Defining the Workforce Edge: A Comprehensive Analysis of Full-Time Equivalent (FTE) Employee Calculation for the Louisiana R&D Tax Credit

Full-Time Equivalent (FTE) is a standardized measure of workforce capacity, calculating the total hours worked by all employees (full-time and part-time) relative to the hours of a single full-time position.1 This metric is foundational for calculating resource allocation and determining compliance obligations under federal laws such as the Affordable Care Act (ACA).1

A deeper analysis reveals that while the general concept of FTE relies on hourly metrics (often 30 hours per week or 130 hours per month), the Louisiana Research and Development (R&D) Tax Credit (Louisiana Revised Statutes Tit. 47, § 6015) utilizes a stricter, non-hourly headcount of “persons” to establish critical thresholds.3 The number of employees determines both the statutory credit rate and the calculation method used to establish the “Base Amount” of prior qualified expenditures. This differentiation creates a strategic necessity for businesses to precisely manage and document their Louisiana-based workforce composition, as the difference between employing 49 individuals and 50 individuals can result in a loss of over 70% of the potential tax benefit.

I. Establishing the Foundation: Definition of FTE and the Louisiana “Person” Standard

A. The Universal Concept of Full-Time Equivalent (FTE)

The universal definition of FTE is a calculation of labor capacity that normalizes the hours of part-time staff against a standard full-time schedule, where 1.0 FTE represents one full-time worker.2 Federally, this measure is crucial for determining whether a business qualifies as an Applicable Large Employer (ALE) under the ACA.1

For ACA purposes, a full-time employee works at least 30 hours per week or 130 hours per month.1 The standard method for calculating FTE from non-full-time employees is to combine their total hours of service for a given month (capped at 120 hours per employee) and divide that total by 120.1 FTE calculations are universally utilized for strategic resource planning, budgeting, and workforce forecasting.2

B. The Louisiana Statute’s Employee Threshold (R.S. 47:6015)

In contrast to federal compliance rules and certain other state incentive programs (like Louisiana’s Quality Jobs, which defines a new direct job as working an average of 30 or more hours per week 4), the R&D Tax Credit statute avoids the complex, hour-based FTE methodology for determining its tier thresholds.

Statutory Clarity: Headcount of “Persons”

The Louisiana Revised Statute (R.S.) 47:6015, which outlines the R&D tax credit, consistently refers to the size of the company using the term “persons” or “employees”.3 Crucially, the statute defines a “Person” as a natural person.3 This focus on the “natural person” rather than an hour-based FTE calculation means that, for the purpose of assigning the credit rate tier, the determination relies on a straightforward headcount of individuals employed. Since an “Employee” in Louisiana is defined simply as any person employed by an employer for compensation in return for services 7, it is established that even a part-time employee is counted as a full person toward the threshold of 50.

This reliance on a simple headcount, rather than an aggregated hourly calculation, offers an administrative simplification by avoiding the month-to-month tracking of part-time hours. However, this structure inherently elevates the strategic risk associated with workforce expansion, as the addition of even a single employee—regardless of their work hours—can instantly and dramatically shift the company into a less beneficial credit tier if the count moves from 49 to 50.

Affiliation Rules: Aggregating Employee Counts Across Related Entities

The determination of the total employee count is not limited to the specific entity filing the R&D credit application. The law specifies that the total number of employees must be determined based on the aggregate of all affiliated companies.6

This aggregation requirement acts as a critical anti-abuse measure, preventing large, multi-entity corporations from subdividing their R&D operations into smaller subsidiaries specifically to qualify for the highly advantageous 30% credit rate designated for entities with fewer than 50 persons. Taxpayers claiming the R&D credit must therefore perform an enterprise-wide review of their corporate structure to ensure the aggregated headcount accurately reflects all natural persons employed in Louisiana by affiliated entities.

II. The Crucial Criterion: Defining a “Louisiana-Based” Employee

Since the Louisiana R&D Tax Credit is designed to encourage research activities within the state, only qualified research expenditures (QREs) incurred in Louisiana are eligible.9 This localization principle directly affects which employees are included in the headcount and whose wages qualify as QREs.

A. The Nexus Test for Louisiana Employment

The designation of a person as “Louisiana-Based” hinges on where the work is performed, as demonstrated by the state’s payroll tax compliance rules and the R&D QRE requirements.

LDR Guidance on Income Tax Withholding

The Louisiana Department of Revenue (LDR) provides clarity on the geographical nexus required for employment through its withholding tax regulations.10 Employers operating within Louisiana are required to withhold state income tax on all wages earned within the state, irrespective of the employee’s state of residency. Furthermore, if a Louisiana resident is employed remotely in a state that does not impose state income tax, the employer must still withhold Louisiana income tax because residents are obligated to pay Louisiana income tax on all income earned, regardless of where the income was sourced.10

This LDR standard establishes the financial and jurisdictional nexus for defining a Louisiana-based employee, tying the individual’s employment status to the state’s tax system, either through physical location of work or the residency of the employee in a no-income-tax state.

