The Strategic Impact of the $12 Million Aggregate Cap and the Post-2025 Louisiana Research and Development Tax Credit Framework

Starting July 1, 2025, the Louisiana Research and Development tax credit transition from an uncapped entitlement to a fiscally constrained $12 million annual statewide aggregate cap. This modification establishes a competitive first-come, first-served environment where priority for allocation is granted to legitimate claims disallowed in the prior fiscal year due to cap exhaustion.1

Detailed Analysis of the $12 Million Aggregate Cap

The implementation of a $12 million statewide aggregate cap represents a fundamental shift in Louisiana’s fiscal policy toward private-sector innovation. Historically, the Research and Development (R&D) tax credit, codified under La. R.S. 47:6015, functioned as a broad incentive with no upper limit on the total credits the state could issue in a single year.4 This uncapped nature provided businesses with absolute certainty regarding their potential tax savings, provided they met the statutory requirements for qualified research expenditures (QREs). However, as the state faced broader budgetary pressures and a mandate for comprehensive tax reform during the 2024 Third Extraordinary Session, the legislature moved to bring the program under a fixed annual budgetary ceiling.1

The mechanism of the cap is governed by Act 11 (House Bill 10) and Act 5 (House Bill 2) of the 2024 Third Extraordinary Session. These acts mandate that for claims allowed on returns on or after July 1, 2025, the total amount of credits granted by the Louisiana Department of Revenue (LDR) cannot exceed $12 million per state fiscal year.1 This cap applies to all categories of R&D credits under R.S. 47:6015, including the general tiered credit for increasing QREs and the specialized credits for Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants.3

The administrative complexity of this cap is intensified by the “first-come, first-served” allocation rule. Unlike other programs that might prorate credits if an application threshold is met, the Louisiana R&D credit awards space in the $12 million pool based on the chronological filing of certified claims on tax returns.2 Because the state fiscal year begins on July 1, companies that file their state income tax returns early in the fiscal cycle are statistically more likely to secure their credits before the cap is exhausted. This creates a temporal priority that necessitates close coordination between a company’s R&D department, which documents the research, and its tax department, which must file the return as soon as the certification from Louisiana Economic Development (LED) is received.2

Perhaps the most critical safety valve in the new law is the priority system for disallowed claims. If the $12 million cap is reached, any certified claim that cannot be fulfilled due to the lack of remaining cap space is not permanently lost. Instead, the claim is carried forward and treated as if it were filed on the first day of the subsequent fiscal year.2 These “priority claims” take precedence over any new claims filed in that subsequent year. From a systemic perspective, this means that if the program is consistently oversubscribed, the $12 million cap for any given year may be largely consumed by backlogged claims from the previous period, effectively lengthening the “waitlist” for actual credit realization.2

Legislative Context and Statutory Reforms

The 2024 Third Extraordinary Session was a landmark event for Louisiana tax policy, resulting in a series of acts that remodeled the state’s incentive landscape. Act 11, in particular, was the vehicle for establishing the $12 million R&D cap, alongside reductions in caps for other prominent programs like the Motion Picture Production Tax Credit and the Rehabilitation of Historic Structures Tax Credit.1

The overarching goal of these reforms was to simplify the tax code by moving toward a flat income tax rate for individuals (initially proposed to drop to 3% or 3.75%) and corporations, while simultaneously sunsetting or capping “underutilized” or high-cost incentives.1 For the R&D credit, the legislature recognized that while the program is vital for high-tech sectors, the previous uncapped model created an unpredictable liability for the state general fund. By setting the cap at $12 million, the legislature aligned the program’s budget with its recent historical utilization levels; for instance, in fiscal year 2023, the total incentives received by businesses under this program were approximately $11.48 million.9

Core Eligibility and Compliance Under R.S. 47:6015

To qualify for the Louisiana R&D tax credit, a taxpayer must satisfy both federal and state-specific criteria. The Louisiana statute, R.S. 47:6015, heavily relies on the definitions found in the Internal Revenue Code (IRC) Section 41 for “increasing research activities” and Section 174 for “research and experimental expenditures”.2

The Federal Four-Part Test

A cornerstone of the program is the “Four-Part Test,” which determines if a business component’s development or improvement qualifies as research. Every project for which the credit is claimed must meet all four tests:

