Gross Receipts Attributable to Indiana: A Key Determinant in the Indiana R&D Tax Credit Calculation

Gross Receipts Attributable to Indiana (GRATI) represents a taxpayer’s total revenue that is sourced to the state based on Indiana’s income tax apportionment rules.

This figure is mandatory for calculating the historical base amount required for determining a company’s incremental increase in Qualified Research Expenses (QREs) eligible for the Indiana Research Expense Tax Credit.

I. Executive Summary: The Strategic Importance of Indiana Gross Receipts

The Indiana Research Expense Tax Credit, established under IC 6-3.1-4, is an incentive designed to spur in-state innovation by providing a credit against state income tax liability based on qualified research expenses (QREs) incurred in Indiana.1 For multi-state companies electing the Regular Credit method, the accurate determination of Gross Receipts Attributable to Indiana (GRATI) is the most critical and potentially complex element of the claim.

GRATI acts as the state-specific measure of revenue, localizing the base calculation derived from the federal IRC Section 41 framework.1 When calculating the base amount, a taxpayer is required to substitute worldwide gross receipts with GRATI in two places: the determination of the fixed-base percentage (FBP) and the calculation of the average annual gross receipts (AAGR).3 This localization mandate ensures that the credit is focused on incremental research relative to the company’s specific commercial footprint within Indiana. Errors in sourcing GRATI across historical base years can significantly distort the base amount and are a primary focus during state audits of the R&D credit.

II. Foundational Framework: Localizing the R&D Credit Base

A. Statutory Authority and Localization of Qualified Research Expenses

The Indiana research credit structure closely follows the federal model but incorporates strict localization requirements. Indiana qualified research expense (QRE) is defined by reference to Section 41(b) of the Internal Revenue Code (IRC) as it existed on January 1, 2001.3 Crucially, only QREs incurred for research activities conducted in Indiana are eligible.1

The Indiana Department of Revenue (DOR) assesses research localization by considering factors such as the place where the services are performed, the residence or business location of the personnel performing the services, and the location where qualified research supplies are consumed.5

B. The Regular Research Expense Credit Structure

The Regular Research Expense Credit rewards incremental growth in QREs above a calculated base amount. The credit is structured with tiered rates to provide maximum incentive for the first tier of growth:

• A 15% credit rate applies to the part of the excess QREs that is $1 million or less.1
• A 10% credit rate applies to any remaining excess QREs above $1 million.2

Unused credits resulting from this calculation may be carried forward for up to 10 taxable years, enhancing their long-term value.5

C. Defining the Base Amount: The Critical Role of GRATI

The base amount calculation, defined under IC 6-3.1-4-1, incorporates the federal IRC Section 41(c) definition but mandates state-specific financial inputs.1 This state modification requires taxpayers to substitute their global QREs and gross receipts with only Indiana qualified research expenses and Gross Receipts Attributable to Indiana (GRATI) in the calculation of both the fixed-base percentage (FBP) and the average annual gross receipts (AAGR).1

The requirement to use only GRATI—which represents just a fraction of a multi-state company’s total worldwide receipts—significantly affects the calculation dynamics. By dividing a local, smaller QRE total by a local, smaller GRATI total, the resulting FBP (Indiana QREs / GRATI) tends to be substantially higher than the corresponding federal FBP. A higher FBP translates directly into a higher base amount, which must be overcome to generate eligible “excess QREs.” This mechanism rigorously targets the credit to companies whose research activities are substantial relative to their localized revenue footprint in Indiana. The FBP calculated this way is capped at 16%.6

Table Title: Key Components of the Indiana Research Expense Tax Credit Calculation

III. Gross Receipts Attributable to Indiana: Statutory Interpretation and Sourcing

GRATI is determined by applying Indiana’s specific income tax apportionment rules, which rely primarily on the single sales factor (IC 6-3-2-2.2), to the relevant base periods. This sourcing analysis is necessary to determine the historical four-year average receipts (AAGR) and the receipts for the 1984–1988 base period (FBP).

