Analysis of Illinois Schedule 1299-I and the Research and Development Tax Credit

I. Executive Summary: The Role and Definition of Schedule 1299-I

Schedule 1299-I is the essential, mandatory worksheet used by Illinois taxpayers to aggregate and calculate the inputs required for various state income tax credits. For the Illinois R&D Tax Credit (Credit Code 5340), it specifically captures the Qualified Research Expenditures (QREs) needed to perform the three-year base period calculation.

Detailed Context: 1299-I as the Core Computational Instrument

Schedule 1299-I, formally titled “Income Tax Credits Information and Worksheets,” is a critical preparatory document for taxpayers claiming certain non-refundable and non-transferable credits against their Illinois income tax liability.1 Unlike primary claim forms (Schedule 1299-A, 1299-C, or 1299-D), Schedule 1299-I is not where the final credit is claimed or offset against tax liability; rather, it is the mechanism standardized by the Illinois Department of Revenue (IDOR) to perform the complex foundational calculations required by statute.2

For the Research and Development (R&D) credit, which is inherently incremental, the calculation requires synthesizing four years of data: the QREs for the current tax year and the QREs for the three preceding base years.4 The IDOR mandates this separation of labor between forms to ensure complex calculations are standardized and fully documented prior to integration into the final tax liability calculation.3

This requirement to complete the multi-page Schedule 1299-I before entering any figures into Schedule 1299-D, Step 1, highlights a highly technical and fragmented compliance process unique to Illinois’ credit administration.3 Since the final claim forms (such as Schedule 1299-D for corporations) only provide a few lines for the R&D calculation 3, the responsibility for the detailed aggregation and historical analysis of QRE data for four years is delegated entirely to Schedule 1299-I. Consequently, this worksheet becomes a vital control document for auditors, as it must demonstrate the accurate translation of internal QRE documentation into the specific input format mandated by the state.

II. Statutory and Regulatory Foundation (IDOR Guidance)

The Illinois Research and Development Tax Credit (Credit Code 5340) is established by state law and is administered through IDOR forms and explicit administrative code sections.

A. Codification and Legislative Basis

The authority for the R&D credit is established under the Illinois Income Tax Act (IITA) Section 201(k).6 The administrative details and technical definitions are codified in the Illinois Administrative Code, specifically 86 Ill. Admin. Code 100.2160.6 This dual structure mandates the allowance of a credit against the tax imposed by IITA Section 201(a) and (b) for taxpayers who demonstrate an increase in research activities within the state.6

B. The Credit Rate and Structure

The Illinois R&D tax credit operates on an incremental basis:

1. Rate and Calculation: The allowed credit is equal to 6.5% (.065) of the qualifying expenditures that exceed the established base amount.3 The qualifying expenditures for increasing research activities are defined as the excess of the current year’s QREs over the average of the QREs incurred during the three-year base period.7
2. Credit Status: The credit is non-refundable.8 This means the credit can only be used to offset the taxpayer’s current or future Illinois income tax liability; any excess credit cannot be claimed as a cash refund.8
3. Carryforward Provision: A significant feature of the Illinois credit is the provision allowing unused credit amounts to be carried forward for up to five subsequent taxable years.11 This provision allows businesses that incur large QREs but have minimal current-year tax liability to benefit from the incentive over time.

C. Legislative Certainty and Continuity

The long-term planning horizon for R&D investment is heavily influenced by the reliability of tax incentives. Historically, the Illinois credit has faced uncertainty due to recurrent sunset clauses, having expired four times in the past.13

However, recent legislative action has solidified the credit’s status, providing stability for corporate tax planning:

1. Extended Expiration Date: Public Act 103-0595 formally extended the Research and Development tax credit (Credit Code 5340) until tax years ending on or before December 31, 2031.9 This long-term extension addresses concerns regarding the credit’s availability, offering confidence to businesses evaluating where to locate or expand their research operations.13
2. Administrative Continuity: The administrative code itself validates the importance of continuity, specifying that the General Assembly intended the credit to apply continuously, even validating actions taken by taxpayers in reliance on the credit during brief statutory lapses (e.g., the period between January 1, 2016, and July 6, 2017).6 The stability provided by the extension to 2031 significantly reduces the inherent risk previously associated with relying on this incentive for multi-year R&D projects, aligning the state’s tax policy with its stated economic growth goals.14

III. The Mechanical Function of Schedule 1299-I: Information and Worksheets

Schedule 1299-I performs the essential function of gathering and synthesizing the QRE data necessary for the final credit calculation. It acts as the internal worksheet for the IDOR system.

