Expert Report: Decoding the Delaware R&D Tax Credit Statutory Framework (Del. Code Ann. tit. 30, $\S\S 2070-2075$)

The Delaware Research and Development (R&D) tax credit, codified under Del. Code Ann. tit. 30, $\S\S 2070-2075$, is a potent state incentive designed to promote corporate investment in qualified research activities.

This framework is notable for offering enhanced credit rates for small businesses and providing fully refundable benefits, offering immediate cash flow regardless of current tax liability.

The statutory provisions encompassing $\S\S 2070$ through $2075$ form Subchapter VIII of Chapter 20 (Business Tax Credits and Deductions) of Title 30 (State Taxes).1 While $\S 2070$ is the mechanical heart of the law, detailing the credit calculation and eligibility, the remaining sections provide the necessary legal and definitional scaffolding, ensuring the credit’s successful administration and coherence with federal tax law.1 The law permits taxpayers to annually elect between two distinct calculation methodologies—an incremental approach based on in-state Qualified Research Expenses (QREs) or an approach tied to the taxpayer’s federal Alternative Simplified Credit (ASC), allowing businesses to strategically maximize their benefit based on their growth profile and federal filing election.1

Legislative Framework: Federal Integration and Definitional Parameters

The Mandate for Federal Conformity ($\S 2071$)

A foundational element of Delaware’s R&D tax credit is its reliance on the definitions established within the Internal Revenue Code (IRC). Del. Code $\S 2071$ stipulates that any term utilized within the R&D subchapter carries the same meaning as when used in a comparable context under U.S. Internal Revenue laws, unless the Delaware statute explicitly provides a different definition.4

This mandate extends specifically to the definitions of “qualified research” and “qualified research expenses” (QREs) as defined in IRC $\S 41$.5 The statute further clarifies that references to the IRC mean the sections of the IRC as they exist on the date the expenses are taken into account for Delaware income taxation.2 This policy establishes a rolling conformity with federal law. By automatically adopting the current federal definitions, Delaware guarantees that its R&D incentive remains consistent with the most current federal policy concerning eligible activities and expense categories, thereby simplifying compliance for multistate taxpayers and eliminating the need for complex state legislative action every time federal definitions are adjusted.2

Eligibility Criteria and Qualified Research Expenses (QREs)

The process of claiming the Delaware R&D credit begins with establishing eligibility under the four-part test of IRC $\S 41$. Generally, QREs include wages paid for employees performing qualified services, the cost of supplies consumed during qualified research, and amounts paid for contract research (typically 65% of contract research expenses).6

For a taxpayer to qualify for the Delaware credit, the research activity must first qualify for the federal credit.5 Critically, the Delaware statute imposes a geographic constraint: only R&D activity conducted physically within Delaware qualifies for the state’s credit.8 This means that while activities across the entire entity may qualify for the federal credit, only QREs (Delaware QREs) directly attributable to activities performed within the state are counted toward the Delaware base amount or used in the state apportionment ratio.1

For multistate companies, this requirement creates a significant compliance requirement concerning location tracking. To accurately determine Delaware QREs, companies must maintain documentation, such as payroll systems and vendor invoices, that are granular enough to reliably distinguish QREs incurred in Delaware from those incurred elsewhere. This precise location tracking directly influences the magnitude of the credit calculated under both Method A (incremental calculation) and Method B (apportioned federal credit).1

Policy Distinction: Refundability and Carryover Management

A defining characteristic that distinguishes the Delaware R&D credit from similar incentives in most other states is its fully refundable nature. Although prior limitations once capped the credit, subsequent legislation, notably beginning January 1, 2017, eliminated both the expenditure cap and converted the credit to be fully refundable.5

This full refundability means that if the approved credit amount exceeds the taxpayer’s qualified tax liability for the year, the unused credit is paid to the taxpayer as a tax refund.8 This transforms the incentive from merely a tax liability reduction mechanism into a powerful source of immediate, non-dilutive capital and cash flow, particularly for startups and pre-revenue companies that are not yet generating profits.5 The combination of a zero-expenditure cap and full refundability places Delaware in a highly competitive position nationally, significantly influencing site selection decisions for innovative companies, especially those in high-growth, cash-intensive R&D sectors.5

In addition to refundability, the law maintains a robust carryover provision. Any unused R&D credits may be carried forward for up to 15 years.7 While full refundability often minimizes the need to rely on the carryover, the 15-year window offers flexibility for companies that choose to defer the benefit or whose tax structure mandates a non-cash application.

