The Delaware Division of Revenue and the R&D Tax Credit: Maximizing Refundable Incentives under 30 Del. C. § 2070

The Delaware Division of Revenue (DOR) is the state authority responsible for administering all tax laws and collections, including the corporate income tax and associated credits. In the context of innovation, the DOR manages the application and issuance of the Research and Development (R&D) Tax Credit, a critical, fully refundable incentive designed to reward in-state qualified research expenses.

This report provides a detailed analysis of the Delaware Division of Revenue’s administrative and regulatory role concerning the Delaware R&D Tax Credit, codified under 30 Del. C. § 2070. The analysis explores the DOR’s jurisdictional requirements, the specific calculation methodologies dictated by state law, the mandatory compliance procedures, and the strategic implications of the credit’s unique refundable nature. This comprehensive understanding is essential for corporate taxpayers seeking to maximize the cash flow benefits derived from their research investments in Delaware.

I. The Role of the Delaware Division of Revenue (DOR) in the State Tax Nexus

The DOR functions as the primary state revenue collection and administrative body, establishing the rules and mechanisms through which corporations comply with Delaware tax mandates and claim available incentives.

A. Core Mandate and Administrative Authority

The Division of Revenue is mandated to enforce compliance with the Delaware Corporate Income Tax (CIT). Every domestic or foreign corporation conducting business within Delaware, unless specifically exempt, is required to file a corporate income tax return (Form CIT-TAX) and pay tax at a statutory rate of 8.7% on federal taxable income allocated and apportioned to Delaware.1 The determination of allocated income is based on an equally weighted three-factor apportionment method utilizing property, wages, and sales ratios.1

The DOR’s authority extends beyond mere collection to the active administration of incentives, including the R&D credit. The Division is responsible for issuing official guidance, such as Technical Information Memoranda (TIMs), which provide clarification on the application of tax statutes, as demonstrated by guidance released on new lodging taxes.3 This oversight ensures uniformity in the interpretation and application of tax provisions across all corporate taxpayers.

A critical aspect of the R&D credit structure administered by the DOR is its fully refundable nature.4 While the 8.7% CIT rate provides a high benchmark for corporate taxation, the refundability feature means the value of the R&D credit is not capped by the actual CIT liability the corporation ultimately owes.1 For R&D-intensive companies, particularly startups or those with limited or zero state tax liability, the DOR effectively converts this tax credit into a direct cash subsidy, enhancing its economic impact far beyond that of non-refundable credits offered by other jurisdictions.

B. Regulatory and Conformity Context

Delaware is characterized as a rolling conformity state, meaning its tax code largely adopts changes made to the federal Internal Revenue Code (IRC) unless the General Assembly specifically legislates to decouple from those changes.6

For the R&D Tax Credit itself, the state statute (30 Del. C. § 2070) maintains a strong linkage to federal tax law. Eligibility for the Delaware credit is directly tied to satisfying the federal definitions and methodologies established under IRC Section 41.4 This requires taxpayers to ensure their activities qualify under the strict federal four-part test for qualified research.8

However, this conformity is not absolute. Recent legislative action has illustrated the state’s independence regarding calculating the underlying taxable income. In response to federal tax code changes, such as the One Big Beautiful Bill Act (OBBBA), Delaware passed legislation (HB 255) to temporarily decouple from certain provisions, including the federal requirement for immediate expensing of research and experimentation (R&E) costs (IRC § 174 amortization) for tax years 2022–2024.6 This strategic move protected state revenue while simultaneously demanding that taxpayers continue to conform to the federal definitions for the R&D credit itself.

II. Statutory Framework of the Delaware R&D Tax Credit (30 Del. C. § 2070)

The Delaware R&D Tax Credit represents a robust mechanism designed to foster innovation, particularly in sectors like biopharma and advanced manufacturing.10

A. Key Features and Eligibility

The incentive is administered under Del. Code Ann. tit. 30, §§ 2070-2075.4 The primary requirement is that the Qualified Research Expenses (QREs) must be incurred for research activities that physically occur within the State of Delaware.5

• Eligible Entities: The credit is broadly accessible, available to C-Corporations, S-Corporations, Limited Liability Companies (LLCs), and Partnerships.4
• Refundability: The full refundability feature is central to the credit’s appeal. If the computed credit exceeds the taxpayer’s annual state tax liability, the unused balance is paid to the taxpayer as a cash refund.4 Delaware is unique among some states for combining a zero-expenditure cap with this refundable structure.4

B. Small Business Enhancements

To specifically support innovation among growing companies, the statute provides substantial enhancements for “small businesses”.12

• Definition: A small business is defined as any taxpayer whose average annual gross receipts, determined by the methodology established in IRC § 41(c)(1)(B), do not exceed an applicable threshold of $20,000,000.7
• Enhanced Credit Rates: For qualifying small businesses, the credit rates under both available calculation methods are doubled compared to standard rates 7:

• Under the Traditional Incremental Method (Method A), the rate increases from 10% to 20% of the excess QREs over the base amount.
• Under the Alternative Simplified Credit Method (Method B), the rate increases from 50% to 100% of Delaware’s apportioned federal R&D tax credit share.

