Expert Report: The Delaware Apportioned Share (DAS) and R&D Tax Credit Optimization for Multi-State Businesses

I. Executive Summary: The Core of the Delaware R&D Tax Credit

The Delaware Research and Development (R&D) Tax Credit is a critical incentive established under Title 30, Chapter 20, Subchapter VIII of the Delaware Code (§ 2070 et seq.). This incentive is designed to encourage in-state innovation and investment by offering substantial, often refundable, tax relief.1

The Delaware Apportioned Share (DAS) is a statutory mechanism used to quantify the portion of a taxpayer’s calculated Federal Alternative Simplified Credit (ASC) that is attributable to research conducted within Delaware. It is determined exclusively by the ratio of Qualified Research Expenses (QREs) incurred in Delaware to the taxpayer’s total worldwide QREs.3

Delaware’s Dual-Method Approach to R&D Incentives

The Delaware Code provides taxpayers with two distinct, annually elected methods for calculating the R&D credit:

1. Method A (Traditional Credit): The credit is calculated as $10\%$ of the excess of the taxpayer’s total Delaware Qualified Research and Development Expenses (QREs) for the taxable year over the taxpayer’s Delaware base amount.2
2. Method B (ASC-Based Credit): The credit is calculated using the Delaware Apportioned Share (DAS), amounting to $50\%$ of the DAS of the taxpayer’s federal R&D tax credit, calculated using the Alternative Simplified Credit (ASC) method under IRC § 41(c)(5).3

Key Takeaways and Strategic Value

The DAS is particularly crucial for multi-state businesses that perform qualified research both inside and outside of Delaware. It serves to isolate and reward only the research activity physically sourced to Delaware for state incentive purposes.3 Furthermore, the credit derived from the DAS calculation (Method B), along with the Traditional Credit (Method A), is fully refundable. This feature provides significant and immediate cash flow benefits, which are especially advantageous for research-intensive startups or businesses that may not yet generate sufficient state income tax liability to utilize a non-refundable credit.1

II. Statutory Foundations: Understanding 30 Del. C. § 2070

The legislative intent behind the Credit for Research and Development Expenses, codified under 30 Del. C. §§ 2070-2075, is to foster economic development by stimulating local R&D investment.5 The specific mechanics detailed in § 2070 govern how taxpayers quantify their eligible credits.

Calculation Methods Mandated by Law (30 Del. C. § 2070(a))

Taxpayers must choose one of the two methods annually, and that election is independent of the method selected for federal tax purposes.3

Method A: The Traditional Credit

Under this method, the credit is calculated based on the excess of current Delaware QREs over a statutorily defined Delaware base amount. For a standard taxpayer, the rate is $10\%$ of this excess.3 The Delaware base amount is determined using a fixed-base percentage multiplied by the average Delaware gross receipts for the four prior years, subject to a minimum floor of $50\%$ of the current year’s QREs.1

Method B: The Alternative Simplified Credit (ASC) Approach

This method links the Delaware credit to the federal ASC, thereby simplifying the base calculation requirement at the state level. The standard credit equals $50\%$ of Delaware’s apportioned share (DAS) of the taxpayer’s federal R&D tax credit calculated using the Alternative Simplified Credit method under IRC § 41(c)(5). This calculation uses federal definitions and methodologies for the underlying ASC amount.3

Defining “Delaware Qualified Research and Development Expenses” (Delaware QREs)

To qualify for either credit calculation method, the expenses must be considered “Delaware QREs.” These expenses must adhere to the federal definitions of qualified research under IRC § 41, encompassing wages for research activities, costs of supplies consumed, and payments for contract research.1 Crucially, the research activities must be performed within the state of Delaware.1

Pursuant to 30 Del. C. § 2072, the Director of Revenue possesses the authority to prescribe specific standards for determining which QREs are considered Delaware QREs. The statute indicates that the Director may consider factors such as the location where the research services are performed, which is typically the primary sourcing standard.1

The “Small Business” Distinction (The $20 Million Threshold)

Delaware provides an elevated incentive structure for small businesses to promote growth in innovative sectors. A “small business” for the purpose of this credit is defined as any taxpayer whose average annual gross receipts, determined by IRC § 41(c)(1)(B), do not exceed the applicable threshold of $20,000,000.3 Taxpayers making use of this alternative calculation must conform to this definition regardless of the method used to calculate their federal R&D tax credit.3

The enhanced rates significantly boost the credit value:

• Under Method A, the rate substitutes “$20\%$” for “$10\%$” of the excess QREs.2
• Under Method B (the DAS approach), the rate substitutes “$100\%$” for “$50\%$” of the calculated DAS.2

It is essential for tax practitioners advising small businesses to monitor the statutory language, as the $20,000,000 threshold is subject to annual adjustment as set forth in 30 Del. C. § 515.3 This ongoing requirement dictates that the initial $20 million figure should be treated as a baseline, rather than a fixed maximum, requiring annual validation against official Division of Revenue guidance or legislative changes to ensure continued qualification.

