Illinois Reinstates R&D Tax Credit - Advanta Tax Advisors, LLC

Illinois Reinstates R&D Tax Credit

  Posted July 24, 2017 at 04:09 PM


On July 6, 2017, Illinois lawmakers overrode Governor Bruce Rauner’s veto to pass a budget after a 2-year standoff. The bad news is that corporations and individuals will now pay approximately 25% more in income taxes with an increase in the corporate tax rate from 5.25% to 7% and the individual rate from 3.75% to 4.95%. The good news is that the new budget reinstates the Research and Development Tax Credit (Research Credit) through tax years ending prior to December 31, 2021.


The Research Credit expired for tax years ending on or after January 1, 2016. However, the reinstatement is retroactive to tax years beginning on or after January 1, 2016 so continuity is not lost. Taxpayers who have filed their 2016 returns can amend to take the credit for their 2016 tax year. However, the Illinois Department of Revenue has yet to issue updated forms, instructions, and guidance on amending and taxpayers would be advised to defer filing until such information is available.


As with the previous credits since 1999, the Illinois Research Credit is available to pass-through entities with the credits generated by the entity and claimed against taxes imposed on the income of partners of partnerships and members of Subchapter S Corporation shareholders.


The credit had been allowed to lapse 4 times since its creation in 1990. This reinstatement gives certainty for industries in the manufacturing, metal fabrication, pharmaceutical companies, software development where none existed during the budget impasse. These companies will now know for the next 5-years that they will recoup a portion of their investment in research activities through this incentive program.


Overview of the Illinois Research and Development Credit

(Illinois Admin. Code Title 86 Part 100 Section 100.2160)

·       The Illinois Research and Development Credit is a non-refundable credit of 6.5% of qualifying expenditures for increasing research activities taking place in Illinois. 

·       Research is defined consistently with federal Research Credit. (IRC section 41(b)) and qualified research expenditures (QRE) are defined as those allowable under the federal rules of IRC section 41. 

·       The 6.5% rate is applied to the amount that QRE’s for the credit year exceed a base amount of the average QRE’s over the three preceding tax years.

·       QRE’s include:

1.     Wages of the individuals performing qualifying activities,

2.     Supplies used or consumed in qualifying activities, and

3.     Contract Research expenditures.  Payments to outside parties (contractors) for activities that would otherwise qualify. 

·       Credit may be used up to the corporation’s or individual’s income tax liability.

·       Unused credits can be carried forward for 5-years.

·       Qualifying activity includes activity that meets the following criteria:

1.     Activity relates to new or improved products or manufacturing processes as they relate to performance, functionality, reliability and / or quality.

2.     Activities rely on the principles of a physical discipline such as chemistry, biological science, computer software engineering or engineering. (So, studies such as marketing research would not qualify)

3.     There must be some element(s) of uncertainty at the onset of the project as to the capability of meeting the project’s goals, methodology of achieving the project’s goals, or the appropriateness of the product’s / process’ design.

4.     Substantially all of the activities must constitute a process of experimentation.  This can, for example, involve such endeavors as evaluating alternative solutions, confirmation of hypotheses through trial and error, testing, and / or modeling. 

·       Some specific qualifying projects might include:

1.     Advancing the design of an existing product or process.

2.     Correcting significant design defects, obtaining significant cost reductions, or enhancing function.

3.     Designing, constructing, and testing of pre-production prototypes and models.

4.     Conceptual formulation, design and testing of possible product or process alternatives.

5.     Engineering efforts to develop or improve manufacturing processes.

6.     Designing computer software and making improvements to existing software components. 


Illinois reinstated its Research Credit to better compete with neighboring states in attracting innovative businesses and to incent resident businesses to innovate to remain competitive.  Advanta has extensive experience with identifying qualifying activity and calculating the maximum sustainable Research Credits at both the federal and state levels.  Our tax consulting professionals can work with you to assess your company’s ability to qualify for these incentives and estimate the tax savings that may be available.