The Architecture of Aggregation: Control Groups and Affiliate Employee Counts in the Louisiana R&D Tax Credit Framework

In the context of the Louisiana Research and Development tax credit, a “Control Group” or “Affiliate” represents a collection of business entities sharing 50% or more common ownership that are treated as a single taxpayer to determine the company’s total employee count. This aggregated headcount dictates whether a business qualifies for the 30%, 10%, or 5% tax credit rate, ensuring that larger corporate structures cannot artificially fragment operations to claim higher incentive tiers.

This aggregation principle is the cornerstone of the state’s efforts to calibrate economic incentives toward small, high-growth businesses while providing a stable, albeit lower, incentive for large-scale industrial players. Under Louisiana Revised Statute 47:6015, the “entity” claiming the credit is not merely the specific legal structure conducting the research, but the entire family of affiliated companies.1 This prevents a multinational corporation with a multi-thousand-person workforce from establishing a small Louisiana-based subsidiary to capture the 30% credit rate intended for startups.2 By mandating that the size of the entity be determined by the total number of employees based on the aggregate of all affiliated companies, Louisiana maintains a “look-through” approach that prioritizes economic reality over corporate labeling.2

The Statutory Foundation of Affiliate Aggregation

The legal authority for the Research and Development Tax Credit is codified in R.S. 47:6015 and further detailed in the Louisiana Administrative Code (LAC) Title 13, Part I, Chapter 29.5 The statute has undergone significant evolution, moving from a system that prioritized Louisiana residency for employees to one that views the firm’s global footprint as the relevant metric for its “size”.8 This change, primarily driven by legislative sessions in 2011 and 2017, aligned the state more closely with federal aggregation standards while maintaining a unique tiered incentive structure.2

The mandate for aggregation is found in R.S. 47:6015(C)(1), which states that for purposes of determining the amount of the credit earned, an “entity” shall be determined by the total number of employees based on the aggregate of all affiliated companies.1 This definition is vital because it determines which of the three statutory tiers the applicant falls into. These tiers are not just different credit percentages; they represent entirely different risk profiles and hurdle rates for the taxpayer.9

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This tiered system creates a “cliff” effect. For a standalone company with 49 employees, the next hire could potentially reduce their credit rate from 30% to 10%, while simultaneously increasing their base amount hurdle from 50% to 80% of historical spending.7 For an entity with affiliates, this hire could happen anywhere in the country—or even internationally—and still impact the Louisiana credit eligibility.1

Defining the Control Group: The 50% Ownership Rule

The Louisiana Department of Economic Development (LED) provides administrative guidance on what constitutes “common ownership or control.” Consistent with federal standards under Internal Revenue Code (IRC) Section 41(f)(5), a controlled group is generally defined by a 50% or more common ownership threshold.13 The LED application requires applicants to provide a comprehensive list of any business that has 50% or more common ownership or control with the applicant.14

Parent-Subsidiary Controlled Groups

A parent-subsidiary group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation.13 Under Louisiana’s R&D rules, if Company A owns 51% of Company B, and Company B conducts research in a Baton Rouge facility, Company B must include all of Company A’s employees in its headcount when applying for the credit.1 This applies even if Company A is located in another state and performs no R&D.13

Brother-Sister Controlled Groups

The brother-sister definition, often imported from IRC Section 1563, covers situations where five or fewer individuals, estates, or trusts own a controlling interest in two or more entities.13 For non-corporate entities like LLCs or partnerships, control is measured by profits or capital interests.13 If a small group of investors owns 60% of three different Louisiana startups, those startups are considered a single entity for credit tier determination.15

The implications of this rule are often felt during mergers and acquisitions. If a startup with 20 employees is acquired by a mid-sized firm with 80 employees, the startup immediately shifts from the 30% credit tier to the 5% tier (as the aggregate count now exceeds 100).1 Because group membership is generally determined as of December 31 of the taxable year, a Q4 acquisition can retroactively alter the value of R&D credits earned throughout the entire year.13

