Comprehensive Analysis of the General or Administrative Wages Exclusion in the Louisiana R&D Tax Credit

I. Executive Summary: The Exclusion of General or Administrative Wages

General or Administrative (G&A) wages are generally excluded from Louisiana Qualified Research Expenses (QREs) because they represent indirect costs, such as payroll and purchasing, that are incidental to the actual performance of qualified research. Only wages paid for the direct performance, direct supervision, or direct support of qualified research activities performed within Louisiana qualify for the credit, necessitating meticulous segregation of labor costs to ensure compliance with the Louisiana Economic Development (LED) and Louisiana Department of Revenue (LDR) guidelines.1

The Louisiana Research and Development (R&D) Tax Credit, established under Louisiana Revised Statutes (L.R.S.) Title 47, Section 6015, incentivizes businesses to conduct research activities within the state, offering up to a 30% credit on qualified expenditures.2 Unlike the inclusion criteria for core R&D personnel—such as engineers or scientists directly performing research—G&A wages are specifically targeted for exclusion. This mandate ensures that the credit subsidizes technical innovation rather than general corporate overhead. Effective compliance requires taxpayers to understand the nuanced distinction between direct R&D support (qualified) and indirect, administrative functions (excluded), as failure to properly exclude G&A costs can lead to significant penalties and future financial disadvantages.

II. Statutory and Regulatory Landscape of Louisiana QREs

The administration of the Louisiana R&D Tax Credit is governed by L.R.S. 47:6015 and detailed regulations within the Louisiana Administrative Code (LAC), primarily Title 13, Part I, Chapter 29. These documents lay the groundwork for defining Qualified Research Expenses, particularly concerning labor costs.

A. Foundational Legal Authority and Federal Conformity

The legislative intent behind the credit is clearly stated as encouraging “new and continuing efforts to conduct research and development activities within this state”.4 Critically, the Louisiana statute achieves technical definition consistency by adopting the federal standard: the terms “Qualified research expenses” and “qualified research” carry the same meanings as defined in 26 U.S.C. 41.5 This conformity means that taxpayers must meet the rigorous four-part federal test for R&D activities and adhere to federal standards regarding what types of expenses qualify, including the fundamental exclusion of non-research overhead.

The management of the credit involves two state bodies: the Louisiana Economic Development (LED) certifies the expenditures and approves the credit application 2, while the Louisiana Department of Revenue (LDR) manages the utilization, transfer, and overall fiscal compliance.4 To maintain program integrity, the LED is required to engage a certified public accountant or tax attorney to prepare an expenditure verification report on the claimed QREs.4 This process underscores the state’s commitment to auditing the accuracy of claimed expenditures, making precise G&A exclusion a critical pre-certification requirement.

B. The Louisiana Incremental Calculation Structure

Louisiana utilizes an incremental calculation method, which calculates the credit based on expenses exceeding a historical average, thus heightening the significance of accurate QRE determination, including strict G&A exclusion.

The mechanism is based on two key components:

1. The Base Amount: This is defined relative to the average annual QREs incurred within Louisiana during the three preceding taxable years. The calculation varies by size:

• Taxpayers employing less than fifty persons calculate the base amount as 50% of the three-year average.3
• Taxpayers employing fifty or more persons calculate the base amount as 80% of the three-year average.3
  If a taxpayer has no prior QREs, the base amount is zero, allowing 100% of the current QREs to potentially qualify as excess.3

1. The Credit Rate: The rate is applied to the amount by which current year QREs exceed the base amount (Excess QREs) and is tiered based on employee count:

• 30% for businesses with fewer than 50 employees.3
• 10% for businesses with 50–99 employees.3
• 5% for businesses with 100 or more employees.3

The reliance on a historical average means that misclassifying General and Administrative costs has compounding negative consequences beyond the current tax year. If a company improperly includes non-qualified G&A wages in its current year QREs, it certainly inflates the credit claimed for that year, raising immediate audit risk. However, the more critical and lasting impact is that the inflated QREs are then automatically used to calculate the base amount in the subsequent three tax years. Because the base amount serves as a floor (50% or 80%) below which no credit is earned, improperly inflating this base permanently reduces the amount of “Excess QREs” eligible for the credit in future periods. Consequently, a compliance error regarding G&A wages today generates a measurable, sustained reduction in credit benefit for years to follow.

C. State Sourcing Limitations

Louisiana imposes strict sourcing requirements that must be met in addition to the federal qualifications. Only research and development activities conducted, and expenses incurred, within Louisiana qualify for the tax credit.2 Specifically, wages described as QREs must be paid to individuals who are residents of Louisiana and who perform their services in Louisiana.6 This geographical limitation is a key factor in documenting labor QREs, ensuring that any claimed payroll costs were paid to employees physically performing qualified services within the state, further distinguishing these specific R&D labor costs from general administrative wages paid to out-of-state personnel.

