Strategic Regulatory and Financial Analysis of the Iowa Renewable Energy Components Research Activities Credit (RECRAC): Compliance under Iowa Code § 15.335 and IDR Guidance

I. Executive Summary: Definition and Strategic Positioning

The Renewable Energy Components Research Activities Credit (RECRAC) is an enhanced, narrowly defined tax incentive offered to eligible businesses in Iowa for expenses related to the development and deployment of innovative renewable energy components manufactured or assembled within the state. Awarded through the Iowa Economic Development Authority (IEDA) under the High Quality Jobs Program, this specific credit requires separate calculation and tracking, as its qualifying expenditures are explicitly ineligible for the federal Research and Experimentation Tax Credit.

A. Mandatory Initial Definition

The Renewable Energy Components Research Activities Credit (RECRAC) is an enhanced tax incentive offered to eligible businesses in Iowa for developing and deploying innovative renewable energy components manufactured or assembled within the state. Awarded under the High Quality Jobs Program, this credit is calculated independently of the Supplemental R&D Credit and explicitly excludes costs eligible for the federal R&D tax credit.1

B. Synopsis of the Credit’s Purpose and Core Restrictions

The RECRAC represents a highly targeted mechanism utilized by the State of Iowa to incentivize in-state manufacturing and assembly within the strategically important renewable energy sector.3 While integrated into the broader structure of the state Research Activities Credit (RAC) as codified in Iowa Code § 15.335, the RECRAC carries unique administrative and calculation burdens that distinguish it fundamentally from the standard R&D credit available to other industries.1

The statutory basis for the RECRAC is found within Iowa Code § 15.335(1)(b), which includes the development and deployment of innovative renewable energy generation components manufactured or assembled in the state as a form of “research activities” eligible for the credit.1 Qualification is tightly linked to state economic policy, requiring approval by the Iowa Economic Development Authority (IEDA) through the application processes stipulated by the stringent High Quality Jobs (HQJ) Program.2 This administrative prerequisite confirms that the credit serves primarily as an economic development tool rather than a standard tax expenditure program.

A critical policy distinction for the RECRAC is its deliberate lack of conformity with federal tax law. The qualifying expenses for the RECRAC are explicitly deemed ineligible for the federal Internal Revenue Code (IRC) § 41 Credit.2 This non-conformity requires meticulous segregation of expenditures. Furthermore, the definition of eligible components is restricted by size: components with more than 200 megawatts (MW) of installed effective nameplate capacity are explicitly excluded from qualifying.1 This limitation ensures the incentive targets a specific segment of renewable energy projects, often decentralized or smaller-scale generation facilities. Finally, the total amount of this specific credit claimed by all eligible businesses statewide is subject to a statutory annual aggregate limit of $2 million, an amount that has been capped at this level since 2009.1

II. Foundational Context: The Iowa Research Activities Credit (RAC) Ecosystem

The RECRAC cannot be fully understood in isolation; it functions as a specialized enhancement built upon the existing infrastructure of the general Iowa Research Activities Credit (RAC). Eligibility requires satisfying the core standards of an “eligible business” under Iowa Code § 15.335.1

A. Calculation of the Base RAC and Apportionment

The standard Iowa RAC is inherently incremental, designed to reward taxpayers for increasing their research investments within the state. The credit is calculated based on the excess of qualified research expenses (QREs) incurred during the tax year over a defined “base amount”.1

1. Incremental Nature and Base Amount Determination

The definition of the “base amount” is vital for determining the portion of QREs that qualifies for the credit. The base amount is calculated by multiplying the taxpayer’s fixed-based percentage (as derived from the calculation of the federal research tax credit on Federal Form 6765) by the average annual gross receipts of the taxpayer for the four taxable years immediately preceding the credit year.8

A mandated minimum base amount rule ensures that not all QREs generate a credit. IDR guidance clarifies that in no event shall the calculated base amount be less than fifty percent (50%) of the total qualified research expenses for the credit year.8 This clarification of existing law applies to all tax years, past and present, serving as a critical threshold that must be overcome before any credit can be claimed.8 Once the incremental amount is determined, the credit calculation must rely only upon the state’s apportioned share of the qualifying expenditures.1

2. Tiered Credit Rates

Iowa’s RAC calculation uses a tiered percentage structure intended to provide a greater incentive rate for smaller businesses, promoting a more diverse economic development footprint.

