The Doctrine of Direct Performance within the Louisiana Research and Development Tax Credit Framework

Direct performance of qualified research constitutes the hands-on technical and scientific labor specifically engaged in a process of experimentation to resolve technological uncertainties. It is the primary tier of qualified services, representing the actual execution of research activities by scientists, engineers, and technicians within the state of Louisiana.

The concept of direct performance serves as the operational heart of the Louisiana Research and Development (R&D) Tax Credit, a policy mechanism designed to stimulate high-tech economic growth and intellectual property creation. Under Louisiana Revised Statute (R.S.) 47:6015, the state identifies three distinct categories of qualified services that entitle a taxpayer to claim wage-based expenditures: direct performance, direct supervision, and direct support.1 While supervision and support provide the organizational and logistical infrastructure for innovation, direct performance represents the raw intellectual and physical work that transforms a hypothesis into a viable business component. The Louisiana Department of Economic Development (LED) and the Louisiana Department of Revenue (LDR) interpret this through a combination of statutory alignment with federal standards—specifically Internal Revenue Code (IRC) Section 41—and state-specific administrative rules that emphasize local labor and physical presence.3 Understanding direct performance requires a granular examination of the “Four-Part Test,” the specific exclusions for certain industries, and the rigorous documentation standards enforced by state auditors.

Statutory Basis and the Integration of Federal and State Standards

The Louisiana R&D tax credit is not a standalone regulatory island but is instead tethered to the definitions found in the United States federal tax code. R.S. 47:6015(E)(5) explicitly states that the terms “qualified research expenses” and “qualified research” shall have the same meanings as provided in 26 U.S.C. 41.2 This conformity ensures that the “Direct Performance” of research in a Shreveport laboratory or a New Orleans software hub is measured against the same scientific benchmarks used by the Internal Revenue Service (IRS). However, the state departs from federal law in its geographic mandate: only research conducted within the borders of Louisiana is eligible for the incentive.1

The Hierarchy of Qualified Services

To qualify as a creditable expense, labor must fall into one of three buckets. Direct performance is the most fundamental of these, as it is the only category that involves the actual “bench work” of discovery. The Louisiana Administrative Code (LAC) and various Revenue Information Bulletins (RIBs) clarify these distinctions to prevent taxpayers from claiming general administrative overhead as research costs.4

The legislative intent behind prioritizing direct performance is to ensure that the tax credit serves as a direct subsidy for high-value technical talent. By focusing on the individuals who are “directly engaged” in research, the state aims to build a workforce of specialized professionals who are less likely to relocate if the state provides a hospitable tax environment.1

The Analytical Framework of the Four-Part Test

For the labor of an employee to be classified as direct performance, the underlying activity must satisfy the Federal Four-Part Test. This test serves as the sieve that separates routine business improvement from genuine scientific research and development.7

Technological in Nature

Direct performance must fundamentally rely on the principles of the “hard” sciences. This includes physical science, biological science, computer science, or engineering.8 In the Louisiana context, this often manifests in the chemical manufacturing and energy sectors. If a chemical engineer is adjusting the molecular structure of a polymer to increase its heat resistance, that engineer is in the direct performance of research because the work is rooted in chemical and materials engineering.7 Conversely, if a business consultant is researching consumer preferences through surveys, this activity fails the “technological in nature” requirement and cannot be claimed as direct performance.8

The Permitted Purpose

The research must be directed toward the creation of a new business component or the significant improvement of an existing one. A business component can be a product, process, software, technique, formula, or invention.8 The improvement must relate to functionality, performance, reliability, or quality.11 For instance, if a Louisiana software firm is developing a new algorithm to optimize sub-surface imaging for oil exploration, the developers are engaged in direct performance for a permitted purpose—improving the functional performance of the software component.9

Elimination of Uncertainty

The individual in direct performance must be working to eliminate a specific uncertainty. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing the component, or the appropriate design of that component.13 Direct performance is characterized by the search for this missing information. If the path to a solution is already known through standard engineering practices, the work is considered “routine” and does not qualify.7

Process of Experimentation

This is perhaps the most scrutinized element of direct performance. At least 80% of the research activities must involve a process of experimentation.8 This is defined as a systematic evaluation of one or more alternatives through trial and error, modeling, simulation, or laboratory testing.8 An employee in direct performance is the one who actually runs the simulation, builds the physical prototype, or conducts the titration in the lab to see which alternative design yields the desired result.1

Administrative Guidance from the LED and LDR

The implementation of the R&D credit is a collaborative effort between the Louisiana Economic Development (LED) office, which certifies the research, and the Louisiana Department of Revenue (LDR), which processes the tax filings. Revenue Information Bulletins (RIBs) provide the essential “how-to” for taxpayers trying to navigate the transition between the law and the tax form.14

