The Temporal Nexus of Capital Investment: Interpreting “Date Purchased (Depreciable Property)” within the Kentucky Qualified Research Facility Tax Credit (KRS 141.395) Compliance Framework

I. Executive Summary: The Documentation Role of Acquisition Timing

1.1 Simple Two-Line Meaning

The “Date Purchased” field records the specific date the cost of tangible, depreciable property for a qualified research facility was incurred (paid or acquired) by the taxpayer.

This date is mandatory for audit documentation supporting the asset’s capitalized cost basis but does not determine the tax year the 5% credit is claimed, which is triggered by the “Date Placed in Service”.1

1.2 Statutory Overview of the Kentucky Qualified Research Facility Tax Credit (KQRFTC)

The Kentucky Qualified Research Facility Tax Credit (KQRFTC), codified under Kentucky Revised Statutes (KRS) 141.395, is a strategic fiscal incentive designed to encourage capital investment in research infrastructure within the Commonwealth.3 The core benefit is a nonrefundable credit equal to five percent (5%) of the qualified costs associated with the construction, remodeling, expansion, or equipping of research facilities physically located in Kentucky.3

A critical feature of the KQRFTC is its narrow focus solely on infrastructure investment, which establishes a fundamental distinction from the federal R&D tax credit defined in Internal Revenue Code (IRC) Section 41. While the state credit relies on the IRC Section 41 definition for determining what constitutes “qualified research” activity, the Kentucky qualified expenses are strictly limited to costs ascribed to tangible, depreciable property.3 The Kentucky credit explicitly excludes operational costs such as wages, supplies, or contract research, which are staples of the federal credit.3

The resulting credit may be applied against various Kentucky tax liabilities, including individual income tax (KRS 141.020), corporation income tax (KRS 141.040), and the Limited Liability Entity Tax (LLET) (KRS 141.0401).1 The application of the credit is subject to a specific statutory ordering clause, as provided in KRS 141.0205.1 Any generated credit that cannot be immediately utilized due to the nonrefundable nature of the credit may be carried forward for a period of ten (10) years.1

1.3 Key Distinction: Date Purchased vs. Date Placed in Service

Compliance requirements established by the Kentucky Department of Revenue (DOR) necessitate meticulous record-keeping, requiring the taxpayer to track two distinct temporal events for every qualified asset: the date of acquisition or cost incurrence, referred to as the “Date Purchased,” and the date the property becomes functional for its intended research purpose, known as the “Date Placed in Service”.1

The requirement to track these separate dates highlights the DOR’s regulatory control over two independent phases of compliance. The “Date Purchased” validates the legitimate cost basis of the investment, establishing what costs are eligible and when those costs were incurred. This date confirms the cost figure that will ultimately be multiplied by the 5% credit rate.2 Conversely, the “Date Placed in Service” dictates the precise tax year in which the taxpayer is legally permitted to calculate and claim the resulting credit.2

This temporal separation of basis and benefit is especially critical in cases involving large-scale construction or complex equipment installation, where financial outlays often span multiple tax years before the facility is fully operational. For instance, if a company incurs substantial construction costs (purchases materials, pays contractors) in Year 1 and Year 2, the “Date Purchased” records will anchor the eligibility of these expenditures. However, if the entire facility is only completed and ready for use in Year 3, the entire calculated credit (5% of the aggregated costs from Years 1 and 2) is only recognized and claimed in Year 3, based on the Date Placed in Service. Therefore, the Date Purchased provides the integrity and history of the cost basis, while the Date Placed in Service dictates the timing of the tax benefit realization.2

II. Kentucky Department of Revenue (DOR) Compliance Mandates and Auditing Requirements

2.1 The Official Documentation Requirement

To successfully claim the KQRFTC, the taxpayer must file Kentucky Schedule QR, the Qualified Research Facility Tax Credit form, in conjunction with the relevant income tax return.1 The instructions for Schedule QR, specifically related to the calculation of construction costs (Line 1) and equipment costs (Line 2), mandate the attachment of a supporting schedule detailing all tangible, depreciable property included in the qualified costs calculation.2

This supporting schedule is not merely a formality but a mandatory component for substantiation, requiring four specific, detailed data points for each qualified asset or capitalized expenditure:

1. Date Purchased
2. Date Placed in Service
3. Description
4. Cost 1

Failure to provide a supporting schedule that includes these four essential data points for the claimed costs will render the credit claim incomplete and subject to audit adjustment or rejection by the DOR.