• 10% Rate: This significantly higher rate is applied to the incremental QREs for eligible businesses whose annual gross revenues do not exceed $20 million.1
• 3% Rate: For larger entities, the incremental QREs are subject to a rate of three percent (3%). This applies to eligible businesses whose annual gross revenues exceed $20 million per year.1

B. The Supplemental Research Activities Credit (SRAC)

The Supplemental Research Activities Tax Credit (SRAC) provides an additional layer of tax relief based on the same qualified expenses used to calculate the regular RAC. The calculation of the SRAC is conditional on the annual gross revenues of the eligible business, and specific formulas apply to taxpayers depending on whether their gross revenues exceed the $20 million threshold.10

The foundational requirement for claiming the SRAC is the increase in research and development activities.5 However, the primary constraint defining the scope of the RECRAC is the explicit statutory and regulatory mandate that the costs associated with innovative renewable energy generation components are not eligible for the Supplemental Research Activities Tax Credit.2 This mandated exclusion necessitates the segregation of QREs, requiring the RECRAC to be calculated entirely separately before being added to the combined total of the Regular RAC and the SRAC.

C. Strategic Planning Under Imminent Sunset

The Iowa R&D tax credit regime faces an imminent legislative sunset, a factor that profoundly influences the strategic valuation and scheduling of all related research projects, including those under the RECRAC. The Iowa Code stipulates that the Research Activities Tax Credit will no longer be awarded effective January 1, 2026, and the credit program, including RECRAC, will be fully repealed from the Code on January 1, 2027.4

This defined timeline creates a regulatory necessity for high-cost research and development cycles, particularly those related to the physical development and deployment mandated by RECRAC, to be completed and claimed before the end of the 2025 tax year. Furthermore, recent legislative action effective for tax year 2025 introduced changes to the liquidity of the credit by placing new restrictions on refundability.12 Starting in 2025, a taxpayer may only receive a refund for 70% of the amount of the Iowa RAC, and 85% of the Iowa Supplemental RAC, that exceeds the taxpayer’s Iowa tax liability.12 Critically, any credit amount that exceeds these refund limitations for the tax year cannot be carried forward to another tax period, compelling businesses to adjust liquidity planning immediately to account for the reduced cash recovery and the inability to reserve non-refunded portions of the credit for future use.12

III. Innovative Renewable Energy Components Credit (RECRAC): Statutory Specifics and Limitations

The design of the RECRAC focuses narrowly on specific activities and manufacturing capabilities, differentiating it from the general R&D activities described in the Internal Revenue Code.

A. Definition of Qualifying Activities and Components

The RECRAC is unique because it permits the inclusion of costs associated with both the development and the deployment of innovative renewable energy generation components.1 The inclusion of deployment costs broadens the scope of qualifying expenditures well beyond the typical research expenses allowed under federal R&D credits, which primarily focus on experimental activities.

The geographical mandate is equally strict: to qualify, the components must be verifiably manufactured or assembled in Iowa.1 This requirement reinforces the policy goal of the credit—to drive local job creation, capital investment, and economic development within the state’s renewable energy supply chain.3

B. The Crucial Nameplate Capacity Restriction

The state legislature imposed a specific technical limit on the size of the components eligible for this enhanced credit. The Iowa Code states unequivocally that “innovative renewable energy generation components” do not include components with more than 200 megawatts (MW) of installed effective nameplate capacity.1

This precise capacity threshold dictates project eligibility. Any research or deployment costs associated with components designed for or integrated into facilities exceeding 200 MW are statutorily ineligible for the RECRAC. Taxpayers must document the component specifications rigorously to ensure compliance with this limit, which is vital for maintaining the integrity of the credit claim during the audit process.7

C. Administrative Prerequisites for Eligibility (IEDA/HQJ Mandate)

Unlike the standard RAC, which is typically claimed directly on a tax return subject only to audit review, the RECRAC requires a rigorous pre-qualification process administered by the IEDA.

