How to Claim the Utah R&D Tax Credit

The Utah Research and Development (R&D) Tax Credit incentivizes businesses to conduct research and innovation within the state. This non-refundable credit is designed to offset a portion of the costs associated with developing new or improved products, processes, or software. As a permanent incentive, it does not have a scheduled expiration date and directly reduces a company’s state income tax liability.

The structure of the Utah credit aligns with the federal R&D credit, providing consistency for businesses claiming both. The credit is available to various business structures, including corporations and pass-through entities, to encourage investment in technological advancements.

Determining Eligibility for the Credit

To qualify for the Utah R&D tax credit, a business must be engaged in “qualified research” as defined by federal standards. Utah law directly references Internal Revenue Code (IRC) Section 41, which establishes a four-part test that research activities must meet. The credit is available to C-corporations, S-corporations, and LLCs conducting eligible research within Utah.

The four-part test includes the following requirements:

• The research must have a permitted purpose, meaning its goal is to create a new or improved business component in terms of function, performance, reliability, or quality.
• The research must be technological in nature, fundamentally relying on principles of the physical or biological sciences, engineering, or computer science.
• The project must aim to eliminate uncertainty that exists at the outset regarding the capability, method, or appropriate design to achieve a goal.
• The company must engage in a process of experimentation, which involves evaluating one or more alternatives to eliminate the identified uncertainty.

Beyond the nature of the activity, the expenses themselves must be Qualified Research Expenses (QREs). These fall into three main categories: in-house research wages, supply costs, and contract research expenses. In-house wages are for employees directly performing, supervising, or supporting the qualified research, while supply costs cover tangible property used in the research process. Contract research expenses are payments made to a third party for conducting qualified research on the taxpayer’s behalf.

Calculating the Credit Amount

Taxpayers in Utah have two primary options for calculating the R&D tax credit. The first and more common method is the standard credit, which is based on an increase in research spending over a historical period. The standard credit calculation provides a credit of 5% of the taxpayer’s current-year QREs that exceed a calculated base amount.

This base amount is determined by multiplying the company’s “fixed-base percentage” by its average annual gross receipts for the four preceding tax years. The fixed-base percentage is a historical ratio of QREs to gross receipts, creating a benchmark against which current year spending is measured. A second component of the credit allows for 5% of certain payments made to qualified organizations for basic research that also exceed a similar base amount.

For businesses that may not have a history of research expenses, there is an alternative calculation. A credit of 7.5% of the current year’s QREs is available. This option is useful for new companies or those just beginning to invest in R&D, as it does not require a historical base period calculation. However, credits generated under this 7.5% calculation cannot be carried forward to future tax years.

Required Information and Forms

To claim the Utah R&D tax credit, businesses must complete the appropriate state tax schedule with specific financial data. The primary document is Utah Form TC-40A, Income Tax Supplemental Schedule, which serves as an attachment to the primary state income tax return. The R&D credit is specifically reported on Part 4 of this form, identified by code 12 for the Credit for Increasing Research Activities in Utah.

A taxpayer must compile the final calculated credit amount and the total amount of Utah QREs for the current tax year, broken down by wages, supplies, and contract research. For those using the standard calculation, historical data, including Utah gross receipts for the prior four years, is also needed to establish the base amount.

Much of the required information aligns with the federal R&D tax credit claim on Form 6765. Businesses should prepare and reference their federal Form 6765 when completing the Utah schedule to ensure consistency. The state requires that all supporting documentation, such as spreadsheets detailing QREs and the base amount calculation, be retained.

Claiming the Credit and Carryforward Rules

To claim the credit, the completed Form TC-40A must be attached to the business’s main Utah income tax return. For corporations, this is Form TC-20, while pass-through entities attach it to their respective returns. The credit amount from Form TC-40A, Part 4, is then transferred to the appropriate line on the main return to offset the calculated tax liability.

The Utah R&D tax credit is nonrefundable, which means it can reduce a taxpayer’s liability to zero, but it will not result in a tax refund for any excess amount. If the calculated credit is larger than the tax liability for that year, the unused portion is not lost if it was generated under the standard 5% calculation method.

Utah law includes a carryforward provision for these unused credits. Any portion of the credit calculated as 5% of the excess QREs over a base amount that exceeds the current year’s tax liability can be carried forward for up to 14 years. This allows businesses to benefit from the credit in future years when they have sufficient tax liability.