Qualified Research Expenditure (QRE) Limitation

Wages included in the calculation of QREs are strictly limited to those paid for services performed in Louisiana related to qualified research.11 Specifically, the law limits eligible wages to individuals who are directly engaging in qualified research, directly supervising qualified research (defined as immediate, first-line management), or directly supporting qualified research.9 General administrative or higher-level management wages are explicitly excluded.9 For companies utilizing hybrid or remote work policies, meticulous time tracking is paramount to substantiate that the claimed wage QREs are solely for services physically performed within Louisiana.

B. Required Documentation: Reporting Workforce Data to LED

Louisiana Economic Development (LED) manages the application and certification process for the R&D credit.3 The application requires a comprehensive submission of workforce data to verify the proper tier assignment and evaluate the economic impact of the research activities.6

Taxpayers must submit documentation detailing the following workforce metrics 6:

1. The total number of persons employed in Louisiana by the taxpayer. This figure is the basis for determining if the entity is below the 50-person threshold.
2. The specific number of those persons employed in Louisiana who are directly engaged in research and development. This group defines the qualified wage expenses.
3. The average wages and benefits received by all persons employed in Louisiana, segregated into those engaged in R&D and those not engaged in R&D.6

LED’s requirement to collect detailed wage data for R&D versus non-R&D employees suggests the agency performs a substantive review to ensure the incentive is supporting high-value job creation, linking the R&D credit to the state’s broader economic development goals.

III. The R&D Tax Credit Calculation: Tiers Defined by Employee Count

The determination of whether a company employs “less than fifty persons” or “fifty or more persons” is the central factor influencing the financial generosity of the credit.

A. Overview of the Incremental R&D Credit Mechanism

Louisiana employs an incremental research activities credit structure, meaning the credit is calculated based on the increase in current-year QREs over a historic average, known as the “Base Amount”.11 The general formula is:

$$\text{R\&D Credit} = (\text{Current Year LA QREs} – \text{Base Amount}) \times \text{Applicable Tiered Rate}$$

B. Headcount Impact on Base Calculation Formula

The Base Amount is calculated using the average annual Louisiana QREs incurred during the three preceding taxable years.6 The applicable percentage applied to this average is defined entirely by the employee count:

• Small Taxpayers (Less than 50 Persons): If the entity employs less than fifty persons, the Base Amount is set at 50% of the average prior three years of Qualified Research Expenditures.6 A lower base percentage means a greater portion of the current year’s expenditures is deemed “incremental” and eligible for the credit.
• Larger Taxpayers (50 or More Persons): If the entity employs fifty or more persons, the Base Amount increases substantially to 80% of the average prior three years of Qualified Research Expenditures.6 This higher percentage significantly reduces the incremental portion of QREs that qualify for the credit.

For taxpayers who have no prior QREs in Louisiana (common for new startups), the Base Amount is set to zero, allowing 100% of their current QREs to be considered incremental, subject to the applicable tiered rate.11

C. Headcount Impact on the Final Credit Rate

The calculated incremental QREs are then multiplied by one of three tiered credit rates, cementing the correlation between employee size and financial incentive 11:

This tiered structure creates a financial inflection point at the 50-person threshold, where a company moving from the small tier to the medium tier is penalized on two fronts. The business simultaneously faces a major increase in its base requirement (from 50% to 80%) and a steep drop in the credit rate applied to its incremental expenditures (from 30% to 10%).11 This design provides overwhelming priority to incentivizing R&D growth within small businesses.

D. The SBIR/STTR Bonus Credit

Louisiana also offers a specialized, non-incremental credit for recipients of federal Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants. Taxpayers receiving such awards are allowed a credit equal to 30% of the qualifying Phase I or II award amount received during the tax year.11 This credit is calculated separately from the incremental QRE calculation and is available regardless of the company’s size or credit tier.

IV. Administrative Guidance and Compliance Requirements (LED & LDR)

A. Mandatory Certification and Deadlines

The R&D credit must be certified by Louisiana Economic Development (LED) before it can be claimed on a Louisiana income tax return.9 This certification is subject to several administrative requirements:

• Application Deadline: Taxpayers must submit the online application to LED within one year after December 31 of the calendar year in which the qualified expenditures were incurred.9 Failure to meet this strict deadline results in disallowance of the credit for that tax year.
• Application Fees: A taxpayer must pay an application fee and submit a deposit for the expenditure verification report fee. This fee structure is based on the claimed QRE amount; for instance, applications claiming QREs up to $1 million require a deposit of $7,500, with a maximum application fee of $15,000.3

B. Expenditure Verification Reports (EVP)

To ensure the accuracy of claimed expenditures, particularly where federal review is absent, LED requires an Expenditure Verification Report (EVP). This report must be prepared by a certified public accountant or tax attorney selected by LED.6

The EVP is specifically required for applicants who employ less than fifty persons IF they have not filed for the federal research and development tax credit (IRS Form 6765) or are not applicants for the SBIR/STTR programs.6 This provision ensures that small businesses receiving the highest credit rate (30%) substantiate their QREs if they are state-only filers. This requirement, however, imposes an inherent compliance cost on certain small businesses, potentially offsetting the net value of the generous 30% credit.

