The Delaware Fixed-Base Percentage: Calculation, Constraints, and Strategic Implications for the R&D Tax Credit

I. Executive Summary: The Strategic Importance of the Delaware R&D Fixed-Base Percentage

The Delaware Fixed-Base Percentage (FBP) is a historical measure used in the calculation of the state’s research and development (R&D) tax credit, representing the ratio of qualified research expenses (QREs) to gross receipts over a four-year base period.1 This percentage establishes a baseline level of historical R&D investment, known as the “base amount,” which must be exceeded by current-year expenses before a taxpayer can claim the state credit, thereby specifically targeting incremental research activity for incentive.1

The FBP is central to Method A, the traditional calculation methodology for the Delaware R&D tax credit, administered under Title 30, Chapter 20, Subchapter VIII of the Delaware Code (§ 2070 et seq.).3 The primary function of the FBP is to ensure that the credit incentivizes genuine growth in R&D activity rather than merely subsidizing expenditures that constitute a standard, historical part of a company’s business operation.1 By anchoring the base amount to historical activity, the state structures the credit as a reward for increasing R&D intensity relative to prior years. Delaware has further enhanced the financial attractiveness of this mechanism by making the credit fully refundable and eliminating the aggregate annual cap, meaning a successful FBP calculation directly translates into a guaranteed, quantifiable tax benefit or cash refund.4 The complexity inherent in determining the base amount—which involves mandatory application of both a 16% cap on the FBP itself and a 50% floor on the resulting base amount—necessitates robust financial modeling before a company elects Method A.1

II. Statutory and Regulatory Foundation (Delaware Code § 2070)

A. Legal Authority and Adoption of Federal Definitions

The legal framework for the Delaware R&D Tax Credit is codified in Title 30, Chapter 20, Subchapter VIII, beginning with § 2070.3 Delaware law dictates that any term used within this subchapter generally carries the same meaning as it does when used in a comparable context in the federal Internal Revenue laws, aligning the state credit with the well-established definitions found in IRC § 41.3 This harmonization ensures that activities qualifying for the federal credit automatically meet the definitional requirements for the Delaware credit, simplifying the initial assessment of eligibility.4

B. Determination of Delaware Qualified Research Expenses (QREs)

Although federal definitions are adopted, a critical distinction exists regarding the geographical location of the research. The Delaware credit is based only on Delaware Qualified Research Expenses (QREs).3 These are defined as expenses that meet federal standards but are specifically attributable to research and development activities conducted within the physical boundaries of the State of Delaware. Section 2072 grants the Director of the Division of Revenue the authority to establish standards for determining Delaware QREs, focusing explicitly on the location where the services are performed.3

For corporations incorporated in Delaware—a common structure for high-growth startups and Fortune 500 companies due to the state’s favorable corporate law 6—this locational requirement creates an immediate and crucial compliance need. Companies with operations spanning multiple states must maintain airtight accounting records that accurately segregate QREs based on the physical location of the research activity. Since Delaware QREs form the numerator for the Fixed-Base Percentage calculation (Method A) and the apportionment ratio (Method B) 3, a failure to precisely isolate Delaware-based expenses may lead to the disallowance of the claimed credit under the state’s regulatory scrutiny.3

C. Annual Election and Calculation Methods

Taxpayers must make an annual election between two distinct methods for calculating the Delaware R&D tax credit, a choice that is explicitly independent of the method selected for the corresponding federal R&D credit determination.3

1. Method (1) — Traditional Method (FBP-Based, or Method A): This method grants a credit equal to 10% of the excess of the taxpayer’s total Delaware QREs for the taxable year over the calculated Delaware base amount. The determination of this base amount is where the Fixed-Base Percentage (FBP) mechanism becomes operational.3
2. Method (2) — Alternative Simplified Credit (ASC) Method (Method B): This alternative provides a credit equal to 50% of Delaware’s apportioned share of the taxpayer’s federal R&D tax credit, provided the federal credit was calculated using the Alternative Simplified Credit method under IRC § 41(c)(5).3 Delaware’s apportioned share is determined by multiplying the federal ASC by a ratio: Delaware QREs for the taxable year divided by the total qualified research and development expenses (U.S.) for the taxable year.3

III. Method A: Detailed Mechanics of the Fixed-Base Percentage and Base Amount

Method A is designed to reward substantial increases in R&D spending. The calculation is rigorous, focusing on a historical benchmark established using the Fixed-Base Percentage.1

A. Establishing the Look-Back Period

To calculate the FBP, the Delaware Division of Revenue (DOR) requires the taxpayer to determine aggregate data over a specific base period. The Base Period consists of the four taxable years immediately preceding the current taxable year for which the credit is being calculated.1 For instance, a tax year 2024 credit claim would utilize data from 2020 through 2023 to establish the FBP.

