Detailed Analysis of Direct Support within the Louisiana Research and Development Tax Credit Framework

Direct support in the context of the Louisiana Research and Development tax credit refers to auxiliary services performed by employees that are essential to the conduct of qualified research or its immediate supervision. This includes technical tasks such as fabricating experimental prototypes, maintaining research equipment, or compiling technical data, provided these activities directly facilitate the resolution of technological uncertainty.

The concept of direct support is not merely an administrative detail but a fundamental pillar of the Research and Development (R&D) Tax Credit program, as codified in Louisiana Revised Statute 47:6015 and aligned with Section 41 of the Internal Revenue Code (IRC). For a business to successfully claim this incentive, it must navigate a complex intersection of federal definitions, state statutes, and the specific regulatory guidance issued by the Louisiana Department of Economic Development (LED) and the Louisiana Department of Revenue (LDR). The distinction between “direct” and “indirect” support serves as the primary battleground during state examinations, where the eligibility of substantial wage expenditures often hinges on the ability of the taxpayer to prove a direct technical nexus between a support worker’s tasks and the core “process of experimentation.” Understanding this relationship requires a deep dive into the legislative intent of the state, the mechanical application of the federal four-part test, and the rigorous documentation standards demanded by state auditors.

The Legislative Intent and Statutory Framework of R.S. 47:6015

The Louisiana Legislature established the Research and Development Tax Credit with the explicit goal of fostering a robust private sector and encouraging innovative activities within the state’s borders.1 The health, safety, and welfare of the people of Louisiana are viewed as inextricably linked to the continued growth and expansion of businesses that invest in high-level scientific and technical advancements.1 By providing a tax credit of up to 30% on qualified research expenditures (QREs), the state aims to offset the high financial risk inherent in innovation.3

The primary mechanism of the credit is its incremental nature. It is designed to reward companies that increase their research efforts over time, comparing current-year expenditures against a calculated “base amount”.5 For entities with 50 or more employees, the base amount is set at 80% of the average annual qualified research expenses in Louisiana over the preceding three taxable years.1 For smaller entities with fewer than 50 employees, the base amount is more generous, set at only 50% of that three-year average.1 This tiered structure reflects the state’s strategic emphasis on supporting small, agile firms that may face greater barriers to entry in capital-intensive research fields.

The law specifically mandates that only research conducted within the physical boundaries of Louisiana qualifies for the credit.3 This “geofencing” of the incentive ensures that the economic benefits—such as high-wage jobs for researchers, supervisors, and support personnel—remain within the state’s economy. While the credit was historically applicable to both income and corporation franchise taxes, recent legislative reforms under Act 11 of the 2024 Third Extraordinary Session have transitioned the credit to apply exclusively against income tax effective January 1, 2026.2

Defining Direct Support through the Lens of Federal Conformity

Louisiana’s R&D tax credit is built upon a foundation of federal conformity. R.S. 47:6015 effectively adopts the definitions of “qualified research” and “qualified research expenses” found in IRC Section 41.3 This alignment means that state guidance regarding what constitutes a “qualified service” is heavily influenced by federal Treasury Regulations and IRS Audit Techniques Guides.

The Categories of Qualified Services

Under IRC Section 41(b)(2)(B), an employee’s wages are eligible for the credit only to the extent they are paid for “qualified services.” These services are bifurcated into three distinct roles:

1. Engaging in Qualified Research: The actual conduct of experimentation, such as a scientist performing lab tests or an engineer designing a new aerodynamic component.10
2. Direct Supervision: The immediate, “first-line” management of individuals who are conducting the research. This is typified by a lab manager who validates test protocols or a lead engineer who reviews a junior developer’s code.10
3. Direct Support: Auxiliary services that are performed in support of either of the above two roles.10

The inclusion of “direct support” recognizes that the primary investigator cannot function efficiently without a support staff that handles the technical groundwork. For instance, if a researcher is testing a new type of valve for a chemical plant, the machinist who fabricates the experimental valve is providing direct support.10 Similarly, the laboratory worker responsible for cleaning and preparing specialized glassware for use in an experiment is engaged in direct support.10 Without these “hands-on” technical contributions, the research process would grind to a halt.

