The Strategic Infrastructure of Innovation: Analyzing the Average LQRE Mechanism within the Louisiana Research and Development Tax Credit Framework

Average LQRE (3 Previous Tax Years) is the arithmetic mean of a company’s qualified research expenditures incurred in Louisiana over the three years preceding the current tax period. This metric serves as the foundation for calculating the base amount, which represents the required spending threshold a business must surpass to qualify for incremental state tax credits.

The Louisiana Research and Development (R&D) Tax Credit is a cornerstone of the state’s economic development strategy, designed to incentivize businesses to establish, maintain, and expand their innovative activities within the state borders. Unlike many tax incentives that provide a flat benefit for all qualifying activity, the Louisiana program, primarily codified in Louisiana Revised Statute (La. R.S.) 47:6015, utilizes a sophisticated “incremental” model. This model is predicated on the idea that the state should reward growth in research spending rather than simply subsidizing the status quo. The engine of this incremental model is the “Average LQRE (3 Previous Tax Years),” a variable that defines the historical baseline of a company’s innovation efforts. By calculating a rolling three-year average of Louisiana Qualified Research Expenditures (LQRE), the state establishes a “base amount” that must be exceeded before a single dollar of tax credit can be earned.1

Statutory Foundations and the Definition of LQRE

To understand the Average LQRE, one must first examine the statutory definition of the expenditures that comprise it. Louisiana law generally aligns its definition of “qualified research” with federal standards set forth in Section 41 of the Internal Revenue Code (IRC).2 However, Louisiana imposes a strict geographic nexus: for an expense to be considered an LQRE, it must be “incurred in Louisiana”.5 This means that while a company may have a large R&D budget globally, only the portion of that budget spent on activities physically conducted within the state qualifies for the calculation of the three-year average or the current year’s claim.6

The components of LQRE are categorized into three primary buckets, each subject to specific state-level nuances that affect how they are averaged over the three-year lookback period.

Louisiana Qualified Research Expenditure Components

The inclusion of these expenses in the “Average LQRE” requires a rigorous three-year retrospective. For a 2024 tax credit application, the “Average LQRE (3 Previous Tax Years)” would be the sum of LQRE from 2021, 2022, and 2023, divided by three.1 This historical data is often pulled directly from the taxpayer’s Federal Form 6765, provided they have adjusted those figures to include only Louisiana-sourced costs.5

The Mathematical Architecture of the Base Amount

The true significance of the Average LQRE lies in its conversion into the “Base Amount.” The Louisiana legislature has created a tiered system that applies different multipliers to the Average LQRE based on the size of the entity. This size is determined not just by the filing entity, but by the total number of employees across all affiliated companies.3

Multiplier Logic by Entity Size

The statute defines the base amount for the purpose of the R&D credit as follows:

• Entities with 50 or More Employees: The base amount is eighty percent (80%) of the average annual qualified research expenses within Louisiana during the three years preceding the taxable year.3
• Entities with Fewer than 50 Employees: The base amount is fifty percent (50%) of the average annual qualified research expenses within Louisiana during the three preceding taxable years.2

This distinction creates a profound economic advantage for smaller firms. By setting the base amount at only 50% of the historical average for small businesses, the state effectively allows those companies to capture a credit on a much larger portion of their current-year spending. In contrast, large corporations must maintain high levels of investment just to “reach” their 80% base amount, meaning only their most aggressive expansions are rewarded.6

Mathematical Formulas for Credit Determination

The credit is calculated by applying a tiered percentage rate to the “increase” in LQRE. The increase is the difference between current-year spending and the base amount. The tiered rates are as follows:

• Small Businesses (<50 employees): 30% of the increase.3
• Medium Businesses (50-99 employees): 10% of the increase.2
• Large Businesses (100+ employees): 5% of the increase.2

Using LaTeX to represent the standard calculation for a small business:

$$\text{Base Amount} = (\frac{\text{LQRE}_{t-1} + \text{LQRE}_{t-2} + \text{LQRE}_{t-3}}{3}) \times 0.50$$

$$\text{Louisiana R\&D Credit} = (\text{LQRE}_{\text{current}} – \text{Base Amount}) \times 0.30$$

If a business is new to the state or has no prior research expenditures, the Average LQRE is zero, and consequently, the base amount is zero. In such cases, the full amount of current-year Louisiana-qualified research expenses qualifies for the tiered credit rate.1

Administrative Guidance: The LED and LDR Framework

The administration of the Louisiana R&D tax credit is a bifurcated process involving the Louisiana Economic Development (LED) office and the Louisiana Department of Revenue (LDR). A defining characteristic of this credit is that it cannot be claimed on a tax return until it has been certified by the LED.5 This pre-certification requirement acts as a safeguard against fraudulent or non-qualifying claims, ensuring that only research activities meeting the rigorous “Four-Part Test” receive state support.