B. Calculating the Fixed-Base Percentage (FBP) and the 16% Cap

The FBP is derived by comparing historical QREs to historical gross receipts.

$$\text{Fixed-Base Percentage} = \frac{\text{Total Delaware QREs in Base Period (4 years)}}{\text{Total Delaware Gross Receipts in Base Period (4 years)}}$$

Once this percentage is calculated (which corresponds to Line 3 of Form 2070AC), a statutory constraint is immediately applied: the calculated FBP must be the lesser of the calculated percentage or 16%.1 This 16% cap serves a crucial policy role, ensuring that the historical R&D intensity used to compute the base amount cannot exceed a state-defined maximum. This constraint limits the benefit available to companies that have historically invested heavily in R&D (i.e., highly R&D-intensive businesses), thereby managing the state’s credit exposure.

C. Determining the Delaware Base Amount and the 50% Floor

The Delaware Base Amount is the numerical threshold that the current year’s QREs must surpass to generate a creditable excess.

The preliminary base amount is calculated by multiplying the capped FBP by the average annual gross receipts (AAGR) from the same four-year base period.1

$$\text{Preliminary Base Amount} = \text{(Lesser of Calculated FBP or 16\%)} \times \text{AAGR (4 preceding years)}$$

However, a second, equally important statutory constraint applies: the 50% floor.1 The final Delaware Base Amount must be the greater of the preliminary amount calculated above or 50% of the current year’s Delaware QREs.1

This 50% floor is a mechanism designed to govern the credit calculation for businesses with negligible or zero historical R&D activity (e.g., startups) or those experiencing rapid, explosive growth in QREs. If a company has a low FBP due to limited historical data, the 50% floor prevents the creditable excess QREs from exceeding half of the current year’s total QREs, thus maintaining fiscal predictability and ensuring that the state does not subsidize more than 50% of the initial R&D investment through the incremental calculation method.1

The complexity of Method A mandates that taxpayers rigorously model which of the two constraints (the FBP-derived amount or the 50% floor) will be the binding factor in their calculation before choosing this method.

The required parameters and constraints governing the FBP calculation under Method A are summarized below:

Delaware Fixed-Base Percentage (FBP) and Base Amount Constraints

IV. Alternative Calculation and Small Business Optimization

Delaware provides robust incentives tailored specifically for high-growth, early-stage enterprises, primarily through Method B and enhanced rates for small businesses.

A. Strategic Use of Method B (ASC)

Method B (the Alternative Simplified Credit approach) offers a valuable alternative for companies with fluctuating QREs or those lacking complete historical data for the full four-year FBP look-back.4 This method simplifies the base calculation by relying on the federal ASC formula (IRC $\S 41(c)(5)$), which uses a three-year QRE look-back, offering an advantage to newer companies.4 For standard businesses, the credit equals 50% of the Delaware-apportioned share of the federal ASC.3

B. The Generous Small Business Provision

Delaware strategically defines a “small business” for the purpose of the R&D tax credit using a generous threshold. A small business is defined as any taxpayer with average annual gross receipts (determined using IRC methodology) that do not exceed $20,000,000.3

This substantial $\$20$ million threshold is designed to attract and retain a wide spectrum of growth-stage companies. For eligible small businesses, the credit calculation rates are doubled 3:

• Method A (FBP): The credit rate increases from 10% to 20% of the excess QREs over the Delaware base amount.3
• Method B (ASC): The credit rate increases from 50% to 100% of the Delaware-apportioned federal ASC.3

This doubling of the potential return, particularly the 100% rate under Method B, effectively transforms the state R&D tax credit into a superior cash grant program for qualifying enterprises.3

A comparison of the two credit methods highlights the importance of the annual election:

Comparison of Delaware R&D Tax Credit Calculation Methods

V. Division of Revenue (DOR) Compliance and Filing Procedures

The administration of the Delaware R&D tax credit is highly formalized, requiring strict adherence to filing procedures established by the Division of Revenue (DOR).

A. Mandatory Application and Documentation

The application process requires taxpayers to first receive approval from the Delaware Division of Revenue to qualify for the tax credits.2 The core computation of the credit, regardless of whether Method A (FBP-based) or Method B (ASC-based) is chosen, must be documented on Form 2070AC, Application and Computation Schedule for Claiming Delaware Research and Development Tax Credits.2

Essential documentation includes attaching a copy of the taxpayer’s Federal Form 6765. If the taxpayer files a consolidated federal corporate income tax return, a proforma Form 6765 for the corporate applicant must also be attached to the Delaware filing.2

B. The Critical September 15th Deadline

A key compliance requirement that requires careful attention is the application deadline. Form 2070AC must be filed on or before September 15th following the end of the taxable year during which the qualified research and development expenses were made.2

This September 15th deadline represents a strict compliance hard stop. Failure to meet this requirement results in the forfeiture of the credit for that tax year, regardless of the amount of the underlying QREs or the method of calculation chosen. The requirement for prior approval and a fixed filing deadline indicates that the state has established a rigorous administrative structure to vet and budget for the credit payments, especially given the program’s full refundability status.