Mechanics of Employee Headcount: Nationwide vs. Local

A common point of confusion for practitioners is whether the 50 and 100-employee thresholds refer to Louisiana-based staff or total nationwide staff. The guidance from the LED and the language of R.S. 47:6015 is clear: the threshold is determined by the total number of “persons” employed by the aggregate entity, not just those in Louisiana.1

This distinction is critical for multi-state operations. A corporation may have a small satellite research office in New Orleans with only 10 researchers, but if its headquarters in Atlanta employs 200 people, the New Orleans office is treated as a “100+ employee” entity.1 While the expenses eligible for the credit must be Louisiana-qualified research expenses (LQREs), the rate at which those expenses are credited is dictated by the size of the entire organization.10

Transition from Residents to Persons

Historically, the Louisiana R&D credit was more restrictive, using “Louisiana residents” as the basis for the headcount.8 However, legislative updates such as Act 336 of 2017 and earlier 2011 sessions removed the residency requirement for the headcount calculation, moving instead to a broader “persons” definition.2 This shift acknowledged that in a modern, mobile economy, a firm’s capacity is better measured by its total human capital rather than just its local footprint.

Full-Time Equivalents and Working Hours

For the purposes of reporting these employees to the LED, the state generally looks for full-time equivalents (FTEs). While some Louisiana incentive programs, such as Quality Jobs or Enterprise Zones, strictly define full-time jobs as those working 30-35 hours or more per week, the R&D credit application asks for the “Total Employees (including affiliates)” as of the last quarter of the year.14 The use of year-end snapshots is consistent with federal R&D aggregation rules under IRC Section 41.13

The Tiered Incentive Architecture: Understanding the “Cliffs”

Louisiana’s credit is an “incremental” credit, meaning it is calculated based on the increase in research spending over a historical “base amount”.9 The aggregate employee count determines both the credit percentage and the calculation of this base hurdle.

The Small Business Advantage (< 50 Employees)

Firms that, together with their affiliates, employ fewer than 50 persons receive the most favorable treatment. They are eligible for a 30% credit on their increased R&D spending.7 Furthermore, their “base amount” is set at only 50% of their average annual Louisiana QREs over the preceding three years.3 This lower base makes it significantly easier for a small firm to generate credits even if their R&D budget is relatively flat.12

The Mid-Market Tier (50-99 Employees)

Once the aggregate count hits 50, the credit rate drops sharply to 10%.1 Simultaneously, the base amount hurdle rises to 80% of the prior three-year average.3 This tier is often viewed as a “transition zone” for growing companies that have moved past the initial startup phase but have not yet reached enterprise scale.

The Enterprise Tier (100+ Employees)

Large corporate groups with 100 or more employees nationwide receive a 5% credit rate on the amount by which their current year Louisiana QREs exceed 80% of their three-year average.9 While the rate is lower, there is no cap on the dollar amount an individual company can earn, though the program is subject to a statewide aggregate cap starting in 2025.9

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The Base Amount Hurdle: A Qualitative Analysis

The base amount calculation is the mechanism that ensures the state is rewarding new or sustained investment rather than just existing operations. For an entity with affiliates, the base amount must be calculated using the Louisiana-only expenses of that entity and any affiliates that also incurred Louisiana QREs during the base period.7

The math for the base amount is defined as:

$$Base\ Amount = (\text{Average LQREs for prior 3 years}) \times (\text{Applicable Percentage})$$

If a company has no prior R&D history, the base amount is essentially zero, and the credit is applied to the total current year spend.9 For companies with 1 or 2 years of history, the average is taken over the available years.9

Example: The Impact of Affiliate Employees on Base Hurdle

Consider “Innovative Robotics LLC,” which has 20 employees in New Orleans and spent $200,000 on R&D in each of the last three years. In the current year, they spend $300,000.

Scenario A: Standalone Company

Because they have < 50 employees, their base hurdle is 50%.

• Average: $200,000
• Base Amount: $\$200,000 \times 0.50 = \$100,000$
• Incremental Increase: $\$300,000 – \$100,000 = \$200,000$
• Credit: $\$200,000 \times 0.30 = \$60,000$

Scenario B: Acquired by a National Tech Firm (Affiliate count = 200)

Even though the New Orleans lab hasn’t changed, the affiliate count pushes them to the 5% tier with an 80% base hurdle.