Distinguishing Direct Support from Indirect Costs

The most frequent error made by taxpayers is failing to distinguish between direct support and general business support. Both state and federal guidance are unequivocal: general and administrative (G&A) services do not qualify as direct support, even if they occur within a research department.3

The defining characteristic of direct support is that the service must have a direct technical nexus to the “process of experimentation.” A person processing payroll for a lab scientist is supporting the scientist as an employee, but not the research as a technical activity. In contrast, the person cleaning the lab equipment is supporting the technical conduct of the research, as clean equipment is a prerequisite for valid experimental results.

State Agency Guidance and Administrative Rules

The administration of the Louisiana R&D credit is split between the Louisiana Economic Development (LED) department, which handles the technical certification of projects and expenses, and the Louisiana Department of Revenue (LDR), which manages the tax filings and credit utilization.3

LED Guidance on Qualified Research Activities

The LED issues specific guidance in its application materials and through the Louisiana Administrative Code (LAC 13:I.Chapter 29).14 To qualify, an activity must satisfy the “Four-Part Test” derived from federal law:

1. Permitted Purpose: The activity must relate to a new or improved function, performance, reliability, or quality of a “business component” (product, process, or software).12
2. Elimination of Uncertainty: The activity must be intended to discover information that would eliminate uncertainty regarding the capability, method, or design of the component.12
3. Process of Experimentation: Substantially all of the activities must involve a process of experimentation, which includes evaluating one or more alternatives through simulation, modeling, or trial and error.8
4. Technological in Nature: The research must fundamentally rely on the principles of the “hard sciences,” such as engineering, physics, chemistry, biology, or computer science.12

Direct support activities must be tied to a project that meets all four of these tests. If the underlying project fails any part of the test—for example, if it is deemed to be “style or cosmetic” rather than functional—then the wages of the support staff are automatically disqualified.5

The Role of Revenue Information Bulletins (RIBs)

The Louisiana Department of Revenue occasionally issues Revenue Information Bulletins (RIBs) to clarify the state’s position on tax credits. While many RIBs address broad tax reforms, such as the flat tax rates introduced in RIB 25-012, they also provide critical guardrails for credit transferability and utilization.18 For instance, RIB 14-005 provides essential guidance on the transfer of R&D tax credits specifically issued to Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grant applicants.5 These particular credits are unique because, unlike the general R&D credit, they are often transferable and can be sold to other Louisiana taxpayers to generate immediate liquidity for early-stage companies.5

The “Substantially All” Rule for Wages

Louisiana follows the federal administrative “substantially all” rule for employee wage allocation. This rule states that if “substantially all”—interpreted as 80% or more—of the services performed by an individual during the taxable year are qualified services (engaging in, supervising, or supporting research), then 100% of that employee’s wages can be included as QREs.9

This rule provides a powerful benefit for employees who are dedicated primarily to the research environment. For example, a specialized machinist in a prototype shop who spends 85% of their time machining experimental parts for the engineering team and 15% of their time on general facility repairs is treated as a 100% R&D expense. However, if that same machinist spends only 60% of their time on experimental parts, the taxpayer must carefully allocate only that 60% of their wages to the credit, excluding the 40% spent on non-qualifying maintenance.11

Documenting the Allocation

During an LED examination, the state will look for contemporaneous records to justify these percentages. The LDR and LED suggest that job titles alone are insufficient; eligibility is based on what an employee actually does during a specific period.3 Recommended documentation includes:

• Detailed Payroll Records: W-2 forms and payroll registers to establish the base wage amount.3
• Time Tracking Systems: Logs or project-tracking software that records time spent on specific R&D projects versus general operations.12
• Organizational Charts: Visual representations of the reporting hierarchy to confirm that supervisors are indeed “first-line” managers and that support staff are appropriately nested within the research department.3
• Performance Evaluations: Internal reviews that describe an employee’s technical contributions to research goals.20