2.2 The Legal Significance of the “Date Purchased” Field

In the context of Kentucky tax regulation, the “Date Purchased” serves as the documented acquisition date, referring to the specific moment the expenditure was paid or incurred, thereby fixing the asset’s cost under accepted accounting principles.3 This temporal marker ensures alignment with standard federal capitalization and depreciation rules used to establish tax basis.

The most profound functional purpose of the “Date Purchased” field, however, is its role in enabling the DOR to verify compliance with a critical statutory exclusion: the prohibition against including costs for replacement property. Kentucky law explicitly excludes from qualified costs “any amounts paid or incurred for replacement property”.1

By demanding the Date Purchased alongside the asset’s description and cost, the DOR establishes a regulatory mechanism to differentiate legitimate capital expansion from routine capital expenditures related to maintenance or simple asset swapping. The purchase date, directly traceable to purchase orders and invoices, allows an auditor to quickly examine the historical context of the acquisition. If a new piece of equipment is acquired shortly after a similar, older asset was disposed of or retired, the Date Purchased raises an immediate query regarding its status as non-qualifying replacement property. The taxpayer must then demonstrate that the asset represents a net addition, improvement, or genuine expansion of the research facility’s capacity, rather than merely sustaining the existing level of functionality.3 The KQRFTC is designed to incentivize new, committed infrastructure investment; thus, the Date Purchased acts as a crucial first line of defense against claims for expenditures that do not contribute to a net expansion of Kentucky’s research capacity.

2.3 Comparison to the “Date Placed in Service” (The Credit Trigger)

While the Date Purchased validates the asset’s cost basis, the “Date Placed in Service” dictates the timing of the tax benefit. Kentucky statutes are unequivocal on this point: “The credit is available once the tangible, depreciable property is placed in service“.2

The definition of “placed in service” is consistently interpreted in line with federal tax law principles (IRC), meaning the property must be in a condition or state of readiness and availability for its specifically assigned research function.3 This condition must be met regardless of when the acquisition occurred or construction payments were made.

The two dates therefore have a distinct causal and temporal relationship. The Date Purchased (cost incurrence) is the necessary condition that establishes the value (cost basis) eligible for the 5% calculation. The Date Placed in Service (operational readiness) is the sufficient condition that triggers the legal ability to claim the resulting credit on the tax return.2

For complex projects, understanding this distinction is paramount. An asset purchased in the prior year but not installed or calibrated until the current year will have its full cost basis—established by the prior year’s Date Purchased—included in the current year’s qualified costs calculation, as the credit cannot be recognized until the asset is placed in service.3

III. Statutory Basis and Nuances of Eligible Depreciable Property (KRS 141.395)

3.1 Defining Tangible, Depreciable Property

KRS 141.395 mandates that qualified costs for the KQRFTC must be strictly limited to “tangible, depreciable property”.1 This requirement serves as a definitive screening criterion, ensuring that only capital investments eligible for cost recovery under federal depreciation methods (such as MACRS) are considered for the state credit. To qualify as depreciable property, an asset must have a determinable useful life and must be used in the taxpayer’s trade or business.3

The explicit limitation to depreciable property highlights a core difference between the Kentucky credit and the federal IRC Section 41 credit. The Kentucky framework excludes the vast majority of operational Qualified Research Expenses (QREs) that are standard under federal law. Specifically, the following common federal QRE categories are ineligible for the Kentucky credit:

• Wages paid to employees performing qualified research.3
• Cost of supplies consumed or used in the research process.3
• Amounts paid or incurred for contract research.3

The Kentucky credit is purely a facility and equipment investment incentive, focusing on the physical infrastructure necessary to conduct the qualified research activity.3

3.2 Categorization of Costs on Schedule QR (Lines 1 and 2)

The mechanics of the credit calculation on Schedule QR require the taxpayer to segregate qualified costs into two primary, capitalized investment categories: Line 1 (Construction) and Line 2 (Equipment).2 Both categories require the attached schedule detailing the Date Purchased, Date Placed in Service, Description, and Cost.

3.2.1 Line 1: Cost of Construction of Research Facilities

This category encompasses costs related to the real property component of the research facility—specifically, construction, remodeling, or expansion of the physical building itself.1

For these costs, the “Date Purchased” documentation often involves complex aggregation. The Date Purchased relates to the dates when various construction elements were acquired, or, more commonly, when specific, capitalized portions of contractor invoices were paid or incurred. For a project lasting several years, these purchase dates may span multiple tax reporting periods, corresponding to the accrual of Construction-in-Progress (CIP) costs on the balance sheet.