RIB 15-019 and the Shift to Non-Refundability

Historically, the Louisiana R&D credit was a refundable incentive, meaning that if the credit amount exceeded the taxpayer’s liability, the state would issue a check for the difference. However, following Act 133 of the 2015 Regular Legislative Session, the LDR issued RIB 15-019, which transformed the credit into a non-refundable offset with a five-year carryforward.4 This change significantly altered the cash-flow planning for companies in the direct performance of research, particularly pre-revenue startups in the biotech and tech spaces that previously relied on refunds to fund their payroll.5

Act 11 and the 2025 Tax Reform

The most recent and profound shift in guidance comes from the 2024 Third Extraordinary Session. Act 11 introduced a flat individual income tax rate of 3% and, more importantly for R&D practitioners, established a statewide cap on the credit.15 According to RIB 25-012, effective July 1, 2025, the total amount of R&D credits allowed in each fiscal year is limited to $12 million on a first-come, first-served basis.15

This cap introduces a new layer of administrative urgency. Companies must ensure that their applications for certification are submitted as early as possible within the eligibility window—which is one year after December 31 of the year in which the expenditure was incurred.1 For example, if a firm incurs wages for direct performance in early 2025, it must be prepared to file its LED application immediately to secure its place in the $12 million queue.7

Bonus Amortization and IRC 174

Act 11 also addresses the treatment of research expenditures under IRC Section 174. While federal law recently moved toward requiring the capitalization and amortization of research expenses over five or fifteen years, Louisiana has authorized “bonus amortization,” allowing for full expensing in the year the costs are incurred.15 This provides a secondary benefit to the “Direct Performance” labor: the wages are not only eligible for a tax credit but can also be fully deducted in the current tax year to reduce taxable income.15

Exclusions and Sectoral Limitations: The “Patent Rule”

Louisiana guidance includes specific exclusionary rules designed to prevent the credit from being utilized by businesses that provide traditional services or routine manufacturing. These exclusions target two main groups: professional services firms and custom manufacturers.1

Professional Services Firms

Under LAC 13:I.2903, a professional services firm is defined as one primarily engaged in work that requires specialized education and judgment, often involving a professional license. This includes architects, engineers, lawyers, and accountants.17 Typically, these firms are assigned a NAICS code starting with 54.18 Direct performance by these firms is ineligible for the credit unless the firm has a pending or issued United States patent related to the expenditures claimed.1

This “Patent Rule” acts as an objective proxy for innovation. Since professional services often involve “high-level thinking” that can look like research, the state requires the patent as proof that the work moved beyond standard professional judgment and achieved a technological breakthrough.1

Custom Manufacturing and Fabricating

Custom manufacturers are defined as businesses that assemble or fabricate parts, equipment, or software in response to specific design criteria provided by a client.17 The logic for their exclusion is that in a typical “request for proposal” (RFP) process, the manufacturer analyzes the design and commits to a fixed price and delivery schedule before work begins.17 In the view of the LED, this implies that the manufacturer has already negated the “technological uncertainty” before starting the work.17 Like professional services, custom manufacturers can only claim the credit if they can point to a patent that resulted from the direct performance of the project.1

Quantitative Mechanics of the Credit

The calculation of the Louisiana R&D tax credit is a tiered process that rewards smaller businesses with higher rates, while still providing significant incentives for large-scale industrial players. The credit is calculated as a percentage of the “Louisiana Qualified Research Expenses” (LA QREs) that exceed a historical “Base Amount”.7

Employee-Based Tiers

The number of employees a business has—including all affiliated entities—determines which credit percentage applies. This headcount is based on Louisiana full-time equivalents (FTEs).2

The Base Amount Calculation

The “Base Amount” represents a threshold of research spending that the state expects a company to maintain. The tax credit is intended to reward the increase in research activity. For a company with 60 employees, the base amount is 80% of its average Louisiana research spending over the previous three years.7 For a small business with 20 employees, the state lowers the bar to 50% of the three-year average, making it easier for them to qualify for the 30% credit.7

The formula for the credit can be represented as:

$$Credit = R \times (QRE_{current} – (B \times \frac{\sum_{i=1}^{3} QRE_{n-i}}{3}))$$

Where:

• $R$ is the tier-based rate (0.30, 0.10, or 0.05).
• $QRE_{current}$ is the current year’s Louisiana research spending.
• $B$ is the base percentage (0.50 or 0.80).
• $QRE_{n-i}$ represents the research spending in each of the three prior years.7

Case Study: Direct Performance in Action

To understand how these rules apply in a real-world business environment, consider the example of “Pelican Aerospace,” a startup based in New Orleans focused on developing lightweight composite materials for drone frames.

The Team and Their Activities

Pelican Aerospace has 12 employees, putting them in the <50 employee tier. In 2024, they spent $300,000 on research labor. Their team consisted of:

1. Lead Engineer (Dr. Smith): Spent 95% of her time designing and testing new carbon fiber weaves to solve issues with structural failure during high-speed maneuvers. (Direct Performance).
2. Junior Developer (Employee J): Spent 100% of his time writing and running stress-test simulations for the new frame designs. (Direct Performance).
3. Operations Manager (Employee M): Spent 15% of his time providing immediate oversight to the lab techs and 85% on marketing and sales. (Direct Supervision for the 15%).
4. Lab Assistant (Employee L): Spent 85% of his time cleaning the vacuum molding equipment and prepping materials for Dr. Smith’s experiments. (Direct Support).