The Certification Lifecycle

The process of obtaining certification is intensive and requires a high degree of transparency regarding the “Average LQRE” used in the application.

1. Application Submission: Taxpayers must submit an online application via the LED’s Fastlane system within one year after December 31 of the year in which the expenditures were incurred.2
2. Required Documentation: The LED requires Federal Form 6765 for the current and three previous tax years to verify the consistency of research spending. For smaller firms that have not filed for the federal credit, an “Expenditure Verification Report” (an Agreed-Upon Procedures report from an independent CPA) must be provided to validate the expenses in both the current and base years.2
3. Application Fees: The LED assesses a fee of 0.5% of the requested credit, with a minimum of $500 and a maximum of $15,000.2
4. LDR Filing: Once certified, the LED notifies the LDR, and the taxpayer can claim the credit on their state income or franchise tax return using Form R-620.5

The Four-Part Test in the Louisiana Context

The LED applies the federal Four-Part Test to determine if an activity qualifies as research, which subsequently impacts whether those costs can be included in the Average LQRE calculation 2:

• Permitted Purpose: The research must relate to a new or improved function, performance, reliability, or quality of a business component.2
• Elimination of Uncertainty: The taxpayer must intend to discover information that eliminates technological uncertainty regarding the development of the component.2
• Process of Experimentation: Substantially all (80% or more) of the research must involve a process of experimentation, such as testing prototypes or evaluating multiple design alternatives.5
• Technological in Nature: The research must fundamentally rely on the principles of engineering, computer science, or the biological or physical sciences.2

Comprehensive Calculation Example: Small Business Growth

To demonstrate the real-world application of the Average LQRE and the base amount, consider a hypothetical Louisiana-based biotechnology firm with 12 employees. The firm is ramping up its prototype development for a new medical device.

Phase 1: Historical Data Gathering

The firm identifies its Louisiana-only qualified research expenses for the three years preceding the 2024 tax year.

Phase 2: Calculating the Average LQRE

The first step is to determine the arithmetic mean of the three previous years 1:

$$\text{Average LQRE} = \frac{\$300,000 + \$400,000 + \$500,000}{3} = \$400,000$$

Phase 3: Establishing the Base Amount

Because the company has fewer than 50 employees, the base amount is calculated as 50% of the Average LQRE 3:

$$\text{Base Amount} = \$400,000 \times 0.50 = \$200,000$$

Phase 4: Calculating the Incremental Credit

The firm now subtracts the base amount from the current-year expenditures to find the “increase” 1:

$$\text{Increase in LQRE} = \$700,000 – \$200,000 = \$500,000$$

Applying the 30% small business credit rate to this increase 2:

$$\text{Louisiana R\&D Credit} = \$500,000 \times 0.30 = \$150,000$$

This $150,000 credit can be used to offset the firm’s Louisiana income or franchise tax liability. If the credit exceeds the tax due, any unused portion can be carried forward for up to five years.2

ROI Trends and Sector-Specific Impact

The Research and Development Tax Credit is a significant fiscal expenditure for Louisiana, and its efficacy is tracked through Return on Investment (ROI) reports issued by the LDR.15 These reports reveal how the credit is utilized across different industries and the broader economic impact of the program.

Comparative Economic Performance (FY 2022 vs FY 2023)

Recent data shows a massive surge in the total amount of R&D credits being awarded, alongside a shift in the primary beneficiaries.

The doubling of the total incentives awarded in just one year (from $5.5M to $11.48M) highlights the growing integration of this credit into the business planning of Louisiana’s industrial sector.15 However, the drop in Economic ROI into negative territory for FY 2023 is a point of debate. Analysts suggest this is due to the concentration of credits in high-capital manufacturing sectors (Chemicals and Paper) which, while important, may have different local economic multipliers than the smaller, high-growth technology sectors.15

Special Restrictions: Custom Manufacturing and Patents

A critical insight for companies in the manufacturing sector is the patent requirement found in LAC 13:I.§2913. Businesses that are primarily engaged in “custom manufacturing” or “custom fabricating” are generally ineligible for the R&D credit unless they have a pending or issued United States patent directly related to the research expenditures claimed.2

This rule prevents the credit from being used for routine job-shop operations where a company is simply fulfilling a client’s specifications. To qualify, the company must prove it is developing proprietary innovation. This creates a strategic necessity for Louisiana manufacturers to coordinate their R&D efforts with their intellectual property (IP) strategy. If a patent is issued or pending, only the costs directly related to that specific business component are eligible for inclusion in the LQRE calculations.16

Legislative Reform: Act 11 and the 2025 Cap

The landscape of the Louisiana R&D credit is undergoing a fundamental transformation due to Act 11 of the 2024 Third Extraordinary Session.17 These changes are designed to provide the state with greater fiscal control over the program.