A. Primary Function: Calculating QRE Inputs for Form 1299-D/1299-A

The Research and Development Worksheet contained within Schedule 1299-I is where the taxpayer calculates and aggregates the total Illinois-sourced QREs for the current tax year and the three preceding base years.3 Once the average of the base period QREs and the current year’s QREs are finalized on this worksheet, those two aggregate figures are the specific output required for the final claim form.

B. Cross-Form Dependency: Linking 1299-I to the Claim Schedules

IDOR instructions explicitly detail the transfer of data from the preparatory form (1299-I) to the claiming form (1299-D for corporations/fiduciaries or 1299-A for partnerships/S corporations).3

The critical transfer occurs as follows: The amounts calculated on Schedule 1299-I, Research and Development Worksheet, Line 6, Columns A and B, are brought directly to Schedule 1299-D, Step 1, Line 1, Columns A and B.3 Column A receives the Base Period Average Expenses, and Column B receives the Current Year’s Expenses.

Schedule 1299-D then executes the final calculation in Step 1:

1. Line 2: Subtracts the base period average (Column A) from the current year expenses (Column B) to determine the incremental increase in QREs. If this result is negative, the taxpayer enters zero, as the credit is based solely on increasing activity.3
2. Line 3: Multiplies the incremental QREs (Line 2) by the statutory rate of 6.5% ($\times 0.065$). The result is the final credit amount (Credit Code 5340) claimed on Schedule 1299-D, Step 3, Column F.3

Table II: Flow of R&D Credit Calculation Data

C. Additional Credit Worksheets

It is worth noting that Schedule 1299-I is not solely dedicated to R&D. It also houses the preparatory worksheets for various other specific tax credits, such as the TECH-PREP Youth Vocational Programs Tax Credit (Code 2000) and the Employee Child Care tax credit (Code 5040).2 It also includes worksheets for specialized incentives like the Manufacturing Illinois Chips for Real Opportunity (MICRO) credits.1

IV. Defining Illinois Qualified Research Expenditures (QREs)

The determination of eligible expenditures for the Illinois credit involves strict adherence to federal definitions coupled with mandatory state sourcing restrictions.

A. Federal Alignment and Eligible Expenses

The definition of “Qualified Research” in Illinois substantially aligns with federal standards outlined in IRC Section 41.4 Qualifying expenditures are those that are of a technical nature and intended to be useful in the creation or improvement of a function, performance, reliability, or quality of a product, process, or software.9

Qualifying expenditures for the Illinois credit include, but are not limited to, the following categories, provided they meet the federal criteria:

• Wages: Salaries for employees who directly perform, supervise, or support qualified research activities.7
• Supplies: Costs of materials and prototypes consumed during the research process.7
• Contract Research: 65% of amounts paid to third-party contractors for conducting qualified research services.7
• Computer Rentals: Costs associated with the rental or lease of computers or cloud services used directly in the research.7

B. Mandatory In-State Focus

While the credit utilizes the federal definition of qualifying activity, Illinois imposes an absolute restriction on geographical nexus: all activities and expenses must be attributable to research conducted in Illinois.7 Out-of-state research does not qualify for the Illinois credit.8

This strict requirement presents a significant compliance challenge and potential audit risk for multi-state or unitary organizations. Businesses must go beyond standard federal documentation to substantiate that the wages, supplies, and contract research were physically sourced to activities performed within Illinois.8

For businesses filing as a combined unitary group, the compliance requirement is particularly rigorous. Although the group files a single Schedule 1299-D, and the credit may be shared among members, the underlying research activities must still be performed and sourced exclusively within Illinois.1 Therefore, meticulous tracking of personnel location and resource consumption within the state is necessary to defend the credit claim.

