Delaware Form 2070AC: The Definitive Application and Computation Schedule for the R&D Tax Credit

Form 2070AC (Application and Computation Schedule) is the required document used by taxpayers to annually elect and calculate the Delaware Research and Development (R&D) Tax Credit. This schedule serves as the formal application that must be approved by the Delaware Division of Revenue (DOR) before the credit amount can be claimed against state tax liabilities or received as a cash refund.

This expert report details the statutory foundation, compliance requirements, and specific methodologies associated with Form 2070AC. The document functions as the gateway to securing one of Delaware’s premier economic incentives, which is designed to promote innovation by providing a fully refundable credit for Qualified Research Expenses (QREs) conducted within the state.1 Successful utilization of this credit requires meticulous adherence to both federal IRC § 41 definitions and Delaware-specific procedural requirements, including an early application deadline and precise jurisdictional apportionment rules.

I. Statutory and Regulatory Foundation of the Delaware R&D Credit

The Delaware R&D Tax Credit program is codified under the Delaware Code Annotated, specifically Title 30, Subchapter VIII, §§ 2070-2075.1 This legislation provides a strong, performance-based incentive for technological advancement and job creation within the state.

A. Legislative Mandate: Delaware Code Title 30, § 2070

The mechanism for the credit’s calculation and application is governed by Delaware Code Ann. tit. 30, § 2070.2 This statute establishes the critical linkage between state and federal definitions while defining the credit’s geographical scope.

1. Federal Alignment (IRC § 41)

Delaware’s R&D credit relies on the foundational definitions and methodologies of the federal research credit program, contained in Internal Revenue Code (IRC) § 41.1 This alignment ensures that R&D activities and expenses that qualify for the federal tax credit automatically qualify for the Delaware credit, provided the research occurs within state boundaries.1

This decision to adopt the federal definition of QREs is a key policy mechanism designed to reduce taxpayer compliance burdens and regulatory ambiguity. By mirroring the federal criteria, Delaware leverages years of established case law and IRS guidance on what constitutes qualified research, thereby reducing the risk of a state-level audit challenging the fundamental eligibility of the research activities themselves. Taxpayers can effectively use their existing federal R&D documentation as the primary basis for the state claim, which significantly streamlines the process of demonstrating QRE eligibility and accelerates the audit readiness of R&D studies for Delaware tax purposes.

2. Geographic Scope

A strict requirement for claiming the Delaware credit is that the QREs must be attributable only to research and development activities physically performed in Delaware.3 The final credit calculation, therefore, focuses exclusively on Delaware-apportioned QREs, differentiating it from the total QREs claimed federally.

B. Program Enhancements: Full Refundability and Elimination of the Aggregate Cap (Post-2016 Reform)

The structure of the Delaware R&D credit was significantly improved for tax years beginning after December 31, 2016 (FY 2017) through legislative reforms.4 These changes profoundly increased the value and predictability of the incentive.

1. Full Refundability

The credit is now fully refundable.1 This means that if the calculated R&D credit amount exceeds the taxpayer’s state income tax liability for that year, the excess portion is returned to the taxpayer as a direct cash refund.4

Prior to the 2017 legislative update, the credit was limited to 50% of the tax otherwise due, with any excess credits required to be carried forward for use in subsequent tax years.4 The current full refundability feature transforms the tax credit from merely an offset into a source of direct working capital for R&D companies, making it particularly beneficial for startups and growth-stage firms that may have high QREs but limited current taxable income.1

2. Elimination of the $5 Million Cap

The reform also eliminated the previous statutory cap on the total aggregate amount of credits awarded annually.4 Historically, the total amount of R&D tax credits approved by the Director across all applicants was capped at $5,000,000 in any given fiscal year.7 If the total credits applied for exceeded this threshold, the law required the credits to be prorated proportionally among all approved firms to ensure the total stayed within the $5 million limit.7

The removal of the cap ensures that all approved companies receive the full calculated credit amount, eliminating the uncertainty caused by potential proration.4 This policy provides maximum predictability regarding the final credit value and offers stable liquidity planning, making Delaware highly competitive for large R&D investments compared to states that maintain capped or non-refundable incentive programs.

II. Compliance and Filing Requirements: Navigating Form 2070AC

Form 2070AC is the formal application used to initiate the claim process and must be rigorously completed to receive approval from the Delaware Division of Revenue (DOR).