1. Permitted Purpose: The research must be related to developing a new or improved business component’s function, performance, reliability, or quality.2
2. Elimination of Uncertainty: The activity must be intended to discover information that eliminates uncertainty concerning the capability or method for developing or improving a product or process, or the appropriateness of the product’s design.2
3. Process of Experimentation: At least 80% of the research activities must involve a process of experimentation, which includes the systematic evaluation of one or more alternatives through modeling, simulation, or trial and error.2
4. Technological in Nature: The research must rely on principles of the physical or biological sciences, engineering, or computer science.2

Louisiana specifically enforces a state-centric requirement: only research conducted within the geographic borders of Louisiana is eligible for the credit.2 If a company has research teams in both Louisiana and another state, it must carefully segregate the expenditures and payroll related only to the Louisiana-based operations.2

Qualified Research Expenses (QRE) and Exclusions

The statute defines QREs in three primary categories, mirroring federal law but restricted to Louisiana activities:

• Wages: Payments for “qualified services,” which include the direct performance of research, the direct supervision of research, or the direct support of research.2 General administrative, human resources, and clerical wages are strictly excluded.
• Supplies: Tangible property consumed during the research process or used to develop prototypes. This category excludes land, utilities, and any property subject to depreciation under federal law.2
• Contract Research: 65% of the amount paid to third parties for research conducted in Louisiana on behalf of the taxpayer.2 The taxpayer must maintain the financial risk of the research and retain substantial rights to the results.

Furthermore, Louisiana law contains specific prohibitions for certain types of businesses. Professional services firms (such as engineering or architectural firms performing services for others) and businesses primarily engaged in custom manufacturing or fabricating are ineligible for the credit unless they possess a pending or issued U.S. patent directly related to the research expenditures claimed.3 This “patent rule” acts as a proxy for the innovation requirement, ensuring that the state is not subsidizing routine custom work that does not advance the technological baseline of the state’s economy.3

Tiered Credit Rates and Base Amount Calculations

The Louisiana R&D credit is an “incremental” credit, meaning it does not apply to all R&D spending, but rather to the increase in spending over a historical baseline. The credit calculation varies significantly depending on the size of the entity, as determined by the total number of employees across all affiliated companies.8

The Tiered Rate Structure

The legislature established a tiered system that provides more aggressive incentives to smaller firms, which are viewed as the primary engines of innovation in sectors like biotechnology and digital media.2

The “Base Amount” is calculated by taking the average of the Louisiana QREs for the three taxable years preceding the current year and multiplying it by either 50% (for small businesses) or 80% (for larger businesses).2 If a business has not conducted research in the state during the preceding three years, its base amount is zero, meaning the credit percentage applies to the entirety of its first-year Louisiana QREs.2

Employee Aggregation and Affiliated Companies

For purposes of determining which tier a company falls into, Louisiana law requires the aggregation of all employees across all affiliated companies.8 This “controlled group” concept prevents large corporations from spinning off small research subsidiaries to capture the 30% credit rate intended for independent startups. The determination of employee count is typically based on full-time equivalents (FTEs) at the end of the tax year.2

Local State Revenue Office Guidance: The Application and Claim Process

The administrative lifecycle of an R&D credit claim involves two distinct phases: certification by Louisiana Economic Development (LED) and the claiming of the credit on a return filed with the Louisiana Department of Revenue (LDR).4

LED Certification Requirements

No R&D credit can be claimed on a Louisiana tax return until the expenditures have been certified by LED.4 This process requires the submission of an online application and the payment of a fee equal to 0.5% of the requested credit (minimum $500, maximum $15,000).2

The application must include:

• Federal Form 6765 (Credit for Increasing Research Activities) for the current year and the three previous years.4
• A detailed breakdown of Louisiana-only QREs categorized by wages, supplies, and contract research.4
• Documentation of the research projects, including a narrative of the R&D activities and how they meet the federal four-part test.4
• Information regarding the number of Louisiana employees and their average wages.8

LED typically takes three to six months to process an application.2 A critical statutory mandate requires LED to select at least 10% of all applications for a detailed, mandatory examination.2 If selected, the business must provide exhaustive documentation, including W-2s, 1099s, invoices, and perhaps even make research personnel available for interviews.4

The Shift from Franchise to Income Tax

A significant change introduced by the 2024 tax reform is the phasing out of the Corporation Franchise Tax. Until January 1, 2026, the R&D credit may be applied against both Louisiana corporation income tax and corporation franchise tax.8 However, for taxable periods beginning on or after January 1, 2026, the credit will be limited strictly to income tax.1