C. Credit Utilization and Flow-Through

Once the credit amount is approved on Form 2070AC (Line 10 for Method A or Line 6 for Method B), the amount is transferred to the Delaware Income Tax Credit Schedule (Form 700).2 The credit is first applied against the taxpayer’s qualified tax liability.3

For pass-through entities, the credit is allocated according to ownership:

• S Corporations allocate the credit by the percentage of stock owned by each shareholder.
• Partnerships allocate the credit by the percentage ownership of each partner, consistent with IRC $\S 41(f)(2)(B)$.2

VI. Strategic Financial Value: Refundability and Cap Elimination

The strategic financial value of the Delaware R&D tax credit is dramatically heightened by legislative reforms that addressed prior limitations, making the credit highly competitive nationally.

A. Elimination of the Annual Credit Cap

Historically, the Delaware R&D credit program was subject to an aggregate annual cap of $\$5,000,000$. If the total amount of credits applied for by all eligible taxpayers exceeded this limit in any fiscal year, the credits were prorated among the qualifying applicants.2

Legislation effective for tax years beginning after December 31, 2016, specifically eliminated this aggregate cap.5 The elimination of the cap means that all approved companies now receive the full amount of the credit calculated using the FBP mechanism or ASC method.5 The removal of the proration risk ensures financial certainty for taxpayers, guaranteeing that the meticulously calculated FBP result will translate directly into the maximum possible financial benefit.

B. Full Refundability as Working Capital

Alongside the cap elimination, the legislation also made the credit explicitly and fully refundable.4 If a taxpayer is unable to use the entire amount of the approved R&D tax credit to offset state tax liability, the unused portion will be paid to the taxpayer as a tax refund.3

This feature is particularly valuable for high-growth technology startups and small businesses that frequently incur substantial QREs but have minimal or zero taxable income in their early stages. For these entities, the credit transitions from a mere liability offset to an essential, non-dilutive source of working capital, reinforcing Delaware’s appeal as a jurisdiction for innovation.

VII. Practical Application: Detailed FBP Case Study Example

To illustrate the technical operation of the Fixed-Base Percentage and the application of the 16% cap and the 50% floor, the following example details a calculation under Method A for a standard company (10% credit rate).

A. Case Study Assumptions and Input Data

A standard corporation (gross receipts above the $\$20$ million small business threshold) is calculating its 2024 Delaware R&D tax credit (Credit Year).

Hypothetical Data for Fixed-Base Percentage Calculation Example (2024 Credit Year)

B. Step-by-Step FBP and Base Amount Computation (Method A)

The computation process dictates that the Base Amount must be accurately derived before the credit percentage can be applied.1

In this scenario, the company experienced substantial R&D growth (QREs grew from $\$800,000$ to $\$2,500,000$). Although the Fixed-Base Percentage of 9.00% was well below the 16% cap, the 50% floor on the Base Amount proved to be the binding constraint. The Base Amount was mandated to be $\$1,250,000$ (50% of current QREs), which was greater than the calculated historical base of $\$1,125,000$.1 Therefore, the state’s mechanism for managing credit exposure on fast-growing companies was activated, limiting the creditable excess QREs to exactly 50% of the current year’s spending.

If this same taxpayer had qualified as a small business (gross receipts $\le \$20$ million), the resulting credit would be $\$1,250,000 \times 20\%$, yielding a refundable credit of $\mathbf{\$250,000}$.3

VIII. Conclusion and Strategic Recommendations

The Delaware Fixed-Base Percentage (FBP) calculation, while highly technical, serves as the critical historical benchmark for accessing the state’s R&D tax credit via the traditional Method A. The rigorous application of the FBP requires taxpayers to accurately track and aggregate Delaware-specific QREs and gross receipts over a four-year base period.

The analysis confirms that the complexity of Method A lies in the interplay between the 16% FBP cap and the 50% Base Amount floor.1 This system is designed to reward companies whose incremental QRE growth exceeds their historical average, while simultaneously imposing a floor that significantly reduces the credit potential for companies that are either new or experiencing rapid, explosive QRE increases.

Strategic Recommendations:

1. Mandatory Dual Modeling: Taxpayers must conduct parallel modeling of both Method A (FBP-based) and Method B (ASC-based) annually. This is essential to determine which method yields the highest credit amount, particularly noting when the 50% floor constraint under Method A becomes the binding limitation. This decision should also factor in the enhanced small business rates (20% for Method A, 100% for Method B) for companies below the $\$20$ million gross receipts threshold.3
2. Compliance Certainty: The full refundability of the Delaware R&D tax credit, coupled with the elimination of the annual aggregate cap, provides a high degree of financial certainty, allowing the calculated credit amount to be budgeted as a reliable source of funds.4
3. Strict Adherence to Deadline: Given the rigor of the DOR’s application process, strict adherence to the September 15th deadline for filing Form 2070AC is non-negotiable. Failure to meet this administrative deadline will result in the forfeiture of the credit, nullifying any planning or calculation efforts.2

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