The Kentucky Qualified Research Facility Tax Credit: A Comprehensive Guide to Application and Compliance (Schedule QR)

The Corporation Income Tax Credit (Application) concerning Kentucky R&D is a nonrefundable 5% tax credit permitted against state tax liability. The credit is calculated solely based on qualified costs for the construction, remodeling, expansion, and equipping of research facilities within Kentucky.

This facility-focused incentive is claimed by filing Schedule QR (Qualified Research Facility Tax Credit) with the annual tax return, offering businesses a strategic mechanism to offset Corporation Income Tax (CIT) and Limited Liability Entity Tax (LLET) over a generous 10-year carryforward period.1

I. Executive Summary: The Corporation Income Tax Credit Application Defined

The Kentucky R&D tax credit represents a highly specific capital investment incentive, codified under Kentucky Revised Statutes (KRS) Chapter 141, that rewards businesses for establishing or improving physical research infrastructure within the Commonwealth.3

A. The Facility-Based Incentive Model: Strategic Intent and Distinctions

Kentucky’s incentive structure under KRS 141.395 fundamentally differs from the federal research tax credit provided under Internal Revenue Code (IRC) Section 41. While the federal credit primarily rewards operational qualified research expenses (QREs), such as researcher wages, supplies, and contract research 4, the Kentucky credit focuses exclusively on rewarding physical, tangible infrastructure.2

The state offers a nonrefundable credit equal to five percent (5%) of the qualified costs associated with the construction of research facilities.6 This highly targeted approach is designed to promote the long-term deployment of large-scale, immovable capital assets within Kentucky, thereby ensuring enduring investment and job stability related to physical research capabilities.2 The incentive is strategically aimed at driving capital expenditures (CapEx), not routine operational spending (OpEx).

B. Strategic Considerations for Business Taxpayers

The incentive provides several structural benefits crucial for long-term tax planning:

1. Capital Expenditure Focus: Tax benefits are triggered only by capital expenditures related to tangible, depreciable property placed in service for qualified research.5
2. Longevity and Planning: The credit is nonrefundable but highly flexible, allowing unused portions to be carried forward for ten (10) years.2 This generous carryforward period is essential for maximizing the credit’s value, especially when the initial capital investment generates a credit amount that exceeds the current year’s tax liability.
3. Dual Tax Offset Capability: The credit can be applied against both the Corporation Income Tax (CIT) imposed under KRS 141.040 and the Limited Liability Entity Tax (LLET) imposed under KRS 141.0401, providing utility across varied profitability and entity structures.5

II. Statutory and Regulatory Framework of the Kentucky R&D Credit

The legal foundation for the Qualified Research Facility Tax Credit is established within KRS Chapter 141.

A. KRS 141.395 and 141.420: Legal Mandate and Purpose

The statutes define the essential parameters of the credit:

• Credit Rate: The amount of the credit allowed is fixed at five percent (5%) of the qualified costs of constructing research facilities.7
• Definition of Qualified Research: To maintain consistency with federal standards, Kentucky adopts the meaning of “qualified research” as defined in Section 41 of the Internal Revenue Code (IRC).5 This means that the activity conducted within the facility must meet the criteria for technological uncertainty resolution and experimentation, even though the state credit is claimed only on the infrastructure used to conduct that research.
• Credit Status: The credit is nonrefundable. Any unused credit may be carried forward for ten (10) years.1

B. Interaction with Major Business Taxes and Tax Rate Dynamics

The nonrefundable credit is permitted against the tax assessed by KRS 141.020 (Individual Income Tax), KRS 141.040 (Corporation Income Tax), and the LLET imposed by KRS 141.0401.5 The ordering of credit utilization is dictated by KRS 141.0205.7

An important aspect of this dual offset is the stability it provides to corporations. Legislative actions have systematically reduced Kentucky’s flat corporate income tax rate, with the rate decreasing in half-percentage-point increments from 5.0 percent in 2022 to an expected 3.5 percent by tax year 2026.9 As the CIT rate declines, the dollar-for-dollar value of a credit offsetting CIT technically diminishes.

