Illinois R&D Tax Credit Extended: Comprehensive Analysis of Public Act 103-0595 and Strategic Compliance Guidance Through 2031
I. Executive Summary: The Significance of PA 103-0595
Public Act 103-0595 (HB 5005) successfully amends the Illinois Income Tax Act (35 ILCS 5/201(k)) to extend the sunset date for the crucial state Research and Development (R&D) tax credit. This key legislative action ensures the R&D credit remains available for tax years ending prior to January 1, 2032, securing long-term stability for Illinois companies engaged in qualified research activities.1
This legislative action by the Illinois General Assembly provides a substantial period of certainty for corporate tax planning and investment strategy. The extension of the R&D credit (Credit Code 5340) demonstrates Illinois’ strong commitment to fostering innovation and retaining research-intensive businesses.3 The law’s passage is especially noteworthy because it was packaged with other high-profile, strategic economic incentives targeting advanced sectors like quantum computing and electric vehicles.1 By embedding the general R&D extension within a comprehensive bill aimed at aggressive, long-term technological development, the legislature signaled that the foundational R&D credit is considered an indispensable component of the state’s multi-year strategy to attract and retain high-tech investment.1 This sustained assurance—aligning the incentive window with the lengthy lifespan of typical capital and research projects—is invaluable for Chief Financial Officers and tax directors who require stable tax policy when making decisions about facility placement and multi-year research budgets.3
II. Statutory Foundation and Legislative Context
A. The Illinois R&D Credit Under 35 ILCS 5/201(k)
The Illinois Research and Development tax credit, codified under 35 ILCS 5/201(k), is designed to incentivize businesses to invest in qualified research activities within the state.5 It is a statutory income tax credit claimed against the taxes imposed under subsections (a) and (b) of Section 201 of the Illinois Income Tax Act.6
The credit operates as an incremental incentive, calculated at a rate of 6.5% of the increase in qualified research expenses (QREs) over a historical base amount.5 This structure rewards expanding research efforts within Illinois. The credit is nonrefundable, meaning it can only be used to offset a taxpayer’s existing Illinois income tax liability, and cannot generate a cash refund.5 Recognizing that research investments often precede profitability, the statute permits any unused credit amount to be carried forward for five succeeding tax years.5
B. Deep Dive into Public Act 103-0595 (HB 5005)
Public Act 103-0595 (HB 5005), which was enacted on June 26, 2024 2, is a sweeping piece of legislation encompassing various economic development provisions. Its most direct impact on the general business community is the definitive extension of the Research and Development credit.
Extension of the Sunset Date
The Act successfully amends the Illinois Income Tax Act to permit the Research and Development credit (Credit Code 5340) for all tax years ending prior to January 1, 2032.1 This action resolves prior uncertainty regarding the credit’s continuity, offering businesses an eight-year planning window beyond the previous sunset projections. This long-term commitment allows corporations to confidently allocate capital expenditure toward Illinois-based R&D activities through the end of the decade.
Contextual Provisions: Quantum Computing and High-Tech Focus
PA 103-0595 was not solely focused on the R&D extension; it simultaneously introduced several targeted incentives designed to attract specialized, high-impact economic development:
- Quantum Computing Campuses Credit: A significant new tax credit (Credit Code 5480) was established, effective for tax years ending on or after the enactment date of June 26, 2024.2 This credit is available to taxpayers certified by the Department of Commerce and Economic Opportunity (DCEO) in an amount equal to 20% of wages paid to employees of a construction contractor involved in building an eligible facility located on a designated quantum computing campus.1 The definition of a “Quantum computing campus” is a contiguous area designated by DCEO to support quantum computing research, development, and implementation, which may include educational institutions and non-profit research organizations.10 Unused portions of this new credit may also be carried forward for five years.1
- MICRO and REV Amendments: The Act also advanced support for other cutting-edge sectors. It expanded the scope of the Manufacturing Illinois Chips for Real Opportunity (MICRO) Act to include quantum computer manufacturers.4 Additionally, amendments were made to the Reimagining Energy and Vehicles in Illinois (REV) Act to include provisions concerning credits awarded for research and development activities related to electric and hybrid aircraft.4
The integration of the general R&D credit extension alongside these highly specialized incentives underscores a strategic policy decision: the R&D tax credit is seen as the foundational, broad-based incentive that complements targeted programs aimed at high-growth industries.3
Table 1 outlines the core operational characteristics of the extended Illinois R&D Tax Credit.
