The Strategic Landscape of the Louisiana Research and Development Tax Credit: Understanding Nonrefundability and Compliance

In the context of the Louisiana Research and Development tax credit, a nonrefundable credit is a dollar-for-dollar reduction of state tax liability that cannot generate a payment to the taxpayer if the credit amount exceeds the total taxes owed. Instead of providing a cash refund, any excess credit must be carried forward to offset future income or corporation franchise tax obligations for a period of up to five years..1

The transition of the Research and Development (R&D) tax credit from a refundable mechanism to a nonrefundable offset represents a significant evolution in the fiscal policy of the State of Louisiana. Traditionally, tax credits served as either a rebate—effectively a subsidy paid regardless of profitability—or a reduction in liability. When a credit is characterized as nonrefundable, its utility is strictly tied to the taxpayer’s “tax capacity,” or their ability to generate enough state-level taxable income or franchise tax base to absorb the incentive.4 For businesses operating in Louisiana, this shift necessitates a more sophisticated approach to tax planning, as the credit no longer functions as a liquid cash infusion but as a multi-year reduction in the effective tax rate. Under the general administrative provisions provided in La. R.S. 47:1675, a nonrefundable credit is legally defined by its inability to result in an overpayment of tax; it can only reduce the tax due to zero.6 If a taxpayer’s certified R&D credit exceeds their liability, the “excess” is held in a suspense account of sorts, known as a carryforward, allowing the business to apply those dollars against the tax bills of future years, provided they remain within the five-year statutory window.3

Legal Foundations and Statutory Definitions

The Louisiana Research and Development Tax Credit is primarily codified under Louisiana Revised Statute 47:6015. The overarching purpose of this legislation is to foster an environment of innovation by rewarding companies that conduct qualified research within the state’s borders.7 The statute aligns itself closely with the federal definitions found in Internal Revenue Code (IRC) Section 41, yet it introduces specific Louisiana-centric constraints and tiered benefits that distinguish it from the federal version. To understand the nonrefundable nature of this credit, one must first look at the broader framework of Louisiana tax credits as established in La. R.S. 47:1675.

General Administrative Provisions for Credits

Louisiana law provides a rigorous structure for how credits are categorized and applied. Under La. R.S. 47:1675, unless a statute explicitly states otherwise, all tax credits are presumed to be nonrefundable.6 This statute serves as the “default setting” for Louisiana’s tax code, ensuring that the state does not issue cash payments for credits unless the legislature has made an affirmative choice to do so. The R&D credit, governed by La. R.S. 47:6015, was historically one of the exceptions but was brought back into the nonrefundable fold through legislative amendments that became effective for all claims on returns filed on or after July 1, 2015.2

The law defines a nonrefundable credit as one that “cannot be used for taxes that became due in a tax year prior to the year in which the credit was initially earned or granted”.6 This prohibits the “carrying back” of credits to recover taxes paid in previous profitable years, a practice that is often allowed under federal R&D rules. Furthermore, La. R.S. 47:1675 establishes a strict “ordering of credits,” which dictates which incentives are exhausted first on a tax return. This sequence is critical for taxpayers managing multiple incentives, such as the Inventory Tax Credit or the Quality Jobs Program.

The R&D credit, being a nonrefundable credit with a five-year carryforward, typically falls into the fourth priority tier.6 This means it is applied after any credits that would be lost if not used immediately, ensuring that the taxpayer preserves the R&D credit’s value for as long as possible within the five-year window.

The Mechanism of Nonrefundability in La. R.S. 47:6015

The specific language of La. R.S. 47:6015(K) reinforces the nonrefundable nature of the R&D incentive. It states that “if the amount of the credit authorized exceeds the amount of tax liability for the tax year, the excess credit may be carried forward as a credit against subsequent Louisiana income or corporation franchise tax liability for a period not to exceed five years”.3 This five-year limitation acts as a “use it or lose it” provision. If a company continues to operate at a loss or lacks sufficient tax liability for six consecutive years, any R&D credits earned in the first year will expire and be removed from the taxpayer’s ledger.

This mechanism fundamentally changes the financial risk profile of research activities. Under a refundable regime, the state essentially co-invests in the research by providing cash when the company is in its most vulnerable, pre-revenue stages. Under the current nonrefundable regime, the state rewards successful outcomes—meaning the research must eventually lead to a profitable business component that generates state tax liability for the incentive to be realized.1

Historical Context: From Refundable to Nonrefundable

The transition of the Louisiana R&D credit in 2015 was not merely an administrative change but a pivot in state fiscal strategy. From 2009 through June 30, 2015, the credit was fully refundable, providing a significant cash-flow advantage for early-stage technology companies.2 During this period, if a company spent $1,000,000 on qualified research and earned a $300,000 credit but owed zero tax, the state would issue a check for the full $300,000.