Strategic Independence in Credit Election

The Delaware statute explicitly allows the taxpayer’s R&D tax credit determination election to be an annual decision that is independent of the federal research and development tax credit determination.3 This independence is strategically valuable for multi-state taxpayers. A business may find the federal Traditional Credit method more beneficial due to a low historical base amount, but simultaneously discover that its Delaware research activities are highly concentrated (a high Delaware QRE ratio). In such a scenario, electing Method B (DAS) in Delaware could yield a larger state credit than Method A, regardless of the federal election. This flexibility ensures state-specific optimization remains possible, maximizing incentives based on the ratio of local research activity.

III. Detailed Analysis of the Delaware Apportioned Share (DAS) Mechanism

The DAS calculation method (Method B) provides a streamlined approach for multi-state entities, focusing purely on attributing the national research effort to Delaware based on the location of the qualified expenses.

The Nuance of Apportionment in R&D vs. Income Tax

A critical consideration for any multi-state business in Delaware is the distinction between how corporate income is apportioned and how the R&D credit is apportioned. For corporate income tax purposes, Delaware transitioned to a single-sales factor apportionment formula, effective January 1, 2020.9 This methodology primarily focuses on the destination of sales to determine the taxable portion of corporate income.

However, the apportionment for the R&D credit under Method B, the DAS mechanism, operates under a separate and distinct rule. The statute dictates the use of a ratio based purely on Qualified Research Expenses (QREs).3 This is not merely an administrative choice; it is a fundamental policy decision that ensures the incentive directly correlates with physical research activity within the state, reinforcing the legislative goal of encouraging local innovation.1 Tax professionals must recognize this dual apportionment regime: while the single-sales factor applies to determining income subject to the corporate tax rate, the QRE ratio applies exclusively to calculating the DAS.

Calculating the Federal Baseline: Requirements under IRC § 41(c)(5)

To utilize Method B, a taxpayer must first compute the hypothetical federal Alternative Simplified Credit (ASC) amount under IRC § 41(c)(5), regardless of whether the ASC method was used on the actual federal tax return.3 The federal ASC generally equals $14\%$ of the current year’s QREs that exceed $50\%$ of the average QREs from the three preceding tax years (or $0\%$ base if no prior QREs exist).1 This computed figure serves as the Federal ASC input for the DAS formula.

The DAS Formula: Step-by-Step Breakdown (30 Del. C. § 2070(a)(1)(2))

The calculation of the Delaware Apportioned Share (DAS) uses a defined ratio, which is the QREs sourced to Delaware divided by the QREs sourced everywhere (total worldwide QREs). The DAS is then calculated by applying this ratio to the Federal ASC baseline.

The statute states: “Delaware’s apportioned share of the federal credit shall be the amount of the alternative simplified credit the taxpayer can claim under § 41(c)(5)… multiplied by a percentage equal to the ratio of the taxpayer’s Delaware qualified research and development expenses for the taxable year to the taxpayer’s total qualified research and development expenses for the taxable year”.3

This can be expressed mathematically as:

$$\text{DAS} = \text{Federal ASC} \times \left( \frac{\text{Delaware QREs}}{\text{Total Worldwide QREs}} \right)$$

This explicit formula ensures that the final state credit reflects only the intensity of the research activity occurring within Delaware’s borders.

Statutory Credit Rates Applied to DAS

Once the DAS is determined, the applicable state credit rate is applied:

• Standard Taxpayers: The final credit is $50\%$ of the calculated DAS.3
• Small Businesses: The final credit is $100\%$ of the calculated DAS.3

The $100\%$ rate for qualifying small businesses applying to the DAS holds significant financial potential. Because the credit is fully refundable (as detailed in Section VI), this combination means that startups and high-growth businesses—which are often capital-constrained and may not generate sufficient taxable income—receive a full dollar-for-dollar cash refund equal to their entire Delaware-sourced share of the federal research incentive.2 This represents one of the state’s highest financial incentives for promoting innovation and job creation.