The combination of the high $20 million small business threshold and the immediate monetization potential offered by refundability creates an efficient mechanism for funding early-stage research activities. This structural advantage allows high-growth technology and life sciences companies, which typically incur losses during intense R&D phases, to convert future tax benefits into present-day operational capital, strongly incentivizing in-state investment.

III. Mechanics of the R&D Tax Credit Calculation: DOR’s Dual Methods

The DOR allows taxpayers to choose annually between two distinct calculation methodologies when filing their claim, an election that must be made on the application form. The selected method dictates the base amount calculation and the applicable credit percentage.4

Table 3: Delaware R&D Tax Credit Calculation Methods

A. Method A: The Traditional Incremental Credit

Method A, often referred to as the traditional or regular method, is designed to reward year-over-year growth in Qualified Research Expenses conducted within Delaware.

The calculation requires taxpayers to:

1. Determine Delaware QREs: Identify QREs that qualify under IRC § 41 and were conducted physically in Delaware.12
2. Compute the Delaware Base Amount: The base is calculated using a fixed-base percentage multiplied by the average Delaware gross receipts over the four prior taxable years.4
3. Apply Statutory Floor: The statute imposes a crucial limitation: the Delaware base amount is statutorily defined as the greater of the calculated fixed base or 50% of the current-year Delaware QREs.4
4. Calculate Credit: The credit is applied to the excess QREs above this base amount at the 10% (standard) or 20% (small business) rate.7

The reliance on prior years’ QREs and gross receipts necessitates rigorous record-keeping for at least the four preceding years.4 This continuous documentation is a compliance prerequisite administered by the DOR, ensuring data availability for computing the base amount, regardless of whether Method A or B is ultimately elected for the current year.

B. Method B: Alternative Simplified Credit (ASC) Method

Method B offers a simpler calculation process that relies heavily on the federal ASC calculation, making it attractive for companies with fluctuating R&D budgets or those with limited historical financial data.4

1. Federal Basis: The calculation begins by determining the taxpayer’s federal R&D tax credit amount using the Alternative Simplified Credit (ASC) method under IRC § 41(c)(5).7
2. Delaware Apportionment: This federal credit amount is then specifically allocated to Delaware using a single-factor ratio: the ratio of the taxpayer’s Delaware QREs to the taxpayer’s total worldwide QREs for the taxable year.7
3. Calculate Credit: The state credit is then applied as 50% (standard) or 100% (small business) of this Delaware-apportioned federal ASC share.7

It is important to note the contrast between the three-factor apportionment used for Delaware Corporate Income Tax 1 and the single-factor QRE apportionment utilized for the R&D credit under Method B.7 This distinction places immense weight on geographically specific QRE tracking. The DOR’s audit focus, therefore, must center on verifying that all claimed QREs are accurately attributable to research activities physically conducted within Delaware borders, as this geographical allocation directly determines the quantum of the state credit.4

IV. DOR Administrative Guidance and Compliance Requirements

To claim the R&D credit, taxpayers must navigate strict procedural requirements established by the Division of Revenue, particularly concerning application deadlines and required documentation.

A. Mandatory Forms and Submission Process

The compliance process involves interlocking federal and state forms, creating a cohesive documentation trail for the DOR:

1. Application and Computation Schedule: The taxpayer must submit Form 2070AC (or Form 2071AC, Application and Computation Schedule for Claiming Delaware Research and Development Tax Credits).13 This form documents the election between Method A and Method B and details the final credit calculation.
2. Federal Requirement: A copy of the federal computation, Form 6765 (Credit for Increasing Research Activities), must be attached to the state application (Form 2070AC).12 This ensures the state’s approval process is supported by the federal substantiation required under IRC § 41, aligning state scrutiny with evolving federal standards.16
3. Reporting Schedule: Once the DOR approves the credit amount derived from Form 2070AC, that amount is transferred to Form 700 (Delaware Income Tax Credit Schedule). Form 700 is then attached to the annual corporate income tax return for claiming the credit or requesting the refundable portion.12

B. Critical Filing Deadlines

The procedural timeline for claiming the R&D credit is strictly enforced by the DOR.

