non-refundable credit equal to 6.5 percent of qualified research expenditures, which exceed a base amount for in-state expenditures
• Expenditures include supplies, employee wages and third-party contracted research as long as it is conducted within the state
• The base amount is calculated on average qualifying expenditures for the three years immediately preceding the research credit year; excess research credits can be carried forward up to five years
• Provisions for pass-through entities: research credit flows through to owners according to their distributive share of the income

While manufacturing has made up the lion’s share of the Illinois R&D tax credit in previous years, it is important to note that other industries have the opportunity to benefit from these valuable tax credits, such as software development, biotechnology, agriculture and aerospace.  In fact, companies in any industry that invest in improving or introducing new processes and products have the potential to benefit from the program.

Qualifying activities, which are defined in Section 41 of the state’s Internal Revenue Code, include numerous activities, including:

• Developing or testing new products or materials
• Developing new or enhanced formulations
• Testing new concepts
• Improving existing products
• Trial and error experimentation in Illinois
• Designing and analyzing prototypes or models
• Developing or improving production or manufacturing processes
• Developing, implementing or upgrading systems and software
• Paying outside consultants or contractors to perform any of these activities

Now that lawmakers have acted, companies can count on the state tax credit being in place for the next five years—a reliability that can result in more capital investment, new product development and overall improved competitiveness, given that nearby states also offer tax credits for R&D activities.

Watch this video: How to Qualify for R&D Tax Credits: The Four Part Test

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for your business. 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 tax credit opportunities. Download our free e-book: The Business Owner's Guide to R&D Tax Credits.

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

Tax Point Advisors, a leading research and development (R&D) tax credit and specialty tax services expert, works with CPAs and businesses across the country in identifying and capturing their maximum federal and state tax credits and incentives. For more information, call us at 800-260-4138 or please leave us a message below.