A. Sourcing Rules for Tangible Personal Property (TPP)

Indiana employs the destination test for sourcing receipts from the sale of tangible personal property.9

• Rule: Sales of tangible personal property are included in GRATI if the property is delivered or shipped to a purchaser located within Indiana.9
• Application: The location where the product originated or conditions like the F.O.B. point are irrelevant to the sourcing determination.9 Only the physical destination of the property governs whether the receipt is sourced to Indiana.

B. Sourcing Rules for Rental, Lease, and Use of Property

For property that is rented or leased, such as equipment, and utilized both inside and outside of Indiana, a usage-based apportionment rule applies.10

• Rule: Gross receipts derived from such property are considered GRATI only to the extent the property was actually used in Indiana during the tax year.10
• Requirement: Taxpayers must maintain detailed records to calculate the percentage of time, distance, or other measurable metric that defines the property’s use within Indiana versus its use elsewhere.

C. Sourcing Rules for Intangible Personal Property (IPP)

The sourcing of revenues from intangible assets (e.g., royalties, software licenses, patents) is crucial for R&D-intensive industries and is governed by rules that hinge on economic presence.10

• Rule: Receipts from intangible personal property are included in GRATI if the taxpayer has economic presence in Indiana and the property has not acquired a business situs elsewhere.10 Interest income and receipts from loans secured by real or tangible personal property are attributed based on the location of the collateral property.10
• Economic Presence Standard: Indiana confirms that economic presence is sufficient to establish substantial nexus for taxation.11 Economic presence is determined by various factors, including the number of in-state customers, the value of intangible property benefits consumed in the state, or deriving income from making loans secured by property in the state.12 The conduct of these economic activities, even without physical presence, is sufficient to subject the entity to taxation, thus requiring sourcing of associated receipts to Indiana.12

The documentation requirement for sourcing intangible receipts is particularly burdensome when calculating the fixed-base percentage. This calculation relies on GRATI figures from the 1984–1988 base period.4 Applying modern concepts of economic nexus and market-based sourcing to financial records from decades past, when physical presence was the dominant nexus standard, forces a substantial, complex retrospective apportionment analysis. Failure to accurately substantiate this historical sourcing of intellectual property revenues can lead to significant audit adjustments and invalidation of the current year’s credit claim.

IV. Application in the Regular R&D Credit Calculation

The Regular Credit calculation determines the base amount that current QREs must surpass. This process is highly dependent on the GRATI calculations established in the previous section.

A. Step-by-Step Calculation of the Base Amount

1. Fixed-Base Percentage (FBP) Calculation: The FBP is calculated by dividing total Indiana QREs by total GRATI for the 1984–1988 base period. This percentage cannot exceed 16%.6 New businesses (those operating for less than five years) use a statutory FBP of 3%, which phases up to the 16% cap over ten years.2
2. Average Annual Gross Receipts (AAGR) Calculation: This involves averaging the GRATI for the four taxable years immediately preceding the current credit year.2
3. Determining the Tentative Base Amount: The FBP is multiplied by the AAGR:
   
   $$\text{Tentative Base Amount} = \text{FBP} \times \text{AAGR}$$
4. Applying the Minimum Base Amount (50% Floor): The final base amount used in the calculation is the greater of the Tentative Base Amount calculated above, or 50% of the current year’s Indiana QREs.2 For many established, non-startup companies, the localization requirement often results in an FBP calculation that yields a Tentative Base Amount lower than the 50% floor, causing the credit calculation to default to the 50% of current QRE minimum base.