C. Program Limitations and Carryforward Rules

Recent legislative changes have introduced a critical limitation on the R&D credit program. Effective beginning July 1, 2025, the aggregate amount of R&D tax credit allowed in each fiscal year is capped at $12 million.13 This cap fundamentally alters the risk landscape for taxpayers, as the credit is no longer guaranteed and is subject to state appropriation limits. Businesses must ensure timely application and certification to secure their portion of the capped pool.

Once certified, the credit can be applied against Louisiana income and corporation franchise taxes 6 and can be carried forward for up to five years from the date the credit was earned.6 Certified credits are transferable, but any sale or transfer must be reported to the Department of Revenue within ten business days, accompanied by a $200 processing fee per transferee. Critically, the transfer or sale does not extend the original five-year carryforward period.6

V. Case Study: Strategic Impact of the Employee Headcount Threshold

The following example demonstrates the severe financial implication of crossing the 50-person threshold, based on the calculation rules defined in R.S. 47:6015.

Scenario Setup: LA Innovate Corp

LA Innovate Corp incurred $1,000,000 in Louisiana QREs during the current tax year (CTY QREs). The average annual Louisiana QREs over the preceding three years (the Base Average) was $400,000.11

Calculation A: Small Business Tier (49 Persons)

If LA Innovate Corp maintains a headcount of 49 natural persons employed in Louisiana, it qualifies for the preferential small business tier.

1. Base Amount Calculation: $400,000 (Base Average) $\times 50\%$ (Small Taxpayer Rate) = $200,000$.6
2. Incremental QREs: $1,000,000 (CTY QREs) – $200,000 (Base Amount) = $800,000$.
3. R&D Tax Credit: $800,000 (Incremental QREs) $\times 30\%$ (Applicable Rate) = $240,000.

Calculation B: Mid-Sized Business Tier (50 Persons)

If the company hires one additional employee, increasing the headcount to 50 persons, the tax benefit calculation immediately shifts to the less advantageous tier.

1. Base Amount Calculation: $400,000 (Base Average) $\times 80\%$ (Larger Taxpayer Rate) = $320,000$.6
2. Incremental QREs: $1,000,000 (CTY QREs) – $320,000 (Base Amount) = $680,000$.
3. R&D Tax Credit: $680,000 (Incremental QREs) $\times 10\%$ (Applicable Rate) = $68,000.

Analysis of Credit Value Differential

The difference in tax benefit generated by adding a single employee demonstrates the critical nature of the threshold management:

R&D Credit Calculation Case Study: Small vs. Mid-Sized Firm

This analysis underscores that for companies approaching the 50-person limit, human resources and finance departments must coordinate closely. The marginal benefit gained from hiring an employee may not offset the loss incurred from the substantial decline in the company’s R&D tax credit eligibility. In such circumstances, a business might achieve greater financial efficiency by utilizing contracted research services, where payments to third parties (65% qualifying) increase QREs without adding to the headcount of natural persons.11

VI. Conclusion and Strategic Recommendations

The definition of “Full-Time Equivalent Employees” in the context of the Louisiana R&D tax credit is not based on hours worked, but rather on a strict headcount of “natural persons” employed in Louisiana across all affiliated entities. This headcount determines highly divergent base requirements and credit rates, with the 50-person threshold acting as a critical financial cliff.

To navigate this regulatory environment and maximize the tax incentive, taxpayers must implement precise workforce monitoring and adhere strictly to LED’s application requirements.

Key Strategic Takeaways:

1. Strategic Headcount Management: Businesses near the 50-person threshold must incorporate the tax impact into their hiring plans. The addition of a single employee could result in a dramatic reduction of the R&D credit, making tactical workforce decisions, such as delaying hiring or restructuring labor resources, a vital part of tax efficiency.
2. Affiliation and Aggregation Due Diligence: The employee count is an enterprise-wide calculation. Companies must annually verify the aggregated headcount of all affiliated entities operating in Louisiana to ensure proper tier assignment. Miscalculation in this area risks total disallowance of the claimed credit.
3. Rigorous Nexus Documentation: Because the credit requires QREs and employees to be Louisiana-based, employers must maintain impeccable records correlating salary QREs with work performed in Louisiana and adhering to LDR withholding requirements. This includes careful tracking of work location for hybrid or remote staff.
4. Proactive Certification: With the new statutory cap of $12 million starting July 1, 2025, the incentive is no longer unlimited. Taxpayers are advised to expedite the compilation of QRE documentation and submit their LED application immediately following the conclusion of the tax year to secure their certification before the annual pool is exhausted.
5. Substantiation of Small Business Claims: Small businesses (under 50 persons) that do not file federal Form 6765 must anticipate the requirement for an Expenditure Verification Report (EVP) prepared by an independent CPA or tax attorney, adding to their compliance costs. This expenditure should be factored into the overall cost/benefit analysis of the R&D claim.

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