Applying the Rules

Under the “Substantially All” rule, because Dr. Smith and the Junior Developer spent more than 80% of their time on qualified services, 100% of their wages can be included in the QRE calculation.4 The Operations Manager does not meet the 80% threshold, so only 15% of his salary is included.4 The Lab Assistant spent 85% of his time on qualified direct support, so 100% of his salary is included under the “Substantially All” rule.4

The Financial Calculation

• Current Year (2024) LA QREs: $300,000.
• Previous 3-Year Average (2021-2023): $100,000.
• Base Amount: $50,000 (50% of the $100,000 average).
• Excess QREs: $250,000 ($300,000 – $50,000).
• Tax Credit Amount: $75,000 (30% of $250,000).

Pelican Aerospace can use this $75,000 credit to offset its Louisiana income tax liability. If it has no liability this year, it can carry the credit forward for up to five years.5

Documentation and Audit Preparedness

The R&D tax credit is a “self-reported” credit on the tax return, but it must be pre-certified by the LED. Furthermore, R.S. 47:6015(G) requires the LED to perform a detailed examination (audit) of at least 10% of all applications every year.1

The Role of the Organizational Chart

In the event of an audit, one of the most important documents is the organizational chart. State guidance requires this chart to include not only the names and titles of employees but also a specific description of the work performed by each person claimed under the credit.1 For “Direct Performance,” the description must clearly articulate how the employee’s work relates to the Four-Part Test. Vague descriptions like “Product Development” or “Engineering Services” are often flagged by auditors.4

Wage Verification

To substantiate the wages of those in direct performance, the state requires copies of W-2s or K-1s.1 If the credit is claimed for 1099 contractors, the state requires invoices and 1099 forms, but notes that only 65% of contract research expenses are typically eligible, and the work must still be performed within Louisiana.9

Technical Substantiation

Auditors will often ask to see the “fruits” of the direct performance. This includes:

• Project narratives detailing the specific technological uncertainties.1
• Diagrams, mark-ups, and notes from the experimentation process.1
• Documentation of failed tests (which proves a process of experimentation occurred).13
• Any patents or pending applications (crucial for custom manufacturers).1

Economic Impact and Program Performance

The Louisiana state government monitors the R&D credit’s performance through Return on Investment (ROI) reports. These reports analyze the program’s ability to grow the state’s economy versus the revenue lost by the state treasury.10

Fiscal and Economic ROI Statistics

Data from the 2023 Return on Investment report shows that while the program has a high cost to the state, its economic impact varies by industry sector.10

The negative ROI in 2023 suggests that the program is currently a net cost to the state, but policy advocates argue that the long-term benefits of “Direct Performance” labor—such as the creation of high-paying jobs and the retention of scientific talent—outweigh the immediate fiscal loss.6 The shift toward a $12 million cap in 2025 is a direct response to these fiscal findings, aiming to control the state’s exposure while still supporting the innovation sector.15

Comparative Context: Louisiana vs. Other States

Louisiana’s R&D tax credit is part of a broader national landscape of innovation incentives. By comparing the “Direct Performance” rules in Louisiana to other states, businesses can better understand the state’s competitive positioning.

Louisiana’s 30% rate for small businesses is significantly higher than the rates offered in many other states, such as California (15%) or Minnesota (10%).21 This makes Louisiana particularly attractive for startups where the “Direct Performance” of a small team of founders can yield a substantial tax offset.16

Conclusion: Navigating the Future of Louisiana Innovation

The Research and Development tax credit in Louisiana provides a sophisticated mechanism for offsetting the high costs associated with technical discovery. By centering the incentive on the “Direct Performance” of research, the state ensures that its tax dollars are directly supporting the engineers, scientists, and technicians who drive technological progress. However, the regulatory environment is increasingly demanding. The transition from a refundable credit to a non-refundable one, coupled with the upcoming $12 million annual cap and the strict “Patent Rule” for service firms, means that businesses can no longer afford to be passive about their R&D tax strategy.

Success in claiming the credit requires more than just high research spending; it requires a meticulous administrative approach. Taxpayers must be prepared to defend their “Direct Performance” through contemporaneous time tracking, detailed project narratives, and a clear understanding of how their activities solve technological uncertainties. As the program moves toward its 2029 sunset date, the ability to effectively document and certify “Direct Performance” will remain the most critical factor for Louisiana companies seeking to maximize their return on innovation. The local revenue office guidance, particularly the recent updates under Act 11, underscores a state government that is committed to innovation but increasingly focused on fiscal accountability and the prioritization of domestic, Louisiana-based labor.

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