Businesses incorporated in Utah can benefit from the state’s Research and Development (R&D) tax credit that offsets costs associated with innovation or product development. This credit is technically composed of two credits. The first credit is worth 5% of current taxable year qualified research expenses (QREs) minus a base amount. The second credit is worth 7.5% of current taxable year QREs.
To qualify, businesses must conduct qualifying research activities in Utah to develop or improve formulas, inventions, processes, products, or techniques. Eligible activities include designing and testing prototypes, developing software or systems that improve existing products and services, creating models or simulations for research purposes, and analyzing data to create new products or services.
What is the Research & Development Tax Credit?
The R&D tax credit comprises both federal and state government-backed incentives that compensate companies for performing qualifying research activities. Initially implemented nearly forty years ago, the R&D tax credit is designed to incentivize innovation in the U.S. economy. This reward enables American businesses to maintain their competitive edge in global markets, as well as encourages enterprises to keep technical jobs stateside.
The Federal R&D Tax Credit Program Has Evolved During Four Decades
The R&D tax credit has undergone several iterations since inception, but its purpose remains the same. The tax credit incentivizes companies to invest resources:
- Creating or enhancing existing software or prototypes
- Developing new products or processes
- Inventing or improving existing formulas
- Improving existing products or processes
The current R&D program remains one of the most effective ways for technology-centric organizations to minimize their tax burden, yielding several impressive benefits including:
- Carryforward credit during a maximum of 20 years
- Decreased effective tax rate
- Increased cash flow
- Potential dollar-for-dollar tax reduction
- Up to 13.5 cents of credit per dollar incurred (at federal and state levels combined) during R&D activity
Utah Offers Local R&D Tax Credit Benefits to Business Owners
Several states including Utah offer their own version of the federal R&D tax credit to encourage local businesses to innovate. Utah offers a non-refundable R&D tax credit to local taxpayers with QREs.
Utah's R&D tax initiative mirrors the benefits and regulations outlined by the IRS in Section 41. However, Utah business owners should understand the differences between state and federal programs to optimize any eligible state credit.
Credit for Increasing Research Activities Conducted in Utah (Code 12)
Utah legislation states that Utah’s R&D tax credit is the sum of:
- 5% of a taxpayer's qualified expenditures from increasing research operations in the state above the base amount*
- 5% of payments made to qualifying organizations for increasing basic research in Utah beyond the base amount*
- 7.5% of qualified research expenses (QRE) for the taxable year**
*Utah business owners may carryforward credits during a maximum of 14 years
**Any unused credits calculated less than 7.5% of QRE may not be carried forward.
Carryforward of Credit for Machinery and Equipment Used to Conduct Research (Code 13)
Utah's current R&D tax program offers a carryforward component. This credit has expired for any taxable years starting after 2010. However, business owners who claimed credit on their tax returns between 1998 and 2011 for machinery and/or equipment used to perform qualifying research activities may carryforward accumulated credits (i.e., earned when tax credit exceeded liability).
Utah allows taxpayers to carryforward extra credit during the next 14 years to offset future taxes until excess credit is completely absorbed.
Are You Claiming R&D Tax Credits in Utah?
Acena Consulting partners with Utah business owners in a multitude of verticals to optimize both local and federal innovative tax benefits. Contact us today to hear more about how we can help your Utah enterprise optimize R&D tax credit results.