• Average: $200,000
• Base Amount: $\$200,000 \times 0.80 = \$160,000$
• Incremental Increase: $\$300,000 – \$160,000 = \$140,000$
• Credit: $\$140,000 \times 0.05 = \$7,000$

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This example illustrates that being part of a controlled group doesn’t just lower the rate; it also increases the “base” that must be cleared before the credit kicks in, resulting in a significantly smaller net benefit.9

State Revenue Office Guidance: LED and LDR Roles

The administration of the R&D tax credit is a bifurcated process involving both the Louisiana Department of Economic Development (LED) and the Louisiana Department of Revenue (LDR).12

The LED Certification Process

A taxpayer cannot simply claim the credit on their tax return. They must first apply for and receive a “Credit Certification” from the LED.12 This application requires the submission of a fee equal to 0.5% of the amount of the tax credits applied for (with a minimum of $500 and a maximum of $15,000).7

The LED review panel examines the technical nature of the research—ensuring it meets the federal four-part test—and verifies the entity size.14 The four-part test requires that the research:

1. Qualifies as a business deduction under IRC §174.14
2. Is undertaken to discover information that is technological in nature.14
3. Is intended to be useful in the development of a new or improved business component.14
4. Involves a process of experimentation.14

The LDR Claim Process

Once the LED issues the certification, the business notifies the LDR by filing Form R-620 (“Research and Development Tax Credit Claim Form”) with their state income or corporation franchise tax return.12 The LDR is responsible for the actual application of the credit against the taxpayer’s liability and the management of any carryforwards.17

Application Procedures and Ownership Disclosure

The LED application form (specifically Section One) is the primary tool for identifying affiliates.14 It requires detailed disclosures that most small businesses may not initially realize are mandatory.

Ownership Disclosure Checklist

In the Section One “Business Information” portion of the application, the LED asks:

• “Is the applicant part of a controlled group?” 21
• “Please provide a list of any business that has 50% or more common ownership or control with the applicant”.14
• “Has the controlled entity applied for the Louisiana Research and Development Credit?” 14

Reporting Employee Statistics

Section Two of the application requires the taxpayer to provide “Total Employees (including affiliates)” as of the last quarter of the year.14 Additionally, the application requires the reporting of:

• The total number of persons employed in Louisiana.1
• The number of Louisiana employees directly engaged in R&D.1
• The average wages of Louisiana employees not directly engaged in R&D.1
• The average wages of Louisiana employees directly engaged in R&D.1
• The average value of benefits (health, dental, life, etc.) and the cost of health insurance offered to all Louisiana employees.3

The requirement to report “Total Employees (including affiliates)” is the mechanism by which the LED cross-checks the applicant’s self-selected tier (LQRE < 50 vs. Increase 50+).14

The Small Business Expenditure Verification Report

One of the most significant administrative differences for the < 50 employee tier is the “Expenditure Verification Report”.1 For larger companies, the state relies on the fact that they have already filed a Federal Form 6765 as proof of their R&D activities.1 However, many small businesses may not have filed a federal R&D claim, either due to their startup status or a lack of federal tax liability.

Under R.S. 47:6015(B)(3)(i), a taxpayer who employs fewer than 50 persons and has not filed for the federal credit can still apply for the Louisiana credit if they agree to a detailed examination by a department-assigned CPA or tax attorney.1 This verification report is conducted at the taxpayer’s expense.

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This verification process is extensive. The assigned professional will review W-2s, 1099s, invoices for supplies, and conduct interviews with employees who participated in the R&D activities.7 For companies in a controlled group, the auditor may even request documentation from affiliates to ensure that no “double-dipping” of expenses occurred across the group.13

Strategic Examples and Case Studies

To fully grasp the nuance of affiliate rules, it is helpful to examine scenarios involving complex corporate structures common in the tech and manufacturing sectors.