III. Defining Qualified Wages: The “Direct Services” Test

The definition of qualified wages rests entirely upon the services performed by the employee. Wages are qualified only if they are paid for qualified services that directly relate to the research activities.1

A. The Three Categories of Qualified Services

The Louisiana Administrative Code clarifies that qualified services must fall into one of three distinct categories, creating a narrow window for inclusion and thereby isolating G&A wages for exclusion 1:

1. Direct Performance: This covers the actual execution of tasks integral to the process of experimentation, such as testing hypotheses, refining designs, or writing code for a new software feature.
2. Direct Supervision: This involves the immediate, first-line management of the employees directly performing qualified research. State guidance specifies that this supervision must be direct only.3 This distinction is crucial, as it separates a research director actively guiding technical work from a corporate vice president managing high-level budgets or strategy.
3. Direct Support: These are services that, while not direct performance, contribute immediately and intimately to the research effort. Examples include technicians who maintain specialized research equipment, data analysts who process raw experimental results, or administrative staff dedicated solely to organizing technical research data and reports.1

B. Managerial Roles: Direct Supervision vs. General Administration

Ambiguity often arises when attempting to allocate the time of management personnel. Salaries for higher-level managers are generally excluded from QREs.10 The key differentiating factor is the function performed. Time spent by managers on generalized corporate duties—such as efficiency surveys, preparation of financial data, general business planning, human resources duties, or developing employee training programs—are deemed G&A and must be excluded, even if the manager oversees the R&D department.11

For a manager’s time to be included, the services must demonstrate a direct technical nexus to the qualified research. For instance, a Chief Technology Officer (CTO) may qualify for a portion of their wages if they spend time reviewing technical specifications or directing the immediate progress of a prototype build (direct supervision). However, the time the same CTO spends on quarterly budget review, investor relations, or general HR matters constitutes G&A time and must be rigorously excluded from the QRE claim.

C. Includible vs. Excludable Compensation

The calculation of qualified wages must start with the correct compensation base. Louisiana follows the federal rule requiring that only wages subject to federal income tax withholding—that is, federal taxable wages reported on Form W-2—are eligible for inclusion as a QRE.10

Conversely, nontaxable items and fringe benefits are explicitly excluded from the QRE calculation, regardless of the quality of the employee’s service. These excludable items include 401(k) contributions, health insurance contributions, other pretax benefit deductions, and non-taxed income.10 Even if an R&D engineer is 100% engaged in qualified research, only their cash taxable wages (salary, bonuses, stock option redemptions) may be included in the QRE base.10

IV. Detailed Analysis of General or Administrative Wage Exclusion

The exclusion of G&A wages is an essential regulatory measure designed to maintain the integrity of the tax incentive, ensuring that public funds support technological activities rather than core business operations.

A. The Nature of G&A Exclusion in Louisiana Code

The Louisiana Administrative Code is clear that “General or administrative wages generally do not qualify”.1 This is based on the principle that these costs are indirect and incidental to the research activity itself, rather than being necessary inputs to the process of experimentation.1 The underlying rationale is that research expenditures must be closely tied to the “four-part test” of qualified research: development or improvement of a business component, seeking to eliminate technical uncertainty, involving a process of experimentation, and technological in nature.10 G&A functions inherently fail this direct connection test.

B. Enumeration of Excluded Functions (LDR/LED Guidance)

State and federal guidance provide specific examples of functions that fall under the G&A exclusion:

• Purchasing and Receiving: State guidance explicitly states that “an allocated portion of the purchasing or receiving department’s wages would not qualify because these are indirect costs and are incidental to research activity”.1 This definitive exclusion requires companies to treat the time spent by procurement staff as G&A, even when they are sourcing supplies used directly in R&D projects.
• Excluded Management Functions: Other functions consistently excluded include efficiency surveys, the preparation of financial data and analysis, and generalized organizational management.11

It is important for taxpayers to recognize the distinction between technical support and administrative overhead. Technical support, such as a lab technician preparing samples, is often a qualified service (Direct Support).1 However, generalized administrative support activities are excluded. This distinction is further confirmed by Louisiana’s exclusion of certain non-labor costs from QREs, such as utilities (phone and electricity) and allocations of total shipping costs.1 The rationale is interconnected: if the cost itself (like general utilities or shipping) is classified as non-qualifying overhead, the labor associated with managing, accounting for, or procuring that overhead (e.g., the facilities manager or accounts payable clerk) must also be classified as G&A and excluded.