However, the R&D facility credit offsets the Limited Liability Entity Tax (LLET), which is calculated based on gross receipts or Kentucky capital and acts as a mandated minimum tax floor. For capital-intensive R&D companies, the LLET represents a stable liability. The fact that the R&D credit can be applied against LLET first ensures that the credit remains highly valuable and predictable, minimizing the impact of volatility resulting from legislative reductions to the CIT rate.

III. Defining and Calculating Qualified Research Facility Costs

Compliance with the Kentucky R&D facility credit hinges entirely upon the strict definition of qualified costs provided by the Department of Revenue (DOR) and statute.

A. The Scope of “Construction of Research Facilities”

KRS 141.395 and related guidance detail four qualifying activities, provided they occur in Kentucky for the purpose of qualified research, and include only tangible, depreciable property:

1. Constructing new facilities.7
2. Remodeling existing facilities.2
3. Expanding existing facilities.5
4. Equipping facilities, which involves the purchase and installation of depreciable equipment used directly in research activities, such as lab machinery or testing gear.2

B. Exclusions and Limitations (The Critical Distinctions)

Taxpayers must carefully distinguish between eligible facility costs and ineligible operating expenses. The statute explicitly excludes:

• Replacement Property: Amounts paid or incurred for replacement property are not eligible for the credit.5
• Non-Tangible Assets: Only tangible, depreciable property qualifies.3 Intangible assets or general administrative overhead are excluded.
• Operational R&D Costs: Costs that are generally qualified for the federal R&D credit, such as employee wages for researchers 4 or the cost of supplies consumed during testing, are specifically excluded from the Kentucky facility credit calculation.2

The timing of the credit is also highly regulated. DOR guidance indicates that the credit is only available once the tangible, depreciable property is placed in service.3 This requirement establishes the accrual date for the tax benefit not based on when the expense was paid, but on when the asset is physically complete and operational for qualified research purposes. This rule necessitates careful synchronization between the company’s accounting for fixed assets and its tax compliance calendar.

C. The Schedule QR Computation: Determining the 5% Credit

The computation of the total allowable credit is performed in Part I of Schedule QR (Form 41A720QR). This calculation establishes the maximum available credit pool that can be drawn down over the subsequent 10 years.3

The calculation process is straightforward:

IV. Kentucky Department of Revenue (DOR) Guidance and Filing Compliance

The Kentucky Department of Revenue (DOR) provides detailed instructions outlining how to claim and manage the Qualified Research Facility Tax Credit.

A. Eligibility and Entity Types

The credit is widely available to various types of taxpayers operating in Kentucky:

• Corporations: C-corporations claim the credit directly against Corporation Income Tax and LLET, generally utilizing Form 720.5
• Pass-Through Entities (PTEs): Entities such as S-Corporations, Partnerships, LLCs, and General Partnerships determine the credit at the entity level but pass the benefits through to owners (via Schedule K-1) for application against individual income tax (Form 740) or other liabilities.5 PTEs utilize Schedule TCS or Schedule ITC for application.2
• Individuals: Sole proprietors reporting business income on Schedule C of federal Form 1040 may also claim the credit.5

B. The Application Instrument: Schedule QR (Form 41A720QR)

Schedule QR is the required form used by taxpayers to determine and record the utilization of the credit against income tax liability and LLET liability allowed for the completion of research facilities per KRS 141.395.3

Filing requirements are highly specific:

1. Mandatory Annual Filing: The Schedule QR must be attached to the appropriate tax return (e.g., Form 720, 740, or 765) in the first year the credit is claimed and every subsequent year until the entire allowable credit is utilized or the 10-year carryforward period has elapsed.3
2. Project-Specific Tracking: A separate Schedule QR must be completed and filed for each new research facility construction or expansion project that qualifies.3

The requirement to file a separate schedule for each project, each of which has a 10-year carryforward life, necessitates meticulous long-term record-keeping. For large corporations undertaking multi-phased facility expansions over several years, this mandates the independent tracking of multiple carryforward pools simultaneously to avoid the forfeiture or misapplication of unused credit balances.