A. The Annual Election Requirement and Filing Deadline

The selection of the credit calculation methodology is an annual election made directly on Form 2070AC, and this choice applies only to the current taxable year.1

The filing deadline is absolute and requires specific scheduling on the part of the taxpayer: Form 2070AC must be submitted to the DOR on or before September 15th following the close of the taxable year during which the qualified R&D expenses were incurred.8 This non-extendable mid-September deadline necessitates that taxpayers finalize all QRE quantification and computation steps, including the pro forma federal calculation, well in advance of the general income tax return deadline.

B. Essential Documentation and Multi-Step Approval Process

The Delaware R&D credit is claimed through a structured, multi-stage process involving two key Delaware forms and mandatory federal documentation.9

1. Federal Form 6765 Requirement

The application must include a copy of the taxpayer’s federal research credit computation, Form 6765.8 If the Delaware entity is part of a federally consolidated corporate income tax return, a pro forma Federal Form 6765 must still be prepared and attached to the 2070AC application to verify the underlying QREs.10

2. DOR Pre-Approval and Transfer to Form 700

The Delaware Division of Revenue must first approve any taxpayer electing to qualify for the credits.7 After the DOR grants tax credit approval, the certified amount calculated on Form 2070AC must be transferred to the appropriate line on Delaware Form 700, Delaware Income Tax Credit Schedule.8 Both the approved Form 2070AC and Form 700 must then be attached to the taxpayer’s annual state income tax return.7

3. Treatment of Credits by Entity Type (Form 700 Linkage)

The mechanism by which the credit is ultimately claimed and refunded depends on the taxpayer’s legal structure.10

The detailed guidance concerning allocation for pass-through entities (S Corporations and Partnerships) is critical. Since many R&D-intensive businesses are organized as flow-through entities, the instruction regarding allocation by ownership percentage on Form 700 ensures that the significant benefit of the refundable cash credit reaches the individual owners or investors. This maximizes the incentive’s impact on small business investment and capital acquisition.

III. Calculation Methodology: The Choice Between Two Systems

Form 2070AC requires the taxpayer to elect one of two mutually exclusive calculation methods, both based on Delaware-apportioned QREs and IRC § 41 definitions. The taxpayer must model both scenarios to select the method yielding the maximum credit, noting that the election is annual and independent of the method chosen for the federal credit determination.2

A. Calculation Method A: The Delaware Regular Incremental Credit

Method A calculates the credit based on the excess of current-year Delaware QREs over a statutorily defined Delaware base amount.5 This method requires comprehensive historical data specific to Delaware operations.

1. Formula and Standard Rate

The credit is calculated as a percentage of the excess QREs:

$$\text{Credit} = \text{Rate} \times (\text{Current Year Delaware QREs} – \text{Delaware Base Amount})$$

• The Standard Rate is 10% of the excess QREs for businesses exceeding the small business threshold.2
• The Small Business Rate is 20% of the excess QREs for qualifying small businesses.1

2. Computation of the Delaware Base Amount

The base amount determination under Method A is complex and highly dependent on historical Delaware gross receipts and QREs.1

The Delaware Base Amount is calculated by multiplying the Fixed-Base Percentage (FBP) by the average Delaware gross receipts for the four preceding taxable years.1

The Fixed-Base Percentage is derived from the ratio of Delaware QREs to Delaware gross receipts for the four preceding years. If a company has fewer than four years of data, it uses the available years, and if none are available, the FBP is set to zero.1

A crucial limitation applies: the Delaware Base Amount must be at least 50% of the current year’s Delaware QREs.1

The presence of the 50% minimum base floor significantly impacts the benefit for companies with stable or slowly growing R&D budgets. However, companies experiencing exponential growth in Delaware QREs benefit greatly from this structure. If current QREs rapidly increase, the excess (CY QREs minus Base) will be large because the FBP calculation is tied to older, lower figures. Moreover, the 50% floor ensures that even in periods of rapid growth, a minimum of 50% of the current-year QREs is taken into account in the excess calculation, providing a predictable minimum incentive level.

B. Calculation Method B: Apportioned Federal Alternative Simplified Credit (ASC)

Method B leverages the taxpayer’s federal ASC calculation, providing an alternative computation path that is often simpler for newer companies or those with multi-state operations.