Detailed Analysis of Credit Calculation Methods (Del. Code $\S 2070$)

Delaware law provides two distinct methods for calculating the annual R&D tax credit, and the taxpayer must make an annual election on Form 2070AC to use only one method.11 The election made for the Delaware credit is independent of the method the taxpayer uses to calculate their federal R&D credit.1

Defining the Small Business Enhancement

Delaware provides substantially enhanced benefits for “small businesses,” defined as any taxpayer whose average annual gross receipts do not exceed $\$20,000,000$.1 This definition is determined using the same methodology outlined in IRC $\S 41(c)(1)(B)$, and the $\$20$ million threshold is subject to annual adjustment.1

The enhancement for small businesses effectively doubles the credit rate under both calculation methods compared to the standard rates available to larger corporations, as detailed below:

Table 1: Delaware R&D Tax Credit Calculation Methods and Rates

Method A: The Incremental Calculation (Regular Method)

Method A calculates the credit based on the excess of the current year’s Delaware QREs over the Delaware base amount.3

Calculation Formula and Base Amount

For standard businesses, the credit is 10% of the excess amount, while for small businesses, the rate increases to 20%.3

The core complexity of Method A lies in determining the Delaware Base Amount. This calculation follows a methodology similar to the federal traditional R&D credit method and requires extensive historical data 9:

1. Historical Data: Taxpayers must retain records of Delaware QREs and Delaware gross receipts for the four taxable years immediately preceding the credit year.9
2. Fixed Base Percentage: This percentage is calculated by dividing the total Delaware QREs from the four preceding years by the total Delaware gross receipts from the four preceding years.11
3. Base Amount Determination: The Delaware Base Amount is calculated by multiplying the Fixed Base Percentage by the average annual gross receipts for the four preceding years.11
4. Base Amount Floor: The calculated Delaware Base Amount cannot be less than 50% of the current year’s total Delaware QREs.9 This floor prevents established companies with high, stable QREs from claiming significant credits if their R&D spending growth plateaus.
5. Excess QREs: The credit is then applied to the amount by which the current year’s Delaware QREs exceed the calculated Delaware Base Amount.9

Method B: Apportioned Alternative Simplified Credit (ASC) Calculation

Method B simplifies the calculation by linking the state credit directly to the federal R&D tax credit, specifically calculated using the Alternative Simplified Credit (ASC) method under IRC $\S 41(c)(5)$.1

Apportionment Mechanics

The Delaware credit under Method B is determined by first calculating Delaware’s apportioned share of the taxpayer’s federal ASC. The apportionment ratio is key, reflecting the proportion of research activity conducted within Delaware 1:

$$\text{Delaware Apportioned Share} = \text{Federal ASC} \times \frac{\text{Delaware Qualified R\&D Expenses}}{\text{Total Qualified R\&D Expenses}}$$

Once the apportioned share is determined, the applicable rate is applied: 50% for standard businesses and 100% for small businesses.1

This methodology offers a distinct benefit for fast-growing companies that may not possess the detailed four-year historical data required for Method A, or those whose rapid growth profile might be penalized by the historical base calculation of Method A. Because Method B relies only on current-year data for apportionment (Delaware QREs to total QREs) and utilizes the federally determined ASC base, it provides a streamlined path for determining the credit.11

Division of Revenue (DOR) Administrative and Compliance Procedures

The successful realization of the Delaware R&D tax credit requires strict adherence to administrative procedures and deadlines established by the Delaware Division of Revenue (DOR).

The Application and Computation Schedule (Form 2070AC)

The foundational step for claiming the credit is the submission of the Delaware Research & Development Application and Computation Schedule, Form 2070AC.5 This form is mandatory for all taxpayers electing to claim the credit and serves as the official mechanism for selecting either Method A or Method B.11

Crucially, the DOR must first approve the credit claimed on Form 2070AC before the amount can be transferred and claimed on the Delaware Income Tax Credit Schedule (Form 700).5

Mandatory Documentation

To process the application, the DOR requires specific attachments that substantiate the claimed expenses and calculations:

1. Federal Form 6765: A copy of the federal Form 6765 (Credit for Increasing Research Activities) must be attached to Form 2070AC.5 This validates that the underlying activities and expenses meet federal qualification standards.
2. Pro Forma Federal Return: If the taxpayer files a consolidated corporate income tax return federally, a proforma Form 6765 for the specific corporate applicant is required.11
3. Delaware QRE Breakdown: Detailed schedules providing a breakdown of Delaware-based QREs and supporting calculations are required to ensure expenses meet the in-state requirement.7

Critical Deadlines and Record-Keeping

The deadline for submitting Form 2070AC is paramount for claiming the Delaware R&D credit. Qualified taxpayers must submit the application to the DOR by September 15th following the end of the taxable year during which the qualified R&D expenses were incurred.5

This deadline is significant because it often occurs before the extended filing deadlines for corporate income tax returns, necessitating that businesses complete their detailed R&D study, expense substantiation, and federal Form 6765 calculation well in advance of their overall tax compliance schedule.5