1. IEDA and HQJ Program Approval

Eligibility for the credit is explicitly linked to an award granted under the High Quality Jobs (HQJ) Program.2 An eligible business must be approved by the IEDA to receive the credit.4 The HQJ Program is designed to provide qualifying businesses with tax credits and financial assistance contingent upon specific investment and job quality commitments.5

2. Labor and Economic Development Requirements

The reliance on the HQJ Program means that tax relief is contingent upon sustained compliance with stringent labor and economic metrics.13 Businesses must satisfy several program requirements, including specific wage and benefit thresholds for all new and retained jobs related to the project.5

• Wage Thresholds: Created jobs must meet at least 100% of the qualifying wage threshold at the project’s start and increase to 120% of that threshold by project completion and throughout the subsequent maintenance period.13
• Benefits Mandate: The business must provide a sufficient benefits package to all full-time employees. This typically requires the business to pay at least 70% of medical premiums for single coverage plans or 60% of medical premiums for family coverage plans, or provide a monetary equivalent value through alternative employee benefits.13

In addition to the IEDA’s HQJ approval, owners of wind and other renewable energy facilities may be required to first receive a preliminary eligibility determination from the Iowa Utilities Board (IUC) by filing an application within the IUC’s electronic filing system before the Iowa Department of Revenue (IDR) can issue the final tax credit certificates.14

3. Compliance Risk Extending Beyond R&D Accounting

The mandatory linkage of the RECRAC to the HQJ program means that the compliance risk for the tax credit extends fundamentally beyond the technical definition and tracking of research expenditures. The continued eligibility for and retention of the credit depends upon maintaining strict adherence to the HQJ’s Human Resources and payroll requirements.13 A failure to satisfy the mandated wage and benefit thresholds during the maintenance period of the HQJ agreement—even if the underlying component development was successful—can constitute a material breach of the agreement, potentially leading to the revocation or clawback of the tax credit awarded by IEDA.5 This interdependence of economic development compliance and tax relief makes the RECRAC a high-compliance-intensity credit.

IV. Regulatory Compliance and IDR Guidance (Local State Revenue Office)

The Iowa Department of Revenue (IDR) enforces the calculation and reporting requirements for the RECRAC through the instructions for the Iowa Research Activities Tax Credit form, IA 128. These instructions mandate specific procedures to manage the necessary segregation of RECRAC expenses.

A. Mandatory Separate Reporting via Form IA 128

The fundamental compliance requirement established by the IDR is the procedural segregation of RECRAC expenses from all other QREs. The instructions explicitly state that a business claiming RECRAC must complete a separate Iowa Form IA 128 specifically to account for the costs related to innovative renewable energy generation components manufactured or assembled in Iowa.2

This separate calculation is essential because RECRAC costs are ineligible for the Supplemental Research Activities Tax Credit.2 Within this dedicated IA 128, the RECRAC QREs must be accurately reported on specific line items, designated as Lines 5 and 21, to ensure proper administrative tracking and review.2 This procedural separation allows the IDR to verify compliance with both the $2 million aggregate annual cap and the exclusion from the SRAC.