IV. Delaware Division of Revenue (DOR) Guidance and Compliance Requirements

Effective utilization of the Delaware R&D tax credit, regardless of whether Method A or Method B (DAS) is chosen, requires rigorous adherence to the administrative and filing procedures established by the Delaware Division of Revenue (DOR).

Required Filing Procedures and Forms

Mandatory Application and Approval

A taxpayer electing to qualify for the Delaware R&D Tax Credits must first receive approval from the Delaware Division of Revenue.11 This process is formalized through specific state forms.

Form 2070AC / 2071AC

This form, titled the “Application and Computation Schedule For Claiming Delaware Research And Development Tax Credits,” must be completed to detail the calculation of the credit amount.11 It provides segregated sections for calculating the credit under Method A (excess QREs) and Method B (DAS/ASC method).

Federal Integration and Submission

Delaware’s credit mechanism relies heavily on federal definitions and underlying computations. Consequently, applicants must attach a copy of the federal research credit Form 6765 to their Delaware application. If the applicant is part of a consolidated group filing a federal corporate income tax return, a proforma federal Form 6765 must be prepared specifically for the corporate applicant and attached.4

Transferring Approved Credit

After the DOR approves the application and computes the final eligible credit amount on Form 2071AC, that amount must be transferred to the appropriate line on Delaware Form 700, the Delaware Income Tax Credit Schedule.4 Both Forms 700 and 2071AC must then be attached to the taxpayer’s annual Delaware income tax return.11

The Critical Filing Deadline

The application process is governed by a strict statutory deadline. Qualified taxpayers must submit the application to the DOR on or by September 15th following the end of the taxable year during which the qualified R&D expenses were incurred.2 Failure to meet this deadline results in forfeiture of the credit for that taxable year.

Administrative Proration (The $5 Million Cap)

Delaware imposes an administrative limit on the total amount of R&D tax credits that can be awarded across all taxpayers in any given fiscal year. The statutory limitation sets the total aggregate amount at $5,000,000. If the combined eligible R&D tax credits applied for by all applicants in a fiscal year exceed this $5,000,000 cap, the credit awarded to each applicant will be proportionally reduced.12

This administrative cap, combined with the September 15th filing deadline, creates a competitive dynamic for the credit pool. Taxpayers cannot afford to wait until the standard corporate income tax return due date; timely and accurate filing by the earlier September 15th deadline is essential. Delaying the application increases the risk of proration if statewide demand for the credit is high, compelling businesses to prioritize tax compliance planning immediately following year-end to secure their allocation.2

Pass-Through Entity Guidance

For flow-through entities such as S Corporations and Partnerships, the credit is first computed at the entity level based on the Delaware QREs. The resulting credit is then allocated among the owners (shareholders or partners) in proportion to their stock ownership or partnership percentage interest, as applicable.11 The allocated credit is reported by the partners/shareholders on the relevant line of Form 700, reflecting the principles generally outlined in IRC § 41(f)(2)(B).7

V. Practical Application: Case Study and Numerical Example

To illustrate the calculation of the Delaware Apportioned Share (DAS) and the corresponding credit under Method B, consider a multi-state technology firm, InnovateCo, in the 2024 tax year.

Scenario: InnovateCo R&D Activity, Tax Year 2024

InnovateCo conducts research across several states, but its headquarters and core development activities are located in Wilmington, Delaware.

Step-by-Step DAS Calculation (Method B)

Step 1: Calculate the QRE Apportionment Ratio

The QRE apportionment ratio reflects the proportion of the taxpayer’s worldwide research effort that occurred in Delaware. This is calculated by dividing Delaware QREs by Total Worldwide QREs.3

$$\text{QRE Ratio} = \frac{\text{Delaware QREs}}{\text{Total Worldwide QREs}} = \frac{\$5,600,000}{\$8,000,000} = 0.70 \text{ (or } 70\% )$$

Step 2: Determine Delaware’s Apportioned Share (DAS)

The DAS is calculated by multiplying the Federal ASC baseline by the QRE Ratio.3

$$\text{DAS} = \text{Federal ASC} \times \text{QRE Ratio} = \$920,000 \times 70\% = \mathbf{\$644,000}$$

The figure of $\mathbf{\$644,000}$ represents the maximum federally-derived research credit attributable to InnovateCo’s research activities conducted in Delaware.

Step 3: Apply the Applicable State Credit Percentage

The final credit amount depends on InnovateCo’s small business status. Assume the applicable threshold is the statutory baseline of $\$20,000,000$.