C. Compliance and Documentation Requirements

To successfully defend the exclusion of G&A wages and the inclusion of qualified wages, meticulous documentation is non-negotiable. Auditors preparing the expenditure verification report will focus heavily on validating employee functions and time allocation.4

• Time Tracking Systems: When an employee performs both R&D and G&A duties, the taxpayer must utilize reliable time-tracking systems to log the time spent on specific R&D projects.9 This contemporaneous record is the primary defense against G&A misallocation claims.
• Audit Scrutiny: The goal of an audit is to determine “what the employee did and how much time they spent doing it”.13 Examiners rely on documentation such as payroll records, employee job descriptions, performance evaluations, and calendars to confirm the segregation of duties.13

The following table summarizes the essential documentation required to support the proper exclusion of G&A wages:

Key Documentation for Defending Wage Allocation

V. Practical Example: Allocating Mixed-Function Wages

Accurate wage allocation hinges on identifying and quantifying the precise amount of time dedicated to qualified services versus G&A functions.

A. Case Study: Innovation Tech Corp

Innovation Tech Corp (ITC), a Louisiana-based software developer employing 45 persons, is calculating its QREs for the current tax year. Since the company has fewer than 50 employees, it uses the 50% base calculation and is eligible for the 30% credit rate. The company must carefully analyze the W-2 wages of its personnel, ensuring G&A wages are excluded.

B. Allocation Methodology

ITC reviews the roles of four employees:

1. Senior Developer (Direct Performance): Spends 100% of time coding and testing a new feature that meets the four-part test. (Annual W-2 Wage: $140,000)
2. Chief Operating Officer (COO) (Mixed Function): The COO spends time providing direct technical oversight to the R&D team (30%) but primarily handles general business administration, legal reviews, and strategic planning (70%). (Annual W-2 Wage: $250,000)
3. Lab Manager (Direct Supervision/Support): Spends 85% of time directly supervising R&D experiments and 15% on non-qualified administrative tasks (e.g., vacation scheduling for non-R&D staff). (Annual W-2 Wage: $110,000)
4. Accounts Payable Clerk (G&A): Processes invoices and manages general finances for the entire company. (Annual W-2 Wage: $60,000)

Table 3: Wage Allocation and G&A Exclusion Quantification

C. Calculation Impact of Exclusion

In this example, $251,500 in wages were identified as G&A and correctly excluded, resulting in total qualified wages of $308,500 from this employee group.

Assuming ITC’s total Louisiana QREs (including all other qualified wages, supplies, and 65% of contract research) equal $1,200,000, and the average QREs over the three preceding years was $500,000:

1. Current Year QREs (Net of G&A Exclusion): $1,200,000
2. Base Amount Calculation (50% for <50 employees): $500,000 (3-year average) $\times$ 50% = $250,000.3
3. Excess QREs: $1,200,000 (Current QREs) $-$ $250,000 (Base Amount) = $950,000.
4. Credit Amount (30% rate): $950,000 $\times$ 30% = $285,000.

The accurate exclusion of the G&A costs is the foundation for the defensible $1.2 million QRE figure, leading directly to the certified tax credit of $285,000. If the G&A wages had been mistakenly included, not only would the $1.2 million QRE total be challenged, but the future average QRE base amount would also be inflated, reducing future credits.

VI. Conclusion and Strategic Recommendations

The exclusion of General or Administrative wages is a non-negotiable regulatory requirement for claiming the Louisiana R&D Tax Credit. The state’s adoption of the federal definitions, coupled with its incremental calculation methodology, dictates that proper G&A exclusion is paramount for both short-term compliance and long-term financial strategy. Misclassification of G&A expenses poses a continuous threat to credit maximization by risking immediate disallowance and structurally increasing the non-credit generating base amount in future years.

To ensure strict compliance with L.R.S. 47:6015 and LED/LDR guidelines, taxpayers are strongly advised to implement the following strategic measures:

1. Define and Document Direct Nexus: Companies must adopt clear internal guidelines that differentiate qualified services (Direct Performance, Direct Supervision, Direct Support) from general administrative tasks. Any claimed wage must have a demonstrable, technical link to the process of experimentation.
2. Establish Robust Time Allocation Systems: For all personnel performing mixed functions, the use of contemporaneous, auditable time-tracking logs is essential. Estimated allocations without underlying data are highly susceptible to disallowance during the mandatory expenditure verification process.9
3. Strict Adherence to Exclusions: Taxpayers must exclude all wages paid for explicitly non-qualifying functions, such as those related to general purchasing, financial reporting, human resources, and general executive planning.1 Furthermore, non-taxable fringe benefits must be removed from the W-2 wage base before calculation.10
4. Proactive Review of Base Calculation Integrity: Because QRE misclassification in the current year negatively affects the base amount calculation for the next three years, regular reviews of historical QRE data integrity are necessary to prevent the structural degradation of future credit opportunity.

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