B. Federal Non-Conformity: Strategic and Compliance Implications

The most complex compliance challenge arising from the RECRAC is its mandatory non-conformity with federal law. IDR guidance repeatedly confirms that costs related to the development and deployment of these innovative renewable energy components are explicitly not eligible for the federal research tax credit under IRC § 41.2

This intentional deviation necessitates that taxpayers implement sophisticated, auditable accounting controls. Tax teams must rigorously ensure that the specific QREs used to calculate the state RECRAC are cleanly carved out of the QRE base reported on Federal Form 6765. Failure to segregate these expenses appropriately creates significant audit exposure at both the state and federal levels, risking the disallowance of the federal R&D credit, the state RECRAC, or both.

The dual compliance policy of the IDR demands careful navigation. Recent legislative changes effective January 1, 2023, require researching businesses to use the same method (regular method or alternative simplified method) to calculate their Iowa RAC as they elected for their federal credit.12 This provision promotes conformity for the general RAC portion of the claim. However, the RECRAC simultaneously mandates a deliberate act of non-conformity by requiring the exclusion of certain QREs from the federal base. This policy paradox requires taxpayers to maintain a dual compliance strategy: adherence to the chosen federal method for the RAC base, juxtaposed with a meticulous exclusion methodology for the state-specific RECRAC QREs.

C. Reporting and Allocation for Pass-Through Entities

When the RECRAC is earned by a pass-through entity, such as an S corporation, partnership, or limited liability company (LLC), specific allocation and reporting requirements apply. The pass-through entity is responsible for formally designating the amount of the tax credit to be allocated to each partner, member, or shareholder.7

Individual recipients of the pass-through credit must then file a separate Iowa Form IA 128S for each credit received from the entity.11 This form serves to report the supplemental or alternative simplified research activities tax credit amount and provide necessary information regarding the underlying pass-through entity. The recipient must include Form IA 128S, along with the Federal Form 6765 and the Iowa Form IA 148 Tax Credits Schedule, with their individual or corporate tax return (IA 1040, IA 1041, or IA 1120).11

V. Financial Modeling: Integrated Credit Calculation and Exclusion Rules

The final, calculated RECRAC amount is integrated into the total tax liability reduction only after the standard RAC and SRAC calculations are completed. This aggregation adheres to the non-eligibility rule regarding the supplemental credit.

A. Calculation Integration Methodology

The computation of the total allowable Iowa Research Activities Tax Credit involves four distinct steps, which ensure that RECRAC costs, calculated separately, are never subject to the SRAC uplift.

1. Step 1: Calculate Regular RAC. Determine the baseline and incremental amounts of QREs that are federally eligible (i.e., excluding RECRAC QREs). Apply the appropriate tiered rate (10% or 3%) to this incremental amount to yield the Regular Iowa RAC.1
2. Step 2: Calculate SRAC. Calculate the Supplemental Credit based on the same incremental QREs used in Step 1. This step formally excludes all RECRAC costs from the SRAC base.2
3. Step 3: Calculate RECRAC. Using the separate IA 128, calculate the incremental credit (10% or 3%) based only on the state-specific, federally ineligible QREs related to innovative renewable components. This calculation must adhere to the $2 million statewide aggregate cap.1
4. Step 4: Final Aggregation. The total Iowa Research Activities Tax Credit is the sum of the Regular RAC, the SRAC, and the separately calculated RECRAC amount.2

B. Practical Illustration: Integrated Credit Calculation Example

The complexity of the RECRAC calculation is best demonstrated through a practical example that integrates the required exclusion and subsequent aggregation, as detailed in IDR guidance.2 This scenario assumes an eligible business with annual gross receipts not exceeding $20 million, qualifying for the 10% rate tier.

Table Title: Integrated Iowa Research Activities Tax Credit Calculation (RECRAC Example)

C. Credit Attributes and Limitations

The utilization of the RECRAC is subject to its non-transferable nature and its ability to offset or result in a refund of tax liability.4 However, the critical change introduced by 2023 legislation affects the liquidity of the credit.12

While the credit is refundable, the ability to obtain a cash refund for amounts exceeding tax liability has been curtailed starting in 2025. This limitation requires specialized financial modeling. Furthermore, any portion of the credit that exceeds the refundable cap (70% for RAC, 85% for SRAC) cannot be carried forward to offset future tax periods.12 This constraint creates an imperative for taxpayers to optimize their tax planning to ensure maximum credit utilization before the impending sunset of the program.