The 2015 Reform (Act 125)

Facing budgetary shortfalls, the Louisiana Legislature passed Act 125 during the 2015 session. This act targeted a variety of tax incentives to reduce their immediate impact on the state’s general fund. Revenue Information Bulletin (RIB) 15-019 was subsequently issued to clarify the impact on the R&D credit.3 The bulletin stated that “the provisions of this Act shall apply to all claims for these credits on any return filed on or after July 1, 2015, regardless of the taxable year to which the return relates”.3

This retroactive application was a point of concern for many businesses. Even if a company had incurred expenses in 2014—when the law still promised refundability—if they waited until July 2015 to file their return, the credit became nonrefundable.3 The LDR established specific codes to track this: Code 299 was used for pre-2015 claims filed late, while Code 231 became the standard for the new nonrefundable era.3

Detailed Revenue Office Guidance: RIBs and LAC

The Louisiana Department of Revenue (LDR) and Louisiana Economic Development (LED) provide overlapping guidance on the R&D credit. While the LED handles the certification of qualified research, the LDR manages the application of the credit against the tax returns and the enforcement of nonrefundability rules.

Revenue Information Bulletin 15-019

RIB 15-019 remains the most critical piece of guidance regarding the transition to nonrefundability. It specifically addresses how the LDR handles excess credits. The bulletin clarifies that for corporations, the credit must first be applied against corporate income tax, and then any remainder against the corporation franchise tax.3 For unincorporated businesses (partnerships and LLCs), the credit flows through to the individual income tax returns of the owners.7

A key insight from RIB 15-019 is the “original return” rule. The nonrefundability provision does not apply to an amended return filed after July 1, 2015, if the credits were “properly claimed on an original return filed prior to July 1, 2015”.3 This protected taxpayers who had already filed and were merely correcting minor errors, ensuring they did not lose their refundable status due to a subsequent amendment.

Revenue Information Bulletin 25-012 and Act 11 (2024)

The landscape shifted again with Act 11 of the 2024 Third Extraordinary Session. RIB 25-012, issued in March 2025, provides the latest guidance on a new statewide aggregate cap.11 Starting July 1, 2025, the total amount of R&D tax credits allowed to be claimed across the entire state is capped at $12 million per fiscal year.1

The LDR and LED administer this cap on a first-come, first-served basis. This adds a new layer of complexity to the nonrefundable nature of the credit. Even if a taxpayer has a valid certification from the LED and enough tax liability to use the credit, they might still be “disallowed” if the $12 million state cap has already been reached by other taxpayers earlier in the fiscal year.1 However, the law provides a priority mechanism: if a claim is disallowed solely due to the cap, that claim receives priority in the subsequent fiscal year over new claims.1

Louisiana Administrative Code (LAC) and Rules

All incentive program rules are officially maintained in the Louisiana Administrative Code (LAC). For the R&D credit, the rules are found in Title 61, Part I, Chapter 29.8 These rules detail the application process, the fees required for certification, and the documentation standards for audits.

The LAC specifies that before any credit can be claimed on a tax return, the business must apply for and obtain a certification from the Department of Economic Development.8 The application fee is calculated as 0.5% of the proposed tax credit, with a minimum of $500 and a maximum of $15,000.12 This fee is itself a nonrefundable administrative cost, highlighting that the state’s approach to R&D is one of “performance-based” incentives where the taxpayer bears the upfront cost of certification.

The Tiers of Compliance: How the Law Applies to Different Taxpayers

The R&D credit’s nonrefundable value is significantly influenced by the size of the entity and its historical spending patterns. The statute creates three distinct tiers based on the total number of employees, including affiliates.7

Tier 1: Small Businesses (Fewer than 50 Employees)

For the smallest innovators, Louisiana provides the most generous terms. These entities qualify for a 30% credit on the incremental increase in R&D spending.7 The “hurdle” for these companies is also lower; the base amount they must exceed is only 50% of their three-year average Louisiana QREs.7

If a small business has zero historical spending in Louisiana, the base amount is zero, meaning the 30% credit applies to the entire current year’s qualified spend.9 This is a powerful tool for startups, though the nonrefundable nature remains a hurdle if they are not yet generating profit.