Scenario A: Standard Business (Gross Receipts > $20M)

The standard credit rate is $\mathbf{50\%}$ of the DAS.3

$$\text{Final Credit} = \$644,000 \times 50\% = \mathbf{\$322,000}$$

Scenario B: Small Business (Gross Receipts $\le$ $20M)

The enhanced credit rate is $\mathbf{100\%}$ of the DAS.3

$$\text{Final Credit} = \$644,000 \times 100\% = \mathbf{\$644,000}$$

The result demonstrates that proper segregation and sourcing of Delaware QREs are essential, as this data point dictates the QRE Ratio, which directly controls the calculated DAS and the final credit amount.

VI. Strategic Tax Planning and Regulatory Landscape

Refundability: Cash Flow and Capital

One of the most powerful strategic advantages of the Delaware R&D tax credit is its full refundability.1 Unlike many state credits that can only offset tax liability and may require lengthy carryforward periods if unused, Delaware’s credit allows for any unused portion to be paid directly to the taxpayer as a cash refund.2 This feature drastically improves cash flow, especially for early-stage or rapidly expanding technology and biotech companies that often generate significant R&D expenses but may report minimal or zero taxable income. For these entities, refundability means the incentive translates immediately into capital rather than a deferred tax asset, eliminating the typical 15-year carryforward requirement often seen in other state mechanisms.4

For example, if InnovateCo (Scenario A) had a final credit of $\$322,000$ but only a $\$50,000$ Delaware corporate income tax liability, the remaining $\$272,000$ would be received as a direct cash refund.

The Interplay with Federal and State Decoupling

Delaware operates as a rolling conformity state, generally adopting changes to the federal Internal Revenue Code (IRC) unless the state legislature specifically “decouples” from them.13 While 30 Del. C. § 2070 ensures the R&D credit calculation is independent from the federal credit calculation, practitioners must remain aware of statutory changes affecting R&E expensing deductions.

Recent legislative activity confirms Delaware’s proactive management of federal tax changes. House Bill 255 addressed the projected budget shortfall caused by changes related to the amortization of research and experimentation (R&E) expenditures under IRC § 174.13 Delaware enacted provisions requiring the continued five-year amortization for R&E costs incurred between 2022 and 2024, effectively decoupling from the federal immediate expensing provisions that existed historically. However, the legislation permits full expensing for R&E investments made from 2025 onwards.14 This requires taxpayers calculating their overall Delaware tax liability—including the QREs that form the basis of the DAS ratio—to ensure compliance with the mandated state-level amortization rules for R&E deductions, even as they use federal definitions for the R&D credit inputs.13

Importance of Documentation and Audit Defense

The foundation of a successful R&D tax credit claim, particularly when relying on the DAS formula, is rigorous documentation.15 The Delaware Division of Revenue requires clear evidence to support the figures reported in Form 2071AC.

For Method B claims, documentation must satisfy two major requirements:

1. Federal ASC Baseline: Proof of the total QREs incurred worldwide, necessary for accurately calculating the hypothetical Federal ASC.16
2. DAS Ratio Sourcing: Detailed records are required to prove the physical location where research activities took place. This is essential for accurately quantifying the Delaware QREs (the numerator in the DAS ratio). Failure to explicitly link expenses (e.g., wages, supplies) to activities performed physically within Delaware exposes the claim to risk, directly reducing the QRE ratio and consequently the final calculated DAS.1 Companies must implement robust systems for maintaining records of qualified activities and associated costs to effectively defend their claims upon audit.

VII. Conclusion: Maximizing Innovation Incentives in Delaware

The Delaware Apportioned Share (DAS) is central to maximizing the state’s R&D tax credit incentive for multi-state entities utilizing the Alternative Simplified Credit (ASC) calculation method (Method B). This mechanism precisely measures Delaware’s commitment to incentivizing local innovation by tying the tax credit directly to the ratio of in-state Qualified Research Expenses (QREs).

Taxpayers benefit significantly from the independent annual election, allowing them to choose the most advantageous calculation method for Delaware, regardless of their federal choice. This optimization potential, coupled with the state’s powerful provision for full refundability, transforms the R&D credit from a mere tax reduction into a significant source of immediate working capital, especially for small, innovative businesses that qualify for the $100\%$ DAS rate.

To successfully claim and defend the credit, taxpayers must navigate critical administrative complexities, notably the strict September 15th application deadline and the potential for pro-rata reduction under the $\$5$ million annual state cap. Comprehensive compliance strategies must prioritize meticulous, contemporaneous documentation that clearly substantiates the physical sourcing of Delaware QREs, ensuring the integrity of the QRE ratio calculation and, ultimately, the final credit derived from the DAS.

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