|Taxpayers located in an Enterprise Zone that make expenditures on research and development (R&D) and experimental activities within the zone qualify for income tax credits. The credit is 3% of the increase of a company’s research, development and experimental expenditures within an Enterprise Zone over the average of expenditures conducted in the same Enterprise Zone during the previous two income tax years. The total amount of the calculated credit must be divided equally over four years. The taxpayer may claim 25% of the tax credit in the year the expenditure is made and 25% in each of the following three years.
Qualified research must satisfy the following three criteria:
1. It must be technological in nature;
2. It must be useful in the development of a new or improved product or component of the business; and
3. It must utilize the process of experimentation.
In-house research expenses may include: wages, excluding fringe benefits; supplies; and payments for the right-to-use computers. Contract research expenses may include the amount paid for research done by a third party for the benefit of the contracting firm.
The following types of expenses do not qualify: Land or improvements to land, depreciable equipment, management surveys, costs incurred to adapt a product to a particular customer’s needs, and research funded by any government entity.
There is no limit on the number of years this credit can be carried forward.
For more detailed information, refer to Department of Revenue publication FYI Income 22.