Tier 2: Mid-Sized Businesses (50 to 99 Employees)

Entities in this tier receive a 10% credit rate.7 The base amount calculation also becomes more rigorous, increasing to 80% of the three-year average Louisiana QREs.7 This reflects the state’s policy that larger, more established companies should be able to absorb more of their research costs as standard “costs of doing business” before the state provides an incentive.

Tier 3: Large Entities (100 or More Employees)

The largest corporations are eligible for a 5% credit on their incremental increases, with the same 80% base amount hurdle.1 For these companies, the R&D credit often serves as a key factor in deciding whether to locate a new research facility in Louisiana versus another state with a similar credit profile.

Defining “Qualified” Research in Louisiana

Because the credit is nonrefundable and subject to audit, the definition of what constitutes a “Qualified Research Expense” (QRE) is paramount. Louisiana law generally conforms to federal standards but adds a “Louisiana-only” geographic restriction.1

The Four-Part Test Narrative

For an activity to qualify, it must pass a four-step evaluation derived from IRC Section 41.

1. Section 174 Qualification: The expense must be of the type that could be deducted as a research and experimental cost under IRC Section 174. This excludes routine data collection, efficiency surveys, or market research.12
2. Technological in Nature: The research must rely on “hard sciences” such as engineering, biology, or computer science. Activities based on social sciences or economics do not qualify.9
3. Permitted Purpose: The goal must be to create a new or improved “business component.” This can be a product, a manufacturing process, or software.8
4. Process of Experimentation: This is the most scrutinized part of an audit. The taxpayer must demonstrate that they systematically evaluated alternatives to resolve a technical uncertainty. “Substantially all” (interpreted as 80% or more) of the activity must involve this experimental process.1

Geography and the “Louisiana Only” Rule

Unlike the federal credit, which applies to research anywhere in the United States, the Louisiana credit is strictly limited to expenditures incurred within the state.1 This creates a high documentation burden. For a software developer, the company must prove that the actual coding and testing occurred at a Louisiana facility. If a Louisiana company hires a consultant in Texas to perform research, those costs are ineligible, even if the work benefits a Louisiana-based project.8

Ineligible Businesses

Certain industries are statutorily excluded from the R&D credit unless they have a pending or issued United States patent directly related to the research.9 These include:

• Professional services firms (such as law or accounting firms).
• Businesses primarily engaged in custom manufacturing or custom fabricating.

This patent requirement ensures that the credit is not used for routine “custom” work that does not truly advance the state’s technological baseline.

Comprehensive Calculation Example: Small Business Growth

To clarify how the nonrefundable mechanism and tiered structure work in practice, consider “Bayou Biotech,” a startup with 15 employees.

Phase 1: Determining the Base

Bayou Biotech spent the following on Louisiana-qualified research over the last three years:

• Year 1: $100,000
• Year 2: $150,000
• Year 3: $200,000
  The average is $150,000. Because they have fewer than 50 employees, their base amount is 50% of this average, or $75,000.1

Phase 2: Current Year Expenditure and Credit

In the current year, Bayou Biotech spends $400,000 on research.

The incremental increase is $400,000 – $75,000 = $325,000.

The credit is 30% of this increase: $325,000 x 0.30 = $97,500.9

Phase 3: Application against Tax Liability

Bayou Biotech has a successful year and owes $50,000 in Louisiana income tax and $10,000 in franchise tax.

• Total Liability: $60,000.
• Credit Applied: $60,000 (reduces total tax to zero).
• Excess Credit: $97,500 – $60,000 = $37,500.

Because the credit is nonrefundable, the $37,500 is not paid as a refund. Bayou Biotech carries it forward to the next year.1

Statistical Insights and Economic Performance

Analyzing the performance of the R&D credit provides a window into the health of Louisiana’s innovation sector. According to the 2024 Return on Investment (ROI) Analysis report, the program’s fiscal and economic impacts have shown significant shifts.

ROI and Fiscal Impact (FY 2023)

In Fiscal Year 2023, the state issued $11.48 million in R&D credits, a substantial rise from the $5.50 million issued in FY 2022.17 Despite this growth in utilization, the “Fiscal ROI” remained deeply negative at -92.67%, indicating that for every dollar of tax revenue given up by the state, only about 7 cents was recouped through new direct tax revenue.17

However, the “Economic ROI”—which measures the value-added to the state’s GDP—tells a different story. While the FY 2023 Economic ROI was -8.97%, it had been 29.28% in the previous year.17 This volatility suggests that the R&D credit’s impact is highly sensitive to the industry sectors participating in a given year.