B. Final Credit Calculation

Once the Final Base Amount is determined, the Excess QREs are calculated by subtracting the Final Base Amount from the Current Year Indiana QREs. The tiered rates are then applied to the resulting excess: 15% on the first $\$1,000,000$ and 10% on the amount exceeding $\$1,000,000$.2

V. Strategic Alternative: The Alternative Simplified Credit (ASC)

Recognizing the administrative complexity associated with the Regular Credit’s reliance on historical GRATI sourcing, Indiana permits the use of the Alternative Simplified Credit (ASC) for QREs incurred after December 31, 2009.4

A. Benefits of the ASC

The ASC is an invaluable strategic tool because its base calculation is defined exclusively by the taxpayer’s historical QRE data, thereby entirely removing the requirement to perform the laborious and highly auditable GRATI sourcing study.2

B. ASC Calculation Methods

1. Standard ASC: The credit is equal to 10% of the amount by which the current year’s Indiana QREs exceed 50% of the average Indiana QREs for the three preceding tax years.2
2. Fallback ASC: If the taxpayer had no Indiana QREs in any one of the three preceding tax years, the credit defaults to 5% of the current year’s Indiana QREs.2

Although the ASC uses a lower flat credit rate (10%) compared to the Regular Credit’s initial 15% tier, its base calculation is typically lower and easier to overcome, especially for high-growth businesses. The Regular Credit is often constrained by the 50% minimum QRE floor, making the base disproportionately high. Conversely, the ASC base is anchored to a lower three-year average QRE figure. For firms experiencing rapid research growth, the larger volume of excess QREs generated by the ASC often yields a higher overall credit amount, compensating for the lower statutory rate.

VI. Comprehensive Modeling Example: Multi-State Taxpayer

This example analyzes the strategic implications of the Regular Credit (requiring GRATI) versus the ASC, using data for a multi-state technology firm (Taxpayer A) whose current year (C) Indiana QREs are $6,000,000.

A. Scenario Setup and GRATI Sourcing

The calculation requires sourcing all sales for the four prior years (P-4 through P-1) to determine GRATI.

Table Title: Example Data and Calculation of Indiana Gross Receipts Attributable to Indiana (GRATI)

B. Regular Credit Method Calculation (Using GRATI)

1. Calculate Average Annual Gross Receipts (AAGR):

• 4-year total GRATI: $6M + $7.5M + $9M + $10.5M = $33,000,000
• AAGR = $33,000,000 / 4 = $8,250,000.

1. Determine Fixed-Base Percentage (FBP):

• Assuming historical FBP is 12%.

1. Calculate Tentative Base Amount:

• $8,250,000 (AAGR) $\times$ 12% (FBP) = $990,000.

1. Apply 50% Minimum Floor:

• 50% of Current QREs ($6,000,000) = $3,000,000.

1. Final Base Amount: The greater amount is $3,000,000.
2. Calculate Final Regular Credit:

• Excess QREs: $6,000,000 – $3,000,000 = $3,000,000
• Credit on first $1,000,000: 15% $\times$ $1,000,000 = $150,000
• Credit on remaining $2,000,000: 10% $\times$ $2,000,000 = $200,000
• Total Regular Credit = $350,000.

C. Comparison: Calculating the Credit Under the ASC Method

The ASC calculation ignores all gross receipts data.

1. Calculate Average Prior 3-Year Indiana QREs:

• ($2,500,000 + $3,000,000 + $3,500,000) / 3 = $3,000,000.

1. Calculate ASC Base (50% of 3-Year Average):

• 0.50 $\times$ $3,000,000 = $1,500,000.

1. Calculate ASC Excess QREs:

• $6,000,000 (Current QREs) – $1,500,000 (ASC Base) = $4,500,000.

1. Calculate Final ASC Credit:

• 10% $\times$ $4,500,000 = $450,000.

Table Title: Comparative Analysis of R&D Tax Credit Calculation Methods

This comparison highlights that for a taxpayer with strong growth in Indiana QREs, the ASC method can generate a significantly higher credit ($100,000 more in this instance) because its base is lower and not restricted by the 50% minimum QRE floor imposed by the Regular Credit method.