Case Study 1: The Multi-State Software Group

“Delta Systems” is a Louisiana-based software company with 30 employees in New Orleans. It is 51% owned by “Global Ventures,” a private equity firm in New York that also owns 51% of “Beta Logic,” a 100-person firm in Seattle.

In this case, Delta Systems and Beta Logic are “brother-sister” affiliates under the Global Ventures parent.13

• Aggregate Employee Count: Delta (30) + Beta (100) + Global (5) = 135 employees.
• Result: Even though the Louisiana company has only 30 people, it is in the 100+ tier. It gets a 5% credit and must use an 80% base amount.1

Case Study 2: The Mid-Year Acquisition

“Bayou Biotech” has 10 employees and has been earning a 30% Louisiana R&D credit for years. On July 1, 2024, it is acquired by a pharmaceutical giant with 5,000 employees.

Because affiliate status is determined at the end of the tax year, Bayou Biotech is now part of a massive controlled group for the entire 2024 tax year.13

• Pre-Acquisition Expectation: 30% credit rate.
• Post-Acquisition Reality: 5% credit rate.
• Strategy: During acquisition negotiations, the “lost” value of these credits should be part of the valuation and tax indemnity discussions, as the acquisition fundamentally changes the company’s state incentive profile.13

Case Study 3: The SBIR/STTR Exception

“SmallScale Innovation” receives a federal Small Business Innovation Research (SBIR) grant. It has 10 employees and is part of a larger group with 200 employees.

Louisiana provides a special 30% credit for SBIR/STTR recipients on the amount of the award received.1 This specific grant-based credit is not tiered by employee count—it is a flat 30% of the award amount.1 However, any R&D spending the company does outside of the grant funds would still be subject to the 5% tier based on the aggregate 210-person headcount.1

Economic Impact and the 2025 Legislative Shift

The Research and Development Tax Credit has a significant impact on the Louisiana treasury. In the 2023 fiscal year, the program provided $11.48 million in incentives, a sharp increase from $5.50 million in 2022.22 However, state audits have shown a negative “Economic ROI Spread” of -38.25%, meaning the state does not currently recoup the full cost of the credits through immediate tax revenue.22

The New $12 Million Cap

In response to budgetary concerns, the Louisiana legislature enacted changes that take effect on July 1, 2025.9 The program will now be subject to a statewide aggregate cap of $12 million per fiscal year.9 These credits will be distributed on a first-come, first-served basis.9

For controlled groups, this creates a new administrative burden. Because larger groups often have more complex filings (due to aggregating affiliates), they must ensure their application process is streamlined to avoid missing out on the capped funds. If a company’s claim is disallowed due to the cap, it receives priority in the next fiscal year’s pool.9

Sunset and Future Outlook

The program is currently scheduled to sunset on December 31, 2029.9 This long-term horizon allows businesses to plan multi-year R&D projects, but the shift from a fully open incentive to a capped one indicates a move toward more stringent oversight and competitive allocation.9

Conclusion: Navigation for the Practitioner

The Louisiana Research and Development tax credit is a powerful tool for reducing the cost of innovation within the state, but it is not a “one-size-fits-all” incentive. The mandate to aggregate employees across all affiliates sharing 50% or more common ownership is the single most important factor in determining the ROI of a Louisiana R&D project.1

For small businesses, the 30% credit rate and 50% base hurdle provide a significant cushion for early-stage growth.7 However, the “shadow” of potential affiliates—whether through venture capital ownership, parent-company control, or shared investors—must be carefully monitored.13 A failure to accurately report nationwide aggregate headcount can lead to the clawback of credits and penalties upon audit by the LED.17

As Louisiana transitions toward a capped credit system in 2025, the accuracy of affiliate disclosures will become even more paramount. Businesses should engage in an annual “controlled group review” to map their ownership structure and headcount before filing their LED application, ensuring that they are applying under the correct statutory tier and maximizing their opportunity to secure a portion of the limited state funds.13 By understanding the “architecture of aggregation,” Louisiana innovators can better position themselves to capture the full value of the state’s research incentives while remaining compliant with the rigorous standards of the Department of Economic Development and the Department of Revenue.

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