3.2.2 Line 2: Cost of Equipment

This category covers the purchase and installation of specialized machinery, laboratory gear, and fixed equipment integral to the performance of qualified research.2

For equipment, the “Date Purchased” is typically the acquisition date, supported by a distinct purchase order and invoice for the item. These items must be tangible and must qualify as capital investments under federal depreciation rules.3

3.3 Construction-in-Progress (CIP) Complexity and Multi-Year Costs

A key structural complexity arises from the treatment of multi-year construction projects. A single facility, or a major expansion, may not reach the “Date Placed in Service” until years after the taxpayer begins incurring substantial costs.

For a complex construction project, the single Date Placed in Service (which triggers the credit claim) may be supported by hundreds of individual “Date Purchased” entries. These purchase dates correspond to various payments for materials, specialized labor, and contractor milestones incurred across several financial reporting cycles. The taxpayer must demonstrate strict accounting discipline to aggregate these numerous individual acquisition dates and their associated costs into the final capitalized basis claimed on Schedule QR, Line 1 or 2.2

The process of cost substantiation demands that the DOR auditor verifies the full cost basis claimed in the completion year (Year X) by systematically tracing back the supporting documentation (the detailed Purchase Dates in Years X-N). This ensures that the final aggregated cost basis includes only costs legitimately incurred for the tangible, depreciable property that ultimately qualifies. The Date Purchased requirement thus enforces meticulous tracking of CIP, ensuring that non-depreciable costs, such as the cost of land or financing soft costs, are meticulously excluded from the qualified base.

3.4 The Role of Qualified Research Activity (IRC Section 41)

The KQRFTC ties the eligibility of infrastructure costs to the type of activity conducted within the facility. The property must be constructed or equipped for qualified research, defined identically to IRC Section 41.1 This federal linkage imposes an indirect burden on the documentation provided for the Date Purchased.

The property schedule submitted to the DOR includes the Date Purchased, Cost, and a Description. This description must implicitly link the asset (e.g., “High-Resolution Spectrometer”) to its intended function of resolving technical uncertainties, thereby satisfying the fundamental requirements of the IRC 41 four-part test.3

Therefore, while the Date Purchased is primarily a temporal marker for cost basis, its inclusion in the required property schedule forces the taxpayer to maintain documentation that confirms the asset’s qualified research function at the time of acquisition. If an asset acquired on a specific Date Purchased is later challenged in an audit, the contemporaneous records—such as the purchase order, engineering blueprints, or R&D project plans—must establish that the asset’s intended use supported IRC 41 qualified research at the moment the expenditure was incurred.

IV. Claiming Mechanics, Multi-Year Projects, and Audit Readiness

4.1 Timing of Credit Generation and Claiming

The calculation of the KQRFTC is straightforward: five percent (5%) of the qualified costs.3 However, the timing of the tax benefit is governed entirely by the Date Placed in Service. The calculated credit is only generated and made available for application in the tax year the property achieves operational readiness.2

This timing rule dictates the handling of assets purchased near year-end or those involving long installation periods. For example, if a company purchases $100,000 of specialized equipment (Date Purchased: 12/1/Y1) but the installation and calibration delay its function until the next year (Date Placed in Service: 1/15/Y2), the resulting $5,000 credit (5% of $100,000) must be claimed on the Year 2 tax return, not Year 1.2

In the case of large, multi-year construction projects, costs incurred and documented by their various Date Purchased entries across several years must be aggregated. The total calculated credit, encompassing all costs, is claimed in the single tax year corresponding to the final Date Placed in Service of the entire facility or phase.9

4.2 Flow-Through Entities and Documentation Consistency

The KQRFTC structure permits the credit to be utilized by various entities, including corporations, individuals (sole proprietors), and flow-through entities such as partnerships, S-corporations, and LLCs.1 When a pass-through entity generates the credit, the calculated amount is passed through to the partners, members, or shareholders via the Kentucky Schedule K-1.1

The reliance of the individual owners on the entity’s records necessitates rigorous documentation consistency. The required Schedule QR and its supporting documentation—which mandates the Date Purchased, Date Placed in Service, Description, and Cost—are completed and filed at the entity level.1 This central record-keeping establishes the legitimacy of the cost basis underpinning the credit.

If a subsequent DOR audit challenges the validity of the Date Purchased or the Cost claimed at the entity level, it retroactively invalidates or adjusts the credit basis, directly impacting the tax liability of every owner who utilized the credit via their Schedule K-1.1 This distribution of tax benefit mandates that the entity maintain impeccably detailed acquisition records, as the integrity of the individual claimant’s credit hinges entirely on the veracity of the entity’s original purchase documentation.