C. Specific Exclusions for Qualified Research

Consistent with federal law, Illinois specifies certain types of research activities that are expressly excluded from qualifying for the credit 16:

• Research performed after the beginning of commercial production.
• Activities involving the adaptation of an existing product or process to meet a specific customer’s requirement.
• Duplication of an existing product or process.
• Studies, surveys, or certain routine testing activities.
• Research relating to certain internal-use computer software.
• Research activities conducted in the social sciences, arts, or humanities.
• Research expenditures that are funded by another party or a governmental entity.7

V. Base Period Calculation and the Incremental Rule (86 Ill. Admin. Code 100.2160)

The core principle of the Illinois R&D credit is that it rewards increased investment. This is enforced through the calculation of the Base Period Average (BPA), which is detailed in the Administrative Code.

A. Defining the Base Period

The “Base Period” is defined as the three taxable years immediately preceding the taxable year for which the credit is being determined.4 Schedule 1299-I provides the necessary framework for calculating the average QREs incurred during these three years.

The computation logic ensures that all relevant historical data is included, even if it is disadvantageous to the taxpayer. For example, qualifying expenditures incurred in prior taxable years when the credit may have temporarily lapsed or when the taxpayer did not otherwise qualify for the credit must still be included in the base period computation.6 Furthermore, if a taxpayer incurred no qualifying expenditures during a base period year, the QREs for that year are counted as zero, which generally benefits the taxpayer by lowering the base.6

B. Special Rules for Part-Year Operations (Normalization)

The IDOR has established specific administrative regulations to prevent inappropriate calculation of the base period for taxpayers who were not conducting business in Illinois for the full duration of a base period year.6 This normalization rule is a technical anti-abuse measure.

If a taxpayer was doing business in Illinois for only part of a base period year, the QREs actually incurred must be mathematically adjusted to represent a full year’s QRE total for the base calculation. The rule requires that the qualifying expenditures incurred be multiplied by 365 and divided by the number of days in the portion of the taxable year during which the taxpayer was operating in Illinois.6

Failure to adhere to this normalization rule would result in an artificially low Base Period Average, which in turn leads to an overstatement of the incremental credit claim in the current year. Tax professionals must therefore carefully apply this normalization, even if it results in a less beneficial (higher) BPA, to ensure strict compliance with 86 Ill. Admin. Code 100.2160(B) and prevent audit adjustments.

VI. Case Study: Calculating the Illinois R&D Credit (Credit Code 5340)

This numerical example demonstrates how Schedule 1299-I aggregates the necessary data before the final calculation occurs on Schedule 1299-D.

A. Example Setup: Advanced Technology Solutions Corp. (ATSC)

ATSC is an Illinois corporation filing Form IL-1120. It is claiming the R&D credit for Tax Year 2024. All QREs listed are strictly Illinois-sourced.

B. Step-by-Step Calculation using Schedule 1299-I Logic

The initial calculation is performed on the Schedule 1299-I R&D Worksheet.

Step 1: Determine Base Period Average QREs (BPA)

1. Sum QREs for the Base Period (2021, 2022, 2023):

• $\$800,000 + \$1,100,000 + \$1,300,000 = \$3,200,000$

1. Calculate the Base Period Average (BPA):

• $\$3,200,000 / 3$ years = $1,066,667 (rounded to the nearest dollar)
• This is the figure for Schedule 1299-I, Line 6, Column A (Base period avg. expenses).

Step 2: Determine Current Year QREs

1. Current Year QREs (2024): $1,900,000

• This is the figure for Schedule 1299-I, Line 6, Column B (This year’s expenses).

C. Form Integration Walkthrough (Schedule 1299-D, Step 1)

The figures from 1299-I are transferred to Schedule 1299-D, Step 1.