Table 1: Key Provisions of the Extended Illinois R&D Tax Credit (PA 103-0595)
| Provision | Detail | Statutory Reference |
| Credit Rate | 6.5% | 35 ILCS 5/201(k) 5 |
| Calculation Basis | Incremental (QREs over a 3-year moving average base) | 35 ILCS 5/201(k), 86 Ill. Admin. Code 100.2160(b) 7 |
| New Sunset Date | Tax years ending prior to January 1, 2032 | PA 103-0595 2 |
| Refundability | Non-refundable (Offsets income tax only) | 5 |
| Carryforward Period | 5 years | 5 |
III. Mechanics of the Illinois R&D Credit (Credit Code 5340)
A. The Incremental Calculation Methodology
The Illinois R&D credit is strictly calculated using an incremental methodology, departing from the federal structure by calculating the increment over a simple three-year moving average base, rather than using the federal fixed-base percentage method.5
QRE Definition and Sourcing Requirements
Qualifying Research Expenses (QREs) eligible for the Illinois credit closely mirror the federal standards established under IRC Section 41.5 These expenses primarily include:
- Wages: Salaries paid to employees performing, supervising, or directly supporting qualified research.5
- Supplies: Costs of materials and prototypes consumed during the research process.5
- Contract Research: Payments made to third-party contractors for qualified research services.5
- Computer Rentals: Costs associated with leased computers or cloud services used directly in the research.5
A critical state-specific limitation is that QREs must be attributable to research activities performed within Illinois.5 For multi-state companies, this requires meticulous tracking and proper allocation of expenses, particularly employee wages, based on the physical location and time spent on qualified activities within the state.5
Base Amount Determination
The credit is fundamentally incremental, requiring a comparison of current-year spending to historical spending to determine the eligible increase.8 The base amount is calculated as the average of the Illinois QREs incurred during the three taxable years immediately preceding the current tax year.5
The incremental formula dictates that the credit equals 6.5% of the qualifying expenditures for increasing research activities in Illinois, defined as the excess of current-year QREs over this 3-year base amount.7
This strict adherence to the 3-year average base creates a dynamic that must be strategically managed by taxpayers. While the mechanism initially rewards rapid increases in R&D spending, it systematically minimizes the benefit for businesses with flat or shrinking R&D budgets.5 If a company maintains consistent research expenditures (e.g., $1 million every year), the average base amount will eventually equal the current year’s QREs, resulting in zero incremental spending and thus, zero state credit.5 The credit functions, therefore, as a strong incentive for continuous expansion of research activities, rewarding growth rather than maintenance. Furthermore, failure to properly document and claim eligible QREs in previous years can inadvertently compromise the ability to generate future credits by artificially inflating the 3-year base period if the true QRE history is not accurately tracked.5
B. Compliance Challenges for Multi-State and Unitary Filers
The incremental nature and non-refundability of the Illinois credit introduce specific compliance complexities for larger entities.
Sourcing Requirements
Due to the Illinois-specific sourcing requirement, businesses must accurately track the geographic location where research activities are performed.5 Wages, the largest component of QREs, must be allocated based on the time and effort that employees spend on qualified research physically conducted in Illinois.5 Maintaining detailed time sheets or project logs that specify location is essential for audit defense.
Unitary Reporting
Unitary business groups that file a combined return in Illinois must compute the R&D credit on that combined return.5 This means the historical QRE data used to calculate the 3-year base must be consolidated across all group members for both the current year and the historical base period. The resulting credit must then be allocated among the members in accordance with Illinois combined reporting rules and the specific instructions provided in the Schedule 1299 series.5 This requires exceptional data synchronization and precision across the entire corporate structure.
IV. Illinois Department of Revenue (IDOR) Compliance and Guidance
Official guidance from the Illinois Department of Revenue (IDOR) confirms the regulatory framework for claiming the R&D credit under the auspices of PA 103-0595.
A. Official IDOR Confirmation of PA 103-0595
The IDOR has explicitly addressed the legislative changes brought forth by House Bill 5005 (PA 103-0595) in its legislative summaries and informational materials. An Informational Bulletin (e.g., FY 2025-16) confirms the extension, stating unequivocally that the Research and Development tax credit was extended until tax years ending on or before December 31, 2031.9 The IDOR also noted the addition of the related Quantum Computing Campuses Credit (Credit Code 5480).2 These documents serve as the authoritative reference for compliance professionals regarding the effective dates and continuity of the R&D program.
B. Claiming the Credit: Required Forms and Procedures
The Illinois R&D credit (Credit Code 5340) is claimed using the Schedule 1299 series of forms, which are mandated for all non-refundable and refundable income tax credits.