4.3 Credit Utilization and Extended Audit Liability

The KQRFTC is nonrefundable and permits unused portions to be carried forward for a maximum period of ten (10) years.3 This generous carryforward period creates a requirement for extended record retention and exposes the taxpayer to a long-tail audit risk.

To utilize the carryforward, the taxpayer must attach a copy of the original Schedule QR to their income tax return each year the credit is claimed until the full amount is exhausted.1

Because the credit amount is derived from the initial qualified cost basis, which is established by the original Date Purchased and Cost records, the documentation supporting the calculation must remain available and defensible for the entire duration of the utilization period. While Kentucky’s standard statute of limitations for challenging a filed return may be four years, the actual audit liability associated with the underlying credit basis is significantly extended. If a credit generated in 2024 (based on asset purchases with various 2023 and 2024 Date Purchased entries) is used in 2033, the DOR has the authority to challenge the validity of the credit carryforward utilized in 2033. Successfully defending the carryforward requires the presentation of the original Schedule QR and its accompanying supporting schedules, which include the detailed Date Purchased records.3 Consequently, corporate tax departments must maintain these critical property records for at least the 10-year carryforward period, plus the standard statute of limitations for the final utilization year.

V. Illustrative Example: Documentation of Purchase vs. Service Dates

This example illustrates the practical application of the documentation requirements for the KQRFTC, focusing on the distinction between the Date Purchased and the Date Placed in Service for assets acquired during a multi-year investment cycle by a Kentucky-based R&D firm.

5.1 Scenario: Bluegrass Advanced Technologies, LLC (BAT)

Bluegrass Advanced Technologies, LLC (BAT) is constructing and equipping a new, dedicated testing laboratory in Louisville, Kentucky. BAT operates on a calendar tax year (January 1 – December 31). The project spans 2023 and 2024, with the facility becoming fully operational near the end of 2024.

• Project Goal: Claim the 5% KQRFTC on qualified facility construction and equipment costs.
• Claim Year Target: 2024 Tax Return.

5.2 Asset Timeline and Documentation Tracking

The following table demonstrates how the Date Purchased fixes the cost basis and timing of incurrence, while the Date Placed in Service determines when the accumulated costs are eligible for the credit calculation.

Table 5.2.1: KQRFTC Asset Acquisition and Utilization Timeline

5.3 Credit Calculation and Application

1. Determine Qualified Costs: The total capitalized costs are calculated by aggregating only eligible expenditures: $\$1,500,000 + \$1,000,000 + \$1,200,000 = \$3,700,000$. The replacement property and consumables are explicitly excluded, despite their purchase dates falling within the project window.1
2. Credit Calculation: The 5% rate is applied to the qualified cost basis: $\$3,700,000 \times 0.05 = \$185,000$.
3. Claim Year Determination: Since all qualified property was placed in service by December 1, 2024, the full $\$185,000$ credit is calculated and claimed on the 2024 Kentucky tax return, filed in 2025.3

5.4 Audit Focus on “Date Purchased” and Substantive Documentation

The Date Purchased records serve as crucial audit evidence for the DOR.

First, the DOR would scrutinize the specific Date Purchased records (10/1/2023 and 3/15/2024) supporting the $\$ 2,500,000$ in construction costs. This ensures that BAT properly capitalized these expenses as CIP in both 2023 and 2024, distinguishing them from potentially expensed operating costs in those years. The ability to link these purchase dates directly to vendor invoices and payment records is essential for verifying the final cost basis reported on Schedule QR Line 1.3

Second, the audit would utilize the Date Purchased field to enforce the replacement property exclusion. The record showing the 9/1/2024 Date Purchased for the High-Speed Camera System would prompt the auditor to confirm its functional status. If documentation shows this acquisition was a direct substitution for a camera disposed of in August 2024, the auditor confirms its exclusion, validating the remaining cost basis of $\$ 3,700,000$.1

VI. Legal and Strategic Considerations for Compliance

6.1 Data Integrity and Record Retention

Taxpayers must maintain the integrity of documentation supporting the claimed costs, specifically records that validate the “Date Purchased” and “Cost” fields on the supporting property schedule.3 This includes, but is not limited to, original purchase orders, vendor invoices, contracts, and payment records. Given the potential 10-year carryforward of the credit, meticulous record retention is mandatory for the lifespan of the credit utilization.1

For construction projects, where the cost basis spans several years, the Date Purchased documentation must align with third-party billing and detailed payment schedules. When auditors review the underlying documentation, the congruence between the taxpayer’s internal accounting ledger (which records the payment date/Date Purchased) and external third-party verification significantly strengthens the audit defense for the capital expenditure.

