Posted by on 10.11.23

Illinois is one of many states finally taking note of the R&D tax credit and how they are extremely beneficial for the economy and business growth throughout the state. In August 2019, Illinois Governor J.B. Pritzker signed SB 1591 extending the Illinois R&D tax credit for an additional 5 years, through 2026. The current R&D tax credit was due to expire at the end of 2021. Since the credit was introduced by Governor Jim Edger in 1990, the program has been re-instated over and over again limiting business owners’ ability to plan ahead for R&D investments. The current version of the credit allows a 6.5% credit on increases in R&D spending that occur within the state. Companies from any industry can benefit from the Illinois R&D credit, if the expenditures occur within Illinois and the activities meet the Federal definitions for qualified activities.

Illinois R&D Tax Credit:

• Qualified research is defined in IRC § 41(d). IRC § 41(b) as the sum of in-house research expenses and contract research expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer
• Qualifying expenditures - expenditures as defined for the federal credit for increasing research activities that would be allowed under IRC § 41 and that are conducted in Illinois
• Qualifying expenditures for the base period - the average of the qualifying expenditures for each year in the base period
• The base period is the three years immediately preceding the tax year for which the credit is calculated
• Qualifying expenditures also include basic research payments, as that term is defined in IRC § 41(e)
• Any credit in excess of tax liability for the tax year can be carried forward for five years or until it is fully used, whichever occurs first

The 4 Part Test 

The Federal legislation describes the exact set of criteria that activities must pass to be eligible for the credit. This is commonly called the four part test. Illinois uses these same guidelines.

    1. Qualified Purpose – The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality. 

     2. Technological in Nature – The research must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science. 

     3. Elimination of Methodology or Capability Uncertainty – Activities must overcome some technical challenges that involve optimal design or methodology or create capability uncertainty 

    4. Process of Experimentation – Experimentation can be demonstrated through test batches, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result. 

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

Qualifying Activities

Home to Chicago, the financial capital of the Midwest, Illinois is a state with strong economic roots. The top industries in Illinois that significantly benefit the economy include services, manufacturing, agriculture, and mining. R&D tax credits represent a money-saving opportunity overlooked by countless Illinois businesses simply because owners aren’t aware the tax credit is available to them, or they misunderstand its intent.

Viewing qualifying activities in terms of new and improved designs, concepts and processes, companies across many industries will likely find that many of their activities will be eligible for valuable R&D tax credits that they can use to reinvest in their business. Also, qualified start-up companies can now take a credit on their payroll taxes for their R&D credit, allowing the company to utilize the R&D credit immediately, even if the company does not have taxable income.

Qualifying activities include:

• 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

Many of the activities conducted by companies across Illinois qualify for the R&D tax credit. Tax Point Advisors currently partners with some of the most forward-thinking companies and we’re eagerly looking to help additional companies take full advantage of the available credits in the most effective way. 

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Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and businesses throughout the U.S. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.