The filing process requires multiple steps:
- Calculation: Taxpayers must first complete the Research and Development Worksheet contained within Schedule 1299-I, Income Tax Credits Information and Worksheets, to accurately calculate the incremental QREs and the resulting 6.5% credit earned for the current year.14
- Reporting: The resulting credit is then transferred to the appropriate Schedule 1299 form based on the taxpayer’s entity type:
- Schedule 1299-C: Used by individuals filing Form IL-1040 and by fiduciaries.14
- Schedule 1299-D: Used by corporations and pass-through entities (e.g., S corporations, partnerships, and LLCs) filing forms IL-1120 or IL-1065.5
All claims must correctly identify the credit using Credit Code 5340.2
Table 2: Relevant IDOR Forms for R&D Credit Compliance
| Form/Schedule | Taxpayer Type | Primary Function | Credit Code |
| Schedule 1299-I | All Taxpayers | Calculation of Incremental QREs and Credit Amount | 5340 |
| Schedule 1299-C | Individuals (IL-1040) & Fiduciaries | Claiming Current & Carryforward Credits | 5340 |
| Schedule 1299-D | Corporations/Pass-Through Entities | Claiming Current & Carryforward Credits | 5340 |
Pass-Through Entity Distribution Rules
For partnerships, S corporations, and LLCs, the credit earned is distributed to their partners, shareholders, or members. Generally, distribution is based on their distributive share of the entity’s income.8 A significant administrative update, effective beginning with the 2023 tax year, permits the credit to be distributed based on a written agreement.8
This new allowance for credit distribution via a written agreement offers greater strategic flexibility, particularly enabling pass-through entities to allocate the credit more efficiently to partners who can best utilize it against their individual Illinois tax liabilities.8 However, leveraging a non-standard allocation structure inevitably heightens the risk profile under IDOR scrutiny. Taxpayers choosing this method must ensure the written agreement is comprehensive, explicitly defines the basis for the allocation, and is sufficiently robust to serve as a central piece of audit documentation, shifting the compliance burden from simple arithmetic to detailed legal substantiation.8 Distributive shares must be reported accurately to the members using the Illinois Schedule K-1-P or K-1-T.16
V. The Crucial Intersection: Federal Tax Law (IRC § 174) and Illinois QREs
The long-term planning enabled by PA 103-0595 must incorporate the ongoing complexities arising from shifts in federal tax law, specifically the treatment of research expenditures under Internal Revenue Code (IRC) Section 174.
A. Illinois’ Rolling Conformity and IRC § 41
Illinois generally operates as a rolling conformity state, meaning its tax code automatically adopts changes to the federal IRC unless the state legislature explicitly decouples from a specific federal provision.17 For the purpose of the R&D credit, Illinois relies on the definitions set forth in IRC Section 41 to determine what qualifies as a QRE.5
B. Strategic Impact of IRC § 174 Capitalization
The Tax Cuts and Jobs Act (TCJA) of 2017 mandated that, for tax years beginning on or after January 1, 2022, research and experimental (R&E) expenses under IRC § 174 must be capitalized and amortized over five years (domestic research) or fifteen years (foreign research).18
It is essential for taxpayers to understand that this capitalization rule impacts the deduction of R&E costs for calculating taxable income, but it does not change the core calculation of the R&D credit itself.5 The Illinois R&D credit is based on the gross expenditures that qualify under IRC § 41, regardless of how those expenditures are treated for federal deduction purposes.5 Therefore, despite federal capitalization requirements, businesses must continue to calculate the 6.5% Illinois credit using the full amount of Illinois-sourced QREs incurred during the current tax year.5
However, because Illinois is a rolling conformity state 17, the required federal amortization of R&E costs under IRC § 174 directly affects the calculation of federal taxable income, which serves as the starting point for determining Illinois base income.18 This interaction requires tax professionals to align state QRE tracking with the updated federal amortization schedules to ensure both accurate credit calculation and compliance with the state’s starting point for taxable income.5
C. Planning for Future Federal Relief
The uncertainty surrounding potential congressional action to restore the immediate expensing of R&E costs (for example, through a new Section 174A starting in 2025) introduces crucial state planning implications.19
If federal legislation passes to restore immediate expensing, it may include transition rules allowing taxpayers to deduct any remaining unamortized R&E expenditures incurred between 2022 and 2024.19 Given Illinois’ rolling conformity 17, this restoration of expensing for income deduction purposes would flow through to the Illinois tax base, potentially providing immediate cash benefits by reducing tax liabilities.20
However, the R&E expenditures involved in this potential transition—the same expenditures that generated the Illinois QREs in 2022-2024—must still be meticulously retained and incorporated when determining the 3-year incremental R&D credit base for subsequent state tax years (e.g., 2025 through 2027).5 Tax professionals must model these complex transitional effects carefully. It is necessary to monitor IDOR guidance on how to treat federal accounting method changes (such as potential Section 481(a) adjustments) to ensure cash flow optimization is achieved without inadvertently compromising the structural integrity of the Illinois R&D credit base calculation.19
VI. Practical Application: Detailed Calculation Example
The following example illustrates the mandatory incremental methodology used to calculate the Illinois R&D credit, which is performed on the Schedule 1299-I worksheet.14
A. Scenario Setup: Illinois Manufacturing Company
Consider an established Illinois manufacturer of components for farming equipment that claims research credits for design and development activities.8 The manufacturer has successfully grown its R&D investment over four years.