1. Basis in Federal ASC (IRC § 41(c)(5))

Method B is defined as a percentage of Delaware’s apportioned share of the taxpayer’s federal R&D tax credit, calculated specifically using the Alternative Simplified Credit (ASC) method under IRC § 41(c)(5), using federal definitions and methodology.2

It is important to note that the federal ASC method (IRC § 41(c)(5)) typically calculates a credit equal to 14% of the current QREs exceeding 50% of the average QREs from the three preceding years.12

2. The Apportionment Mechanism

Delaware restricts the credit to R&D performed in the state using an apportionment formula.

First, the taxpayer determines the Delaware Apportioned Share of the Federal Credit by applying a ratio to the total calculated federal ASC 2:

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

Second, the state credit is calculated by applying the appropriate rate to this apportioned share 2:

• The Standard Credit Rate is 50% of the Delaware-apportioned share.1
• The Small Business Rate is 100% of the Delaware-apportioned share.2

Method B offers a strategic advantage in multi-state operations if historical state-specific data required for Method A is difficult to compile. However, the calculation involves linking the state benefit to the ratio of Delaware QREs to total QREs. If a multi-state firm has high R&D activity outside Delaware, the apportionment ratio will be low, potentially making the resulting credit less beneficial, even with the small business 100% multiplier.

IV. Strategic Advantage: Enhanced Small Business Provisions

Delaware provides an exceptionally strong incentive for small businesses, defined in Title 30, § 2070(a)(2), by doubling the credit rate under both calculation methods.2

A. Defining a Delaware Small Business

For the purposes of the R&D credit, a small business is defined as any taxpayer whose average annual gross receipts, determined according to IRC § 41(c)(1)(B), do not exceed the applicable threshold of $20,000,000.2 This threshold is subject to annual adjustment.2

A crucial element of the Delaware structure is that the election for the enhanced small business calculation is independent of the taxpayer’s federal R&D tax credit determination.2 This means a company can utilize the higher Delaware rates even if it did not claim the federal credit under specific small business provisions (such as the payroll tax offset for startups). Eligibility is solely determined by meeting the $20 million gross receipts test as defined by Delaware statute.

B. Increased Benefit Rates

The enhanced rates dramatically increase the potential for a substantial cash refund for small businesses.3

Table 4: Delaware R&D Credit Calculation Rates

The 100% rate under Method B for small businesses is particularly notable. If a small business performs nearly all its R&D within Delaware, the state credit effectively equals the federal ASC amount, proportionate to the Delaware share of R&D activity. This effectively doubles the total governmental support for R&D (federal credit plus state credit) and maximizes the refundable cash benefit.

V. Division of Revenue (DOR) Guidance and Administration

The Delaware Division of Revenue (DOR) administers the Research and Development Tax Credit program and outlines specific requirements for recordkeeping and submission.

A. Administrative Procedures for Application Approval and Review

The general instructions for Form 2070AC confirm that the DOR must explicitly approve the application before the credit amount can be utilized by the taxpayer.7 This mandatory pre-approval process is a necessary step, especially given the credit’s refundable status, to ensure the state controls the outflow of funds. Taxpayers must await this approval before transferring the amount to Form 700.

The DOR provides contact information for assistance in completing the form, often directing inquiries to the corporate tax division (e.g., historical contacts such as Steve Seidel, or general emails like DOR_CorpTax@Delaware.gov, at 820 N. French Street, Wilmington, DE 19801).6

B. Recordkeeping and Base Period Calculations

Accurate documentation is paramount, especially for taxpayers electing Method A.

To compute the fixed-base percentage and the average gross receipts for Method A, taxpayers must maintain comprehensive records of Delaware QREs and Delaware gross receipts for the four preceding tax years.1 This requirement often necessitates meticulous record-keeping across half a decade of operations.

Furthermore, the calculation of gross receipts for the base determination must adhere to Delaware apportionment rules; the figure is not limited solely to sales delivered within Delaware.1 This specialized requirement means that a multi-state firm utilizing Method A must calculate a Delaware-specific fixed-base percentage that differs from any federal FBP calculation, requiring an additional layer of complexity in allocating state-specific gross receipts across the base period.

VI. Comprehensive Computational Example

The annual election on Form 2070AC necessitates a comparative analysis of Method A and Method B. The following scenarios demonstrate how the chosen method dramatically affects the final credit amount for different taxpayer profiles.