Expenditure Verification and the “Agreed-Upon Procedures” (AUP) Report

A distinctive feature of the Louisiana R&D credit is the requirement for an expenditure verification report for certain taxpayers. Specifically, businesses with fewer than 50 employees that have not filed for the federal R&D tax credit (Form 6765) or are not SBIR/STTR applicants must submit an “Agreed-Upon Procedures” (AUP) report prepared by an independent Louisiana-licensed CPA or tax attorney.1

The AUP report is a rigorous audit-like procedure where the CPA must verify that the claimed expenditures meet the requirements of IRC Section 41.1 The taxpayer is responsible for the cost of this report, with fees ranging from $15,000 for expenditures under $1 million to $25,000 for larger claims.1 This verification step is crucial because it often serves as the first filter for disqualifying “indirect” support wages before the application even reaches the LED. The CPA must explicitly examine whether the wages of support personnel are truly “direct” or if they include prohibited G&A tasks.1

Statistical Performance and ROI of the R&D Credit

The Louisiana Department of Revenue is required to track the effectiveness of tax incentives through annual Return on Investment (ROI) reports. These reports reveal significant insights into the scale of R&D activity in the state and the sectors that drive it.23

The negative fiscal ROI indicates that the state does not recoup the full cost of the credit through immediate tax revenue (it recoups roughly 7 cents for every dollar spent).24 However, the program is viewed as successful in terms of “Value Added” to the state’s economy, which was estimated at over $10 million in 2023.24 The sharp increase in total incentives from 2022 to 2023 suggests a growing sophistication among Louisiana firms in identifying and documenting their R&D expenses, including the expansion of “direct support” claims in large-scale industries like chemical manufacturing.24

Detailed Example: Precision Manufacturing in the Gulf South

To understand how these rules apply in a real-world scenario, consider “Delta Aerospace Fabricators,” a mid-sized company in Slidell, Louisiana, with 65 employees. The company is developing a new, ultra-lightweight heat shield for sub-orbital satellites.

The Project Team

• Project Lead (Engineer): Spends 100% of their time on design and testing. (Qualified Service: Engaging in Research).
• Shop Foreman: Spends 40% of their time directly supervising the technicians working on the heat shield prototype and 60% managing general factory production for other clients. (Qualified Service: Direct Supervision for 40% of time).
• Machinist A: Spends 90% of their time machining the specialized ceramic tiles for the prototype heat shield. (Qualified Service: Direct Support).
• Machinist B: Spends 30% of their time helping Machinist A on the prototype and 70% of their time on standard commercial parts for sale. (Qualified Service: Direct Support for 30% of time).
• Office Manager: Spends 10% of their time ordering the specialized ceramic materials for the R&D project and 90% on general HR and billing. (Service: Non-Qualifying Administrative).

The Application of the Rules

Delta Aerospace Fabricators must apply the rules as follows:

1. Engineer: Because they meet the 80% threshold, Delta can claim 100% of their W-2 wages.9
2. Shop Foreman: They do not meet the 80% threshold. Delta must allocate exactly 40% of their wages to the R&D claim.11
3. Machinist A: They meet the 80% threshold. Delta can claim 100% of their wages as direct support.9
4. Machinist B: They do not meet the threshold. Delta must allocate only 30% of their wages to the claim.11
5. Office Manager: Their time is considered “purchasing/receiving” and general G&A. Even though they are ordering materials for the R&D project, this is considered an indirect cost and is excluded from the QREs.3

The Fiscal Result

Delta Aerospace Fabricators falls into the 50-99 employee tier. Their credit rate is 10% of the increase in Louisiana QREs over an 80% base amount.1 If their total qualified wages (after the allocations above) plus their supply costs are $400,000, and their 3-year average was $300,000:

• Base Amount: $300,000 x 80% = $240,000.1
• Incremental Increase: $400,000 – $240,000 = $160,000.6
• Louisiana Tax Credit: $160,000 x 10% = $16,000.