Table 3: Historical Illinois QRE Data
| Year | Illinois QREs |
| Year 1 (2021) | $500,000 |
| Year 2 (2022) | $700,000 |
| Year 3 (2023) | $900,000 |
| Current Year (2024) | $1,200,000 |
B. Step-by-Step R&D Credit Calculation (Tax Year 2024)
The calculation follows the required methodology of comparing the current year’s QREs against the average QREs of the three preceding tax years.5
| Step | Calculation Component | Formula / Value | Result |
| 1 | Current Year QREs (2024) | $1,200,000 | $1,200,000 |
| 2 | Base Period QREs (3-Year Average) | $(\$500,000 + \$700,000 + \$900,000) / 3$ | $\$2,100,000 / 3 = \$700,000$ |
| 3 | Excess QREs (Incremental Increase) | Current QREs – Base Period QREs | $\$1,200,000 – \$700,000 = \$500,000$ |
| 4 | Illinois R&D Tax Credit | $6.5\% \times \text{Excess QREs}$ | $0.065 \times \$500,000 = \textbf{\$32,500}$ |
The manufacturer earns a nonrefundable R&D credit of $32,500 for the 2024 tax year, which is used to directly offset its Illinois corporate income tax liability.5
Real-World Magnitude of the Incentive
The formula demonstrates that sustained research efforts yield substantial returns. A case study involving an Illinois manufacturing company, which spanned four tax years and included total QREs of $5,775,000, resulted in a final total of $165,750 in Illinois state R&D Tax Credit.8 This figure highlights the material savings available through consistent investment in qualified research activities within the state.
VII. Strategic Planning and Future Outlook (Post-2031)
A. Maximizing Credit Utilization Best Practices
The extension of the R&D credit to 2031 secures its presence for nearly a decade, requiring businesses to adopt rigorous, long-term compliance strategies to maximize benefits:
- Meticulous Documentation and Sourcing: Businesses must maintain highly detailed, source-level documentation for all QREs for a minimum of five years, covering both the statute of limitations and the 5-year credit carryforward period.5 This documentation must specifically support the four-part research test (functional, technological, experimentation, and business purpose) and verify that the activities generating the QREs were physically conducted in Illinois.12
- Effective Credit Management and Forecasting: Since the credit is non-refundable, it is imperative for tax teams to accurately model future Illinois income tax liabilities through 2031 and beyond.5 This forecasting is necessary to predict the optimal utilization timing of the current year credit and to ensure that any credit carryforwards are utilized within their 5-year expiration window.5
- Maintaining QRE Base Integrity: Consistent tracking and aggregation of all eligible QREs are vital, even in years where the calculated incremental credit is small or zero.5 Properly documenting QREs annually is the only way to establish and maintain the integrity of the 3-year moving average base calculation. Any lapses in documentation could lead to an inaccurate, inflated base in subsequent years, permanently compromising the ability to generate future incremental credits.5
B. The Policy Future Beyond 2031
While PA 103-0595 provides substantial stability, the credit remains subject to a statutory sunset clause on December 31, 2031.8 This extension provides the state’s economic development agencies, such as DCEO, with significant runway to thoroughly assess the credit’s effectiveness in achieving stated economic goals, particularly in attracting investment in advanced manufacturing, clean energy, and high-tech industries like quantum computing.3
In preparation for the eventual expiration, businesses that benefit substantially from the credit should proactively engage in legislative advocacy. By providing clear data demonstrating the tax incentive’s direct correlation to retained jobs, increased capital investment, and technological advancement within Illinois, stakeholders can position the credit favorably for a subsequent renewal or, ideally, for a permanent extension prior to the 2031 deadline.
VIII. Conclusion
Public Act 103-0595 represents a decisive policy measure that guarantees the continuity of the Illinois Research and Development tax credit (Credit Code 5340) for tax years ending through December 31, 2031. This extension provides essential, long-term certainty necessary for corporations making significant capital allocation decisions in research-intensive sectors.
Taxpayers must focus their compliance efforts on two key areas: strict adherence to the incremental 6.5% calculation methodology, which requires establishing and tracking the 3-year moving average base; and careful alignment of state QRE tracking with the complexities introduced by federal tax law, including the amortization of R&E expenditures under IRC Section 174. The continued availability of the non-refundable credit, combined with the 5-year carryforward provision, necessitates sophisticated credit management and meticulous, Illinois-sourced documentation to ensure the maximum return on R&D investment through the 2031 sunset date.
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What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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