Table III: Schedule 1299-D R&D Credit Calculation

• Result: ATSC generated an incremental increase of $\$833,333$ in qualifying R&D spending. The resulting Illinois R&D Tax Credit for 2024 (Credit Code 5340) is $54,167.
• This amount is then carried to Schedule 1299-D, Step 3, Column F, to be applied against the current year’s tax liability.

VII. Compliance, Documentation, and Administration

Maximizing the value of the Illinois R&D credit requires stringent adherence to IDOR’s administrative requirements, especially concerning documentation retention and tracking the carryforward.

A. Documentation Requirements and Audit Defense

Thorough documentation of R&D activities and expenses is not merely prudent practice; it is essential for defending the credit claim in the event of an IDOR audit.11 Because the credit is based on the incremental increase over three preceding base years, the documentation must support the QRE claims across four distinct tax periods.

The administrative requirement for maintaining these records is compounded by the carryforward provision. Unused credits may be carried forward for five years.8 Therefore, a business must maintain detailed documentation, typically for a period of up to eight years (the five-year carryforward period plus the typical three-year statute of limitations).8 If an audit reviews a carryforward claim utilized in a future tax year, the auditor will demand documentation proving the validity of the originating QRE claim from the year the credit was earned. A failure to produce adequate documentation for the originating year risks the denial of the credit not only for that year but also for all subsequent years in which it was carried forward, resulting in compounded financial risk involving penalties and interest across multiple tax returns.

B. Unitary Business Group Filing

For corporate groups filing a combined unitary return in Illinois (Form IL-1120), compliance mandates that the entire group completes only one Schedule 1299-D.1 While the calculation of the credit (using the inputs from Schedule 1299-I) is centralized, the final schedule requires transparency regarding which specific unitary member generated the credit.1

For flow-through entities, such as partnerships and S-corporations, the credit is first calculated at the entity level using Schedule 1299-I and the corresponding 1299-A. The resulting credit amount is then passed through to the partners or shareholders via Schedule K-1-P. The recipient taxpayer must then report this distributive share on their own applicable credit schedules (1299-A, 1299-C, or 1299-D) and retain the Schedule K-1-P as required support.5

C. Administration of Credit Carryforward

Given the non-refundable nature of the credit, the tracking and utilization of the credit over subsequent years are crucial. This process is managed in Step 2 of Schedule 1299-D.3

Taxpayers must report the total amount of unused credit available to be carried into the current tax year from prior years (up to five years) on Schedule 1299-D, Step 2, Line 4.3 This carryforward is then combined with the current year credit calculated in Step 1 to determine the total credit available. This multi-step process necessitates accurate tracking of the year each credit was earned to ensure that the five-year expiration limit is not violated.11

VIII. Conclusion

Schedule 1299-I is fundamental to the compliance architecture of the Illinois Research and Development Tax Credit (Code 5340). As the required computational instrument, it standardizes the aggregation of four years of Qualified Research Expenditures (QREs) into the specific base period average and current year QRE totals needed for the final incremental calculation on Schedule 1299-D.

The R&D credit, set at 6.5% of the incremental increase in QREs, is a significant, non-refundable incentive extended through 2031, providing valuable long-term tax stability for innovation in Illinois. However, the successful utilization of this credit demands strict attention to three critical compliance areas:

1. Sourcing Rigor: Taxpayers must be able to prove, through exhaustive documentation, that all claimed QREs are strictly attributable to activities performed within Illinois, a critical requirement for multi-state and unitary organizations.
2. Base Period Accuracy: Adherence to 86 Ill. Admin. Code 100.2160, including the mandatory normalization of QREs for any partial year of operation in the base period, is non-negotiable for accurate calculation.
3. Long-Term Record Keeping: Given the five-year carryforward rule, documentation supporting the originating QREs must be maintained for the entire utilization period to mitigate the high risk of compounding audit adjustments across multiple tax years.

For corporations operating in Illinois, navigating Schedule 1299-I accurately is the indispensable first step toward validating and maximizing the substantial tax savings offered by the state’s commitment to incentivizing increased R&D investment.

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