Furthermore, taxpayers must adhere to stringent record-keeping requirements, particularly those electing Method A. Maintaining verifiable documentation of Delaware QREs and gross receipts for the current year and the four preceding years is necessary to compute the fixed-base percentage and the base amount accurately.9

Claiming and Utilizing the Credit (Form 700)

Upon receiving approval from the DOR for the credit amount determined on Form 2070AC, the taxpayer then completes Delaware Income Tax Credit Schedule Form 700 to utilize the credit.5

The credit utilization procedure involves two critical mechanisms:

1. Refundability: The key policy feature of full refundability dictates that any approved credit amount that exceeds the taxpayer’s liability for the taxable year is converted into a cash refund.8 This direct cash injection offers immediate financial benefit, distinct from non-refundable credits that only reduce liability.
2. Flow-Through Allocation: For pass-through entities, such as partnerships and S corporations, the approved credit must be allocated among the partners or shareholders in accordance with the rules established under IRC $\S 41(f)(2)(B)$.1 This allows individual owners of the flow-through entity to claim their portion of the refundable credit on their respective tax returns.13

Table 2 summarizes the administrative requirements:

Table 2: Delaware R&D Tax Credit Administrative Checklist

Strategic Planning and Quantitative Example

Strategic Choice: Method Optimization

The annual election between Method A (Incremental) and Method B (Apportioned ASC) requires a strategic analysis of the taxpayer’s operational and financial data.

For small businesses (average gross receipts $\le \$20$ million), the strategic decision often leans toward maximizing the benefit under the enhanced rates:

1. Small Business Preference (100% Apportionment): If the company’s QREs are growing but fluctuate, Method B, offering 100% of the apportioned federal ASC, often provides the highest, most predictable refundable cash benefit.1 This eliminates the risk that the Method A base amount floor (50% of current-year QREs) might severely limit the creditable excess.
2. Standard Business Evaluation (10% vs. 50%): For large companies (average gross receipts $>\$20$ million), the 10% incremental rate (Method A) must be compared against the 50% apportioned ASC rate (Method B). If the company has experienced rapid and sustained QRE growth relative to its historical fixed base, Method A may yield a higher credit due to a smaller effective base amount. Conversely, if QRE growth has been modest or cyclical, Method B generally provides a simpler and potentially more robust calculation, especially for multistate taxpayers already calculating the federal ASC.

Case Study: Multi-Year Credit for a Delaware Small Business

To illustrate the financial impact of the enhanced small business rates and the full refundability feature, consider a case study involving a small manufacturing company located entirely in Dover, Delaware, with fewer than 50 employees, thus meeting the small business criteria (average gross receipts below $\$20$ million).8

This company qualified for both federal and state R&D tax credits over a three-year period (2019–2021). The analysis below focuses specifically on the Delaware credit realization, which was fully refundable.

Table 3: Case Study: Small Business Delaware R&D Credit Utilization (2019-2021)

Financial Interpretation

Over the three-year study period, the company claimed a total of $\$114,562$ in additional state R&D tax credits.8 Given the company’s status as a small business, this amount was fully refundable and provided an immediate cash flow benefit to the business, rather than merely reducing a future tax obligation.5

The total state benefit of $\$114,562$ represents approximately $5.33\%$ of the company’s total Delaware QREs of $\$2,150,000$ over the period. This percentage, achieved in addition to the federal credit, underscores the potent economic boost provided by the Delaware statute, specifically leveraging the enhanced small business rates (likely the 100% ASC apportionment, Method B). This substantial financial return on investment in R&D demonstrates the strategic value of conducting qualified research activities within the state.

Conclusion: Delaware’s Competitive Advantage for Innovators

Del. Code Ann. tit. 30, $\S\S 2070-2075$ establishes a comprehensive and exceptionally advantageous R&D tax credit regime for businesses performing qualified research within the state. The statutory framework relies on definitive definitions from IRC $\S 41$, ensuring consistency and clear eligibility criteria for QREs (wages, supplies, and contract research).4

The competitive strength of the Delaware R&D credit hinges upon three key legislative components: dual calculation methods, enhanced rates for small businesses, and, most critically, full refundability.1 This combination transforms the credit into a source of working capital, a feature that distinguishes Delaware from almost every other state program.5

For corporations, particularly high-growth startups and small businesses, capitalizing on this incentive requires rigorous, year-round compliance, including granular tracking of in-state QREs and meticulous documentation to support the chosen calculation method. Furthermore, strict adherence to the Division of Revenue’s application deadline of September 15th via Form 2070AC is essential to securing the approved refundable benefit.5 Proper strategic modeling to select the optimal Method A or Method B election—based on gross receipts thresholds and QRE growth—is a necessary step to maximize the financial return provided by this powerful state tax incentive.

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