This shift is crucial for corporate tax planning. Many capital-intensive businesses in Louisiana historically had higher franchise tax liabilities than income tax liabilities. The repeal of the franchise tax simplifies the tax structure but also narrows the utility of the R&D credit as an offset.5 Furthermore, any unused credits can be carried forward for five years, but post-2025, these carryforwards will only be applicable against income tax.2

Statistical Landscape and Sectoral Impact

The decision to cap the R&D credit at $12 million was informed by the program’s historical trajectory and its ROI performance. The Louisiana Department of Revenue’s Return on Investment (ROI) reports provide a detailed look at who is utilizing the credit and the fiscal impact on the state.9

Growth in Credit Utilization

The program saw a dramatic increase in utilization between 2022 and 2023. In fiscal year 2022, the state issued approximately $5.50 million in R&D credits.9 By fiscal year 2023, that number had surged to $11.48 million.9 This near-doubling of the program’s cost within one year likely served as the impetus for the $12 million cap enacted in 2024.

The “Fiscal ROI” of approximately -92% indicates that the state does not recover the cost of the credit through immediate tax revenue; rather, the state bears a net revenue loss of 92 cents for every dollar of credit issued.9 The “Economic ROI,” which measures broader GDP growth, turned negative in 2023, largely due to shifts in the industrial sectors claiming the credit.

Top Industries Utilizing the Credit (FY 2023)

In 2023, the utilization of the R&D credit was highly concentrated in a few key industrial sectors:

• Chemical Manufacturing (NAICS 325): 33.29% of all credits.9
• Paper Manufacturing (NAICS 322): 31.06% of all credits.9
• Professional, Scientific, and Technical Services (NAICS 54): Historically a major user, though its share fluctuated as industrial manufacturing claims increased.9

The fact that two sectors—chemical and paper manufacturing—accounted for over 64% of the program’s total credits highlights the risk of the $12 million cap being consumed by a small number of large-scale industrial projects.9 For small tech firms, this reinforces the need for early filing to avoid being crowded out by industrial giants.

Specialized Tracks: SBIR/STTR and Transferability

Beyond the general R&D credit, Louisiana offers a specialized incentive for participants in the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.2

The 30% SBIR/STTR Grant Credit

Taxpayers who receive a federal Phase I or II SBIR or STTR grant are eligible for a Louisiana tax credit equal to 30% of the award received during the tax year.2 This is distinct from the general credit because it is based on the grant award amount rather than incremental research expenses.

A unique advantage of the SBIR/STTR credit is its transferability. Credits earned through these programs for tax years 2018 and later may be transferred or sold to another Louisiana taxpayer.2 This provides vital liquidity for early-stage companies that have significant research potential but no state tax liability. The sale of these credits must be recorded in the state’s tax credit registry, and a $200 processing fee applies to each transfer.4 Importantly, even these credits are subject to the $12 million statewide aggregate cap, meaning that if the cap is reached, the ability to certify new transferable credits may be delayed until the following fiscal year.2

Comprehensive Example: “Pelican Bio-Tech Ventures”

To demonstrate the application of the law, let us consider “Pelican Bio-Tech Ventures,” a fictional startup based in New Orleans.

Fact Pattern

• Entity Size: 12 Louisiana-based employees (qualifies for the <50 tier).
• 2025 Louisiana QREs: $800,000.
• Historical Average (2022-2024 QREs): $200,000.
• Federal SBIR Phase II Award Received in 2025: $250,000.

Step 1: Calculate the General R&D Credit

First, we determine the “Base Amount” for a small business:

$$Base = 50\% \times \$200,000 = \$100,000$$

2

Next, we calculate the “Excess QREs”:

$$Excess = \$800,000 – \$100,000 = \$700,000$$

2

Finally, we apply the 30% rate for small businesses:

$$General Credit = 30\% \times \$700,000 = \$210,000$$

2

Step 2: Calculate the SBIR Grant Credit

The SBIR credit is a flat 30% of the award amount:

$$SBIR Credit = 30\% \times \$250,000 = \$75,000$$

2

Step 3: Total Credit and Application Fee

Pelican Bio-Tech’s total potential credit is $285,000. Before claiming this, they must pay the LED application fee:

$$Fee = 0.5\% \times \$285,000 = \$1,425$$

2

Step 4: Interplay with the $12 Million Cap

Pelican Bio-Tech files its Louisiana income tax return on July 15, 2026.