VI. Strategic Summary and Compliance Checklist

A. Comparative Analysis of Iowa Research Activities Tax Credit Components

To underscore the distinct regulatory profile of the RECRAC, a comparison against the other components of the Iowa R&D tax regime is warranted.

Table Title: Comparative Analysis of Iowa Research Activities Tax Credit Components

B. Comprehensive Compliance Checklist for RECRAC Claimants

For a business to successfully claim the RECRAC, a multi-agency, integrated compliance strategy is essential, spanning economic development, accounting, and tax filing procedures.

1. Initial Eligibility and Award: Obtain the necessary approval and official Research Activities Tax Credit award from the IEDA under the HQJ Program.2 For specific facilities (e.g., wind energy), secure a preliminary eligibility determination from the IUC.14
2. HQJ Maintenance: Establish continuous monitoring protocols across HR and Operations to ensure sustained adherence to HQJ wage and benefit thresholds throughout the required compliance period.13
3. Technical Documentation: Document and verify that all claimed components are either manufactured or assembled in Iowa and strictly adhere to the technical maximum nameplate capacity limit of 200 MW.1
4. QRE Segregation and Accounting: Implement granular accounting methodologies to ensure that RECRAC QREs are rigorously carved out of the QRE base used for federal purposes (Federal Form 6765). These QREs are mutually exclusive.2
5. IDR Reporting: Complete and file a separate, dedicated Iowa Form IA 128 solely for the RECRAC calculation, ensuring that QREs are correctly entered on lines 5 and 21 of that separate form, as required by IDR guidance.2
6. Final Claim Integration: Aggregate the final calculated RECRAC amount with the Regular RAC and the SRAC on the taxpayer’s final Iowa corporate or individual income tax return.11

VII. Conclusion and Strategic Policy Outlook

The Iowa Renewable Energy Components Research Activities Credit (RECRAC) represents a targeted state policy instrument designed to foster domestic manufacturing within a specific clean energy niche. Its successful utilization requires tax professionals to master not only the complex incremental calculation method of Iowa Code § 15.335 but also the intricate administrative compliance requirements imposed by the IEDA and the HQJ Program. The explicit exclusion of RECRAC expenses from both the federal R&D credit and the state Supplemental R&D Credit mandates a rigorous, bifurcated accounting and reporting methodology to avoid state and federal penalties.

The most critical strategic consideration for any business currently leveraging the RECRAC is the program’s impending sunset. With the termination of awards scheduled for January 1, 2026, and full repeal on January 1, 2027, companies must accelerate capital investment and deployment cycles to maximize QREs claimed in tax years 2024 and 2025.4 This urgency is further compounded by the reduction in refundability percentages for 2025, which necessitates immediate adjustments to cash flow and liquidity forecasting, particularly since disallowed refunded credit portions cannot be carried forward.12

While the current legislative mandate dictates the program’s expiration, the state of Iowa has demonstrated a sustained, multi-decade commitment to energy leadership, particularly in wind and biofuel production.3 The history of expanding the RECRAC cap from $1 million to $2 million illustrates the political and economic support for subsidizing this manufacturing sector.6 Given the state’s strategic interest in maintaining this leadership position, economic and political dynamics strongly suggest that the legislature will be compelled to introduce a successor credit or a modified targeted incentive package for renewable energy component manufacturing prior to the 2026 cessation. Proactive tax counsel should therefore monitor legislative developments during the 2024 and 2025 sessions for potential “grandfathering” rules or replacement programs that would allow current HQJ participants to transition their incentives beyond the statutory repeal date.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/