The $12 Million Aggregate Program Cap

Beginning July 1, 2025, Louisiana will impose an annual aggregate cap of $12 million on the total amount of R&D tax credits that can be authorized in a single fiscal year.2 This is a major shift from the historical “no cap” status of the program.5

• First-Come, First-Served: Credits will be allocated based on the order in which applications are approved.2
• Priority for Disallowed Claims: If a taxpayer’s claim is disallowed solely because the annual cap was reached, that claim will receive priority in the next fiscal year.2
• Strategic Planning: Businesses must now ensure that their LED applications are filed as early as possible after the close of the tax year to secure their portion of the $12 million allocation before it is exhausted.

Transition from Refundable to Non-Refundable Credits

Historically, the R&D credit was refundable, meaning the state would pay out the full value of the credit even if the company had no tax liability. Since July 1, 2015, the credit has been non-refundable, with a five-year carryforward period.2 This change shifted the credit’s value toward established firms and growing startups that are beginning to generate taxable income in Louisiana.

The SBIR/STTR Grant Exclusion

The “Average LQRE” and “Base Amount” calculations do not apply to tax credits earned through federal Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants. For these programs, the state provides a direct credit equal to 30% of the award amount received during the tax year.2 These credits are unique because they are transferable or sellable to other Louisiana taxpayers via the state’s tax credit registry, providing an essential source of non-dilutive capital for very early-stage companies that do not yet have the revenue to utilize non-refundable credits.2

Affiliated Companies and the Employee Threshold

Determining whether a company uses the 50% or 80% base amount multiplier depends on the “entity” size. Louisiana law defines an entity based on the aggregate total number of employees across all affiliated companies.3 This prevents a large corporation from spinning off small subsidiaries to qualify for the 30% small business rate and the 50% base amount threshold.

Aggregation Rule Implications

If Company A has 20 employees but is owned by Parent Corp, which has 200 employees, Company A is treated as having 220 employees for the purposes of the R&D credit. Consequently:

• Its base amount will be 80% of its Average LQRE (not 50%).
• Its credit rate will be 5% (not 30%).

This aggregation rule ensures that the state’s most generous incentives are reserved for truly independent small businesses that face the greatest hurdles in accessing capital for innovation.3

Audit Risks and Record-Keeping Requirements

Because the Average LQRE is based on three years of historical data, the audit trail for a single R&D credit claim can span four years (the current year plus the three base years). The LED is mandated to audit at least 10% of all applications.5

Auditors look for the following documentation to support the historical averages 5:

• W-2 and K-1 Records: To verify that wages were paid to Louisiana residents.
• Project Logs and Lab Notebooks: To prove that the activities in the base years met the Four-Part Test.
• Contractor Invoices: To ensure that contract research was performed within the state.
• Financial Statements: Compiled or reviewed statements for all four relevant years to ensure consistency in accounting.5

If a company cannot substantiate its spending in the three “base” years, it risks having its base amount adjusted upward. An upward adjustment in the base amount decreases the “increase” and can lead to a significant reduction in the credit earned, or even a total recapture of previously claimed credits.

Strategic Outlook for Louisiana Innovators

The “Average LQRE (3 Previous Tax Years)” is the most critical variable in the Louisiana R&D tax credit equation. It represents the state’s expectation of a firm’s commitment to the local economy. As the program enters a new era of aggregate caps and increased fiscal oversight, businesses must transition from reactive filing to proactive tax planning. This involves not only maximizing current-year research activities but also maintaining a clean and verifiable three-year history of innovation spending.

For small businesses, the 50% base amount multiplier remains a powerful engine for growth, potentially providing hundreds of thousands of dollars in tax relief. For larger industrial firms, the credit continues to support the high-stakes engineering required to maintain Louisiana’s competitiveness in the global chemical and paper markets. By understanding the interaction between the three-year average, the tiered base amounts, and the new 2025 legislative constraints, Louisiana companies can ensure that their innovation efforts are fully supported by the state’s incentive framework.

Conclusion: Balancing Incremental Growth and Fiscal Control

The Louisiana Research and Development Tax Credit effectively utilizes the Average LQRE (3 Previous Tax Years) to create a self-regulating mechanism that rewards continuous improvement. By tethering state benefits to an incremental increase over a rolling historical baseline, the program ensures that taxpayer funds are used to drive new innovation rather than subsidizing existing operations. While the upcoming 2025 aggregate cap of $12 million and the 2029 sunset date present new challenges, the core of the program remains a vital asset for any Louisiana business engaged in the sciences or engineering. Success in leveraging this credit requires a deep understanding of the statutory math, a robust approach to documentation, and a strategic alignment with state economic development priorities. Through these efforts, Louisiana businesses can continue to transform their research initiatives into tangible fiscal advantages, fostering a more innovative and resilient state economy.

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