• Scenario A: The total claims filed between July 1 and July 15 total $4 million. Pelican’s $285,000 claim is allowed, and they can offset their income tax liability or sell the $75,000 SBIR portion.
• Scenario B: Due to massive filings from chemical plants on July 1, the LDR reports that the $12 million cap was reached on July 10. Pelican’s claim is “disallowed” for the 2025-2026 fiscal year but is immediately placed at the front of the queue for the fiscal year beginning July 1, 2027.2

Compliance and the Examination Process

The R&D tax credit is one of the most heavily scrutinized incentives in Louisiana. The requirement that LED examine 10% of all applications is a statutory floor, not a ceiling.2

Desk Audits vs. Detailed Examinations

Most applications undergo a “desk audit” where LED staff verifies the math and ensures that the provided federal forms match the state application.4 However, if an application is selected for a detailed examination, the burden of proof shifts heavily to the taxpayer. The taxpayer must be able to demonstrate that the research was not “routine” and that they followed a scientific process of experimentation.4

A common point of failure in these examinations is the lack of “contemporaneous documentation.” LED expects to see lab notes, prototype revisions, and project meeting minutes that were created during the research process.4 If a company tries to reconstruct its research narrative months or years after the fact, the credit is frequently disallowed upon examination.

The Role of Expenditure Verification Reports

For small businesses (<50 employees) that do not file for the federal credit, the “Expenditure Verification Report” is a mandatory hurdle.4 This report is prepared by a state-assigned CPA or tax attorney who acts as a neutral third party to certify that the expenses claimed are accurate and qualify under the law. The fees for these reports are significant, and companies should budget for these costs as part of their R&D overhead.8

Strategic Guidance for Post-2025 Tax Planning

In light of the $12 million cap and the 2029 sunset date, businesses must adapt their R&D incentive strategies. The program is no longer a passive benefit but a competitive asset that requires active management.

Timing is the New Currency

Under the previous regime, the timing of a tax filing was largely a matter of internal convenience. Post-2025, timing is a competitive advantage. Companies should:

1. Prepare R&D documentation in real-time. Do not wait for the year-end to gather invoices and payroll records.
2. Submit LED applications early. Since LED certification can take up to six months, applications for a calendar year should ideally be submitted by early spring of the following year.2
3. Coordinate with Tax Preparers. Ensure the state income tax return is ready to be filed as soon as the LED certification letter arrives.

Navigating the “Priority” Queue

For companies that miss the $12 million cap, the “priority” status is a vital protection. However, it also introduces a cash-flow delay. If a company depends on the R&D credit to fund future innovation, a one-year delay in receiving that credit could be disruptive. Companies should consider the $12 million cap as a risk factor in their financial modeling, particularly if they are in the chemical or paper manufacturing sectors where large claims are common.9

The Impact of the Franchise Tax Repeal

The repeal of the franchise tax in 2026 means that C-corporations will lose a primary avenue for utilizing R&D credits.1 For profitable corporations, this is a minor shift, as they will still have income tax liability. However, for companies in a “loss” position, the R&D credit will simply accumulate as a carryforward. Unlike the SBIR credit, general R&D credits are not transferable, making them “trapped” assets for companies without income tax liability.2

Conclusion

The Louisiana Research and Development Tax Credit remains a potent tool for fostering a culture of innovation, particularly for small businesses that can capture a 30% credit on their incremental research spending. However, the introduction of the $12 million statewide aggregate cap on July 1, 2025, marks the beginning of a new era of fiscal discipline. This cap, combined with the repeal of the corporation franchise tax and the upcoming 2029 sunset, necessitates a proactive and highly organized approach to tax compliance.

By adhering to the strict “Four-Part Test,” maintaining contemporaneous documentation, and prioritizing early filing to secure a spot within the annual $12 million allocation, Louisiana businesses can continue to mitigate the costs of innovation. The “first-come, first-served” rule is not merely an administrative detail; it is a strategic mandate that defines the success of R&D incentive captures in the post-2025 landscape. As the state continues to refine its tax structure, the R&D credit stands as a testament to the balance between fiscal responsibility and the ongoing pursuit of technological progress.

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/