VII. Compliance and Documentation Requirements

A. Indiana Department of Revenue Filing

To claim the credit, taxpayers must submit Schedule IT-20REC (Indiana Research Expense Tax Credit, Code #822) with their annual state income tax return.3 A copy of the corresponding federal Form 6765 (Credit for Increasing Research Activities) must also be attached.3 The IT-20REC requires detailed information regarding the localization of research activities in Part II, specifically asking for the addresses where services are performed, the residence of personnel, and the location where supplies are consumed, underscoring the DOR’s focus on validating Indiana QREs.6

B. Documentation Requirements for GRATI

If the Regular Credit method is chosen, the taxpayer must be prepared to defend the calculation of GRATI for the AAGR (four preceding years) and the FBP (historical base years). This necessitates comprehensive documentation of sales sourcing:

1. Tangible Personal Property (TPP): Records must track the destination of all shipments over the relevant historical periods to prove that the sales were delivered or shipped to a purchaser in Indiana.9
2. Intangible Personal Property (IPP): If the company generates licensing or service revenue, comprehensive studies must demonstrate the taxpayer’s economic presence in Indiana in the historical periods and justify the sourcing of those revenues to the state’s customers.10 The logistical challenge of obtaining or reconstructing historical gross receipts data and applying modern sourcing concepts consistently across decades is substantial and should be weighed against the benefits of the Regular Credit.

C. Interplay with Federal IRC § 174 Decoupling

Beginning in tax year 2022, Indiana decoupled from the federal requirement under IRC Section 174 that mandates the capitalization and amortization of R&D expenses. For Indiana income tax purposes, R&D expenses are fully deductible in the current year.13 This provides an additional state tax benefit (expensing) separate from the R&D credit (calculated based on IRC § 41, as of January 1, 2001). Taxpayers must manage two distinct sets of R&D expense calculations—one for state income tax deduction and one for the state credit calculation—requiring precise internal tracking and financial reporting adjustments.13

VIII. Conclusion and Strategic Recommendations

The determination of Gross Receipts Attributable to Indiana (GRATI) is the technical linchpin of the Indiana R&D tax credit for multi-state entities utilizing the Regular Credit method. By modifying the federal formula to use only localized gross receipts, Indiana effectively ensures that the credit incentivizes research growth specifically relative to the taxpayer’s in-state market presence.

The complexity of applying current apportionment rules retrospectively, especially concerning intangible property sourcing, creates significant compliance costs and audit exposure for the Regular Credit calculation. Taxpayers must recognize that the potential gain from the Regular Credit’s 15% introductory rate is often nullified by the statutory 50% QRE minimum base, which is frequently the binding constraint.

Strategic Recommendations

1. Mandatory Dual Modeling: Taxpayers should always model the credit amount under both the Regular Credit method (dependent on GRATI) and the Alternative Simplified Credit (ASC) method. The modeling should explicitly incorporate the impact of the 50% minimum QRE floor on the Regular Credit.
2. Prioritize Compliance Efficiency: For companies experiencing robust year-over-year QRE growth, the ASC often provides a higher credit value, as demonstrated in the modeling example, while simultaneously eliminating the substantial administrative and audit risk associated with the historical sourcing of GRATI. The predictability and efficiency of the ASC frequently outweigh the potential, but often unrealized, benefit of the Regular Credit’s higher tiered rates.
3. Validate Sourcing Consistency: If the Regular Credit is claimed, the methodology for calculating GRATI must align precisely with Indiana’s current income tax apportionment rules, including strict adherence to destination-based sourcing for tangible sales and the economic presence standard for intangible receipts. This requires highly defensible documentation for all relevant historical periods.
4. Leverage State Decoupling: Taxpayers should ensure they fully utilize the Indiana decoupling from federal IRC Section 174, claiming the immediate deduction of R&D expenditures on their Indiana income tax returns while concurrently calculating the IRC § 41-based credit.

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