C. Credit Utilization and Tax Limitations

Once the total allowable credit is computed on Schedule QR, the actual amount utilized is transferred to either Schedule TCS (Tax Credit Summary) or Schedule ITC (Income Tax Credits), following the instructions of each schedule, for application against the tax liabilities.2

The maximum amount of credit claimed in any given year is strictly limited by the nonrefundable status and the LLET minimum tax: the credit cannot reduce the LLET liability below the $175 minimum.3 This constraint dictates the initial utilization of the credit, as taxpayers must prioritize maximizing the offset against both LLET and CIT while respecting the minimum LLET floor.

D. Mandatory Documentation and Audit Preparedness

Substantiation requirements for the credit are demanding due to its reliance on tangible, depreciable property. Taxpayers must include a detailed supporting schedule with their return in the year the costs are incurred or the assets are placed in service.5

This supporting schedule must list all tangible, depreciable property claimed, providing specific details including the date purchased, date placed in service, a description of the asset, and the corresponding cost.3 Synchronization between the tax claim schedule and the company’s fixed asset ledger is essential for audit defense.

V. Strategic Tax Planning and Numerical Case Study

The Kentucky R&D tax credit serves as a powerful incentive when integrated into a broader tax strategy that includes the federal R&D tax credit.

A. Hypothetical Scenario: Bluegrass Research Labs (BRL)

Bluegrass Research Labs (BRL), a C-Corporation, completed a significant expansion of its research laboratory in Kentucky during Tax Year 2024.

• Project Completion Date (Placed in Service): October 2024.
• Total Qualified Facility Costs: $4,500,000 (representing construction, remodeling, and equipment costs that qualify as tangible, depreciable property for qualified research).5
• Tax Liabilities (2024):

• Gross LLET Liability: $75,000
• Corporation Income Tax (CIT) Liability: $150,000

B. Step-by-Step Calculation of Allowable Credit (Schedule QR Part I)

BRL calculates its total allowable credit pool by applying the 5% statutory rate to the qualified facility costs:

BRL has a total pool of $225,000 in nonrefundable credit available for use over the 10-year carryforward period.

C. Utilization Analysis: Year 1 (Schedule QR Part II & Schedule TCS/ITC)

BRL must apply the credit against its liabilities in the mandated order, ensuring the LLET minimum is maintained.

In this scenario, BRL effectively utilized nearly the entire credit in the first year, reducing its combined $225,000 tax liability down to the $175 minimum LLET payment.

D. Maximizing the R&D Investment Multiplier

Companies should recognize that the Kentucky Qualified Research Facility Tax Credit creates a powerful investment multiplier effect by directly supporting the federal R&D claim.

The capital investment in the new facility (CapEx), which generates the $225,000 Kentucky credit, immediately enables the operational research activities (OpEx) that generate the federal R&D tax credit.11 For example, the wages paid to researchers or the cost of supplies used in the new lab—expenses that are specifically excluded from the Kentucky credit—are qualified expenses for the federal credit.2

By reducing the net cost of the facility investment, the Kentucky credit improves the return on capital deployed in the Commonwealth. This financial boost allows companies to reinvest capital into further research activities, such as hiring more qualified personnel or accelerating prototyping, which, in turn, amplifies the amount of federal QREs claimed. Therefore, successful tax planning integrates both the facility-based Kentucky credit and the operational expense-based federal credit to maximize overall tax savings.

VI. Conclusion

The Kentucky Corporation Income Tax Credit related to qualified research facilities is a highly specific, capital-focused incentive that demands precise adherence to state statute and Department of Revenue guidance. The credit’s 5% rate applied exclusively to tangible, depreciable property for construction, remodeling, expansion, and equipping of research facilities clearly establishes Kentucky’s strategic priority: fostering enduring physical infrastructure for technological innovation.

Successful management of this credit requires corporate tax departments to maintain rigorous compliance, particularly through the mandatory annual filing of Schedule QR for up to 10 years per project. The critical requirement that the credit only becomes available once property is “placed in service” dictates synchronization between capital expenditure reporting and tax period claims. Furthermore, the capacity to offset both Corporation Income Tax and the stable LLET liability ensures that the incentive remains valuable regardless of fluctuations in the state’s corporate income tax rate. Businesses that strategically coordinate their qualified facility costs (Kentucky credit) with their operational research expenses (federal credit) realize maximum cost offsets on their R&D investments.

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/