Example Scenario Data Cluster (FY 2023)

A. Scenario 1: Company Alpha (Small Business)

Company Alpha qualifies as a small business (gross receipts below $20M), allowing it to use the 20% (Method A) or 100% (Method B) enhanced rates.2

1. Method A Calculation (20% Rate)

• Calculated Base: $4.0\% \times \$5,000,000 = \$200,000$.
• Minimum Floor: $50\% \times \$1,500,000$ (CY DE QREs) = $\$750,000$.1
• Delaware Base Amount: $\$750,000$ (The minimum floor is higher and must be used).
• Excess QREs: $\$1,500,000 – \$750,000 = \$750,000$.
• Final Credit: $\$750,000 \times 20\% = \mathbf{\$150,000}$.

2. Method B Calculation (100% Rate)

• Apportionment Ratio: $\$1,500,000$ (DE QREs) / $\$1,500,000$ (Total QREs) = $100\%$.
• Apportioned ASC: $\$100,000$ (Federal ASC) $\times 100\% = \$100,000$.
• Final Credit: $\$100,000 \times 100\% = \mathbf{\$100,000}$.
• Conclusion for Alpha: Company Alpha must elect Method A ($150,000) on Form 2070AC to maximize its credit.

B. Scenario 2: Company Beta (Standard Business)

Company Beta exceeds the small business threshold, necessitating the use of the standard 10% (Method A) or 50% (Method B) rates.2

1. Method A Calculation (10% Rate)

• Calculated Base: $3.5\% \times \$10,000,000 = \$350,000$.
• Minimum Floor: $50\% \times \$3,500,000$ (CY DE QREs) = $\$1,750,000$.
• Delaware Base Amount: $\$1,750,000$ (The minimum floor is higher and must be used).
• Excess QREs: $\$3,500,000 – \$1,750,000 = \$1,750,000$.
• Final Credit: $\$1,750,000 \times 10\% = \mathbf{\$175,000}$.

2. Method B Calculation (50% Rate)

• Apportionment Ratio: $\$3,500,000$ (DE QREs) / $\$5,000,000$ (Total QREs) = $70\%$.
• Apportioned ASC: $\$350,000$ (Federal ASC) $\times 70\% = \$245,000$.
• Final Credit: $\$245,000 \times 50\% = \mathbf{\$122,500}$.
• Conclusion for Beta: Company Beta must elect Method A ($175,000) on Form 2070AC to maximize its credit.

VII. Conclusion: Strategic Takeaways for Delaware Taxpayers

Form 2070AC is the pivotal administrative and computational tool for accessing the highly valuable Delaware R&D Tax Credit. The credit’s current statutory framework, characterized by full refundability and the elimination of the annual aggregate cap, establishes it as a superior incentive mechanism for fostering corporate research investment.1

The analysis confirms three critical mandates for optimizing the Delaware R&D claim:

1. Strict Compliance Timing: Taxpayers must recognize the Form 2070AC filing deadline of September 15th as an absolute administrative constraint. Since DOR pre-approval is mandatory before the credit can be claimed on Form 700, failure to submit the application along with the required federal Form 6765 documentation by this mid-September date results in the forfeiture of the credit for that tax year.8
2. Annual Computation Optimization: The necessity of performing an annual election between Method A and Method B underscores the importance of ongoing R&D tax modeling. As demonstrated in the examples, Method A (Regular Incremental Credit) often yields a higher credit value, even for small businesses, particularly when the minimum 50% QRE base floor is triggered.1 Method B (Apportioned ASC) provides a valuable alternative, especially for smaller companies whose QREs are largely confined to Delaware or for entities lacking the four years of detailed Delaware gross receipts history required for Method A.1
3. Apportionment Discipline: Multi-state taxpayers utilizing Method A must maintain highly granular data spanning four years, specific to Delaware QREs and Delaware-apportioned gross receipts.1 This specific state apportionment requirement for the base calculation distinguishes the Delaware credit from simpler federal calculations and demands dedicated recordkeeping.

By ensuring strict compliance with the filing deadlines and executing a thorough annual computational optimization strategy on Form 2070AC, businesses can effectively leverage the Delaware R&D Tax Credit to secure significant, fully refundable capital necessary to fund future qualified research activities.

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