Judicial Interpretations and the “Process of Experimentation” Fraction

The meaning of direct support was significantly clarified by the federal Seventh Circuit Court of Appeals in Little Sandy Coal v. Commissioner (2023). While this is a federal case, its impact on Louisiana is direct because of the state’s reliance on IRC Section 41.25

The core issue in Little Sandy Coal was how to calculate the “substantially all” requirement for a business component. The IRS had argued that direct support and direct supervision time should be excluded from the “numerator” of the fraction—the portion representing the process of experimentation. This interpretation made it nearly impossible for many projects to qualify if they had a high ratio of support staff to lead researchers.25

The Appeals Court rejected this view, stating that if a support activity (like building a prototype) is itself a research activity that constitutes an element of the process of experimentation, it must be included in the numerator.25 This is a critical insight for Louisiana taxpayers: the wages of a support worker who builds the tool used to resolve the uncertainty are just as valuable to the credit claim as the wages of the engineer who designed it. However, the court also reaffirmed that if the support is not technical in nature (e.g., a non-technical manager overseeing budgets), it has no place in the “experimentation” fraction at all.25

Ineligible Businesses and Custom Manufacturing Exclusions

The Louisiana R&D credit is not available to everyone. R.S. 47:6015(B)(6) lists several types of businesses that are ineligible unless they hold a pending or issued U.S. patent directly related to the expenditures.1 This is particularly relevant for “custom manufacturing” and “custom fabricating” firms.1

Many Louisiana firms engage in custom work for the oil and gas or maritime industries. If a company is simply adapting an existing design for a new customer—even if that adaptation involves complex engineering—it may be disqualified under the “adaptation or duplication” exclusion.5 To overcome this and include the wages of support staff in an R&D claim, a custom manufacturer must prove that the project involved a “process of experimentation” to resolve a technological uncertainty, not just a design preference. Having a patent is the state’s “safe harbor” for these types of businesses.6

Administrative Compliance and the 2025 Aggregate Cap

Starting July 1, 2025, the Louisiana R&D credit program will undergo a significant structural change. For the first time, the program will be subject to a statewide aggregate cap of $12 million per fiscal year.6

This cap introduces a “first-come, first-served” dynamic to the application process. LED will prioritize claims based on when they are filed.6 If the $12 million cap is reached, any remaining certified claims will be disallowed for that fiscal year but will gain priority in the following year’s queue.6

For businesses claiming “direct support” wages, this new cap emphasizes the importance of timely and accurate filing. An application that is delayed because of poor documentation for support staff wages could miss the cap entirely. Furthermore, the LED is statutorily required to examine at least 10% of all applications.3 If an application is selected for this detailed examination, the presence of clear documentation for every support worker—including their nexus to the four-part test—will be the difference between a certified credit and a rejected claim.3

Conclusion: Maximizing Innovation through Diligent Support Documentation

The concept of “direct support” within the Louisiana Research and Development tax credit represents the state’s practical understanding of the innovation process. Research is a team effort that requires not just the vision of the lead scientist but the technical skill of the machinist, the precision of the lab technician, and the diligence of the data clerk. By allowing these wages to be included in the credit calculation, Louisiana significantly lowers the net cost of conducting high-level experimentation within its borders.

However, the “direct” qualifier is a strict legal barrier. To successfully claim these wages, Louisiana businesses must move beyond a “generalized feeling” of research and adopt a rigorous, technical approach to documentation. The state’s conformity to federal law brings with it the complexities of the four-part test and the “substantially all” rule, both of which require contemporaneous evidence and a clear technical narrative. As the state transitions to a flat income tax and introduces new aggregate caps in 2025, the ability to clearly articulate and document the technical role of every support worker will remain the hallmark of a successful and defensible R&D tax credit strategy. Businesses that invest in these documentation systems today will be best positioned to navigate the evolving legislative landscape and continue driving the technological growth of the Louisiana economy.

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