6.2 Interaction with Federal Depreciation Timing

The Kentucky credit’s reliance on tangible, depreciable property inherently links state compliance to federal tax treatment. The Date Placed in Service used for KQRFTC purposes must be consistent with the date used by the taxpayer to commence depreciation for federal income tax purposes.3

While the Kentucky credit does not mirror the federal calculation methodology, its foundational requirement for a depreciable asset means that the cost basis (tied to the Date Purchased) and the service date must be perfectly reconcilable between the Kentucky supporting schedule and the federal depreciation schedule (Form 4562, if applicable).

A mismatch between the Date Purchased cited in the Kentucky documentation and the acquisition date used for federal tax records constitutes a significant audit risk. Best practice dictates ensuring internal accounting consistency where the Kentucky “Date Purchased” accurately reflects the true date of cost incurrence used for establishing the capital asset’s accounting basis, regardless of potential variations in federal depreciation conventions (such as mid-year or mid-quarter conventions) that affect the precise depreciation start date.

6.3 Credit Ordering and Application (KRS 141.0205)

The KQRFTC is nonrefundable and must be applied against the tax liability in a specific statutory sequence. KRS 141.0205 provides the ordering clause for applying business incentive credits.1 The calculation of the credit, which is derived from the costs tracked by the Date Purchased records, flows onto Schedule QR, and then is applied through one of two supplementary forms, depending on the entity type: Schedule TCS (Tax Credit Summary, for corporations and pass-through entities) or Schedule ITC (Individual Tax Credit Summary, for individuals).1

An important constraint applies to taxpayers subject to the Limited Liability Entity Tax (LLET): the research facility credit cannot reduce the LLET liability below the statutory minimum of $175.3 Proper adherence to these ordering rules, which are applied subsequent to the calculation validated by the Date Purchased documentation, is necessary to correctly utilize the nonrefundable credit and maximize carryforward potential.

6.4 Documentation for Pass-Through Credit Utilization

When the KQRFTC is passed through from a partnership, LLC, or S-Corporation to its individual owners, the Schedule K-1 (Kentucky) must accurately report the allocated credit amount.1

To ensure the validity of the credit claimed by the owners, the originating entity must ensure that the Schedule QR, along with the detailed supporting asset schedule containing all Date Purchased and Date Placed in Service data, is attached to the entity’s original tax return. This attachment creates the necessary audit trail, proving that the costs incurred by the entity on the specified purchase dates support the credit flowing through to the partners or shareholders, mitigating the risk of credit disallowance at the individual taxpayer level.1

VII. Conclusion and Strategic Recommendations

The mandated inclusion of the “Date Purchased” in the documentation supporting the Kentucky Qualified Research Facility Tax Credit (KRS 141.395) serves a distinct and vital compliance function that transcends simple record-keeping. This date anchors the auditability of the capitalized cost basis and acts as the regulatory tool used by the Kentucky Department of Revenue (DOR) to enforce the exclusion of non-qualifying replacement property. Crucially, the Date Purchased must be tracked separately from the Date Placed in Service, as the former establishes the cost basis, while the latter dictates the timing of the tax credit claim.

7.1 Summary of Best Compliance Practices

Taxpayers seeking to maximize and defend the KQRFTC must implement robust accounting procedures focused on strict temporal separation and documentation integrity:

• Mandatory Dual Tracking: Corporate accounting protocols must explicitly recognize and track the distinction between the “Date Purchased” (cost incurrence date, validating basis integrity) and the “Date Placed in Service” (operational readiness date, dictating the tax claim year). Both data points must be meticulously recorded on the supporting property schedule submitted with Schedule QR.1
• Rigor in CIP Accounting: For any facility construction or major remodeling (Line 1 costs), robust Construction-in-Progress (CIP) tracking is essential. Internal accounting systems must systematically map individual contractor invoices, material acquisitions, and associated payment dates (the Date Purchased) across potentially multiple tax years to the final capitalized asset accounts. This ensures that the eventual aggregated cost basis is defensible upon audit.2
• Proactive Exclusion of Replacement Property: Taxpayers must institute stringent internal controls designed to immediately identify and segregate expenditures related to routine replacement or simple maintenance from qualified expansion or equipping costs. Any assets identified as replacements, regardless of their Date Purchased, must be excluded from the qualified cost basis to avoid audit scrutiny over inflated claims.3
• Extended Record Retention: Given the 10-year carryforward provision for unused credits, documentation supporting the original Date Purchased, Cost, and Schedule QR filing must be retained for the full 10-year utilization period plus the relevant statute of limitations for the final tax year in which the credit is claimed. Failure to maintain these records exposes all years of credit utilization to potential disallowance.3

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