Industry Sector Shifts

The 2024 report highlighted a major shift in credit utilization. The Chemical Manufacturing sector (NAICS 325) saw its share of the credits jump from 9.87% in 2022 to 33.29% in 2023.17 Conversely, credits for Railroad Construction dropped by 33%, and Petroleum/Coal Product Manufacturing fell by 12%.17 These trends indicate that Louisiana’s innovation is increasingly concentrated in the petrochemical and process-engineering sectors.

The Future of the R&D Credit: Act 11 and Beyond

The 2024 tax reforms introduced several “guardrails” that will define the R&D credit for the remainder of the decade.

The Sunset Date

Under current law, no credits are allowed for research expenditures incurred or grant funds received after December 31, 2029.9 This sunset provision provides a “cooling off” period for the legislature to evaluate the program’s long-term efficacy before deciding whether to renew it.

Elimination of Franchise Tax Offset (2026)

One of the most significant changes for C-corporations is that effective January 1, 2026, the R&D credit will no longer be available to offset corporation franchise tax.10 It will only be applicable against income tax. This change aligns with a broader state effort to simplify the tax code and eventually phase out the franchise tax entirely. For businesses, this means the “tax capacity” for the R&D credit will be significantly reduced, making the nonrefundable carryforward even more important.

The $12 Million Aggregate Cap

The imposition of the $12 million annual cap (starting July 2025) introduces a “competitive” element to the credit. Unlike the federal credit, which is an entitlement for all who qualify, the Louisiana credit will effectively be restricted to the first companies to file their returns and claim the incentive each year.1 This makes the LED’s pre-certification process—which typically takes 3 to 6 months—even more time-sensitive.1

Compliance and Audit Risks: Protecting the Credit

Because the R&D credit is nonrefundable and subject to a 10% mandatory audit rate, businesses must be prepared to defend their claims. The LED’s audit process is thorough and involves a “detailed examination” of both financial and technical records.8

Audit Checklist and Documentation

Taxpayers selected for audit are typically required to provide:

• A narrative of the research completed, explicitly addressing the federal 4-part test.2
• A breakdown of costs by activity (the “business component” level).8
• W-2s or K-1s for all wages listed on the application.2
• Invoices, receipts, and 1099s for contracted research and supplies.2
• An organizational chart for the tax year, including employee titles and descriptions of work performed.2

Consequences of Non-Compliance

The LED has the authority to disapprove applications or recapture credits if they determine the research did not meet the statutory requirements. Furthermore, submitting false information can lead to civil or criminal penalties, including the forfeiture of all tax credits approved under the program.12

Comparisons with Other Louisiana Incentives

For many companies, the R&D credit is not used in isolation but as part of a larger incentive package. However, Louisiana law generally prohibits “double dipping”—meaning expenditures that qualify for the R&D credit cannot receive other LED-administered incentives for the same activities.1

• Digital Interactive Media Credit: This is often the primary competitor to the R&D credit for software firms. Because it is refundable and can be taken as a cash rebate at 85% of its value, pre-profit startups often prefer it over the nonrefundable R&D credit.14
• Quality Jobs Program: While many companies receive both, they must ensure the wages claimed for the Quality Jobs rebate are not the exact same dollars claimed for the R&D credit, unless specific exceptions apply.1
• Angel Investor Tax Credit: Over 97% of this credit is claimed as a refundable individual income tax credit, making it the preferred vehicle for outside investors funding early-stage research.17

Conclusion: Strategic Recommendations

The Louisiana Research and Development Tax Credit is a robust but complex tool for fostering innovation. Its nonrefundable nature demands that businesses view it not as a short-term cash source, but as a long-term strategic asset. To successfully navigate this environment, companies must:

1. Understand Tax Capacity: Before embarking on a certification process that costs up to $15,000, firms must ensure they have, or will soon have, the state tax liability (income or franchise) to absorb the nonrefundable credit.
2. Act Early on the Cap: With the $12 million statewide limit approaching in 2025, the “first-come, first-served” rule will favor companies with efficient accounting departments that can file certified returns early in the fiscal year.
3. Maintain Documentation in Real-Time: Given the high audit rate, the “detailed narrative” and employee-level time tracking should be handled contemporaneously, rather than reconstructed years later.
4. Monitor the 2026 Shift: C-corporations should prepare for the loss of the franchise tax offset by evaluating their state income tax projections.

By aligning their innovation activities with the state’s rigorous compliance standards and understanding the multi-year utility of the nonrefundable carryforward, Louisiana businesses can significantly reduce their cost of development and remain competitive in an increasingly technology-driven economy.

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