The application, Form 2070AC, must be submitted to the Division of Revenue on or before September 15th following the end of the taxable year during which the qualified R&D expenses were made.5

This September 15th date is not subject to the extensions typically granted for filing the main corporate income tax return. It represents a hard statutory deadline for the application itself. Failure to file Form 2070AC by this date results in the forfeiture of the credit for that taxable year. Given the complexity of gathering and calculating the required four years of historical data necessary for the application 4, diligent and proactive preparation is required well in advance of the deadline.

Table 4: Key R&D Tax Credit Compliance Requirements

C. Documentation and Audit Focus

To successfully defend a claim upon audit by the DOR, taxpayers must adhere to rigorous documentation standards.4 Since the Delaware credit mirrors federal standards, audits center on proving the validity of QREs under IRC § 41.8

Taxpayers must maintain contemporaneous documentation, including detailed project descriptions, payroll records, and contracts, for the applicable statute of limitations period (generally three years for corporate income tax).4 The audit process specifically focuses on two areas:

1. Federal Qualification: Ensuring the activities meet the federal four-part test, substantiating the process of experimentation, technological nature, and application to a new or improved business component.8
2. Delaware Apportionment: Verifying the geographical allocation of QREs to Delaware, as only research activities physically conducted in the state qualify for the credit.4 Penalties may apply for claims that cannot be adequately substantiated.4

V. Practical Application: A Hypothetical Case Example

Understanding the interplay between Method A and Method B, particularly for a small business, is vital for maximizing the cash benefit provided by the DOR.

A. Case Profile: BioTech Innovations Inc. (Small Business)

Consider BioTech Innovations Inc., an R&D-intensive C-Corporation operating exclusively in Dover, Delaware. The company qualifies as a small business because its average annual gross receipts are below the $20 million threshold.7

B. Calculation Method A: Traditional Incremental Credit (20% Rate)

This method utilizes the enhanced 20% small business rate.12

1. Calculate Fixed Base: 4.0% $\times$ $10,000,000 = $400,000.
2. Determine Statutory Floor: 50% $\times$ Current QREs ($1,500,000) = $750,000.4
3. Determine Delaware Base Amount: The Base Amount is the higher of the fixed base ($400,000) or the statutory floor ($750,000). Base Amount = $750,000.
4. Calculate Excess QREs: Current QREs ($1,500,000) – Base Amount ($750,000) = $750,000.
5. Calculate Credit: 20% $\times$ $750,000 = $150,000 (Credit Amount).

C. Calculation Method B: Alternative Simplified Credit (ASC) (100% Rate)

This method utilizes the 100% small business rate applied to the apportioned federal credit.12

1. Determine Apportionment Ratio: Since all $1,500,000 of QREs were incurred in Delaware, the apportionment ratio is 100% (Delaware QREs / Total QREs).7
2. Calculate Delaware Apportioned Federal Credit: $170,000 (Federal ASC) $\times$ 100% = $170,000.
3. Calculate Credit: 100% $\times$ $170,000 = $170,000 (Credit Amount).

In this example, BioTech Innovations Inc. would elect Method B, yielding a maximum refundable credit of $170,000. This case demonstrates how the mandatory 50% floor on the Base Amount in Method A significantly limits the effectiveness of the 20% rate. Due to this floor, Method A only provided a credit on 50% of total QREs, resulting in an effective rate of 10% of total QREs ($150,000 / $1,500,000). Method B, offering 100% of the apportioned federal ASC, frequently proves more advantageous for small, R&D-intensive firms.

VI. Conclusion: DOR Administration and Strategic Tax Planning

The administration of the Delaware R&D Tax Credit by the Division of Revenue transforms a complex tax code section into a powerful financial tool for innovation. The DOR’s framework is defined by a rigorous compliance path focused on federal synchronization and geographical verification, but it delivers an exceptionally high-value incentive via full refundability.

For corporate taxpayers, strategic planning must focus on three critical dimensions dictated by DOR compliance:

1. Punctuality: The September 15th application deadline for Form 2070AC is paramount; missing this date negates the possibility of claiming the credit for the entire tax year.
2. Documentation Consistency: Success requires maintenance of four years of historical QRE and gross receipts data, necessary for DOR verification and modeling the optimal calculation method (A or B).
3. Geographical Integrity: Since the state benefit is derived only from activities physically conducted within Delaware, the precision of payroll logs and expenditure tracking to substantiate in-state QRE apportionment is critical to minimizing audit risk and maximizing the apportioned credit amount.

By adhering strictly to the procedural requirements enforced by the Division of Revenue and effectively modeling the dual calculation methods, companies operating in Delaware can efficiently monetize their research expenditures, transforming tax incentives into immediate, beneficial working capital.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/