The Louisiana Small Business Research and Development Tax Credit: A Comprehensive Analysis of the 30% Incentive Framework

The Louisiana Small Business Research and Development tax credit provides a thirty percent credit on qualified research expenditures exceeding a fifty percent base threshold for entities with fewer than fifty employees. This statutory mechanism serves as a primary driver for in-state innovation by offering a robust non-refundable offset against income tax liabilities for qualifying technological advancements.1

The legislative architecture of this incentive is designed to mitigate the inherent financial risks associated with early-stage research and development (R&D) within the private sector. By establishing a preferential tier for small businesses, the State of Louisiana acknowledges the disproportionate burden that R&D costs place on smaller firms compared to large-scale corporations. While larger entities with 100 or more employees are restricted to a five percent credit rate, the thirty percent rate available to small businesses represents a significant competitive advantage intended to foster a burgeoning tech and manufacturing ecosystem.2 The integration of these credits into the broader fiscal strategy of the state involves a dual-agency oversight process, where Louisiana Economic Development (LED) manages certification and eligibility while the Louisiana Department of Revenue (LDR) administers the application of these credits against tax liabilities.1 This report examines the statutory origins, calculation mechanics, administrative requirements, and the evolving legislative landscape that governs the Small Business Credit Rate in Louisiana.

Statutory Authority and Legal Foundations

The primary legal basis for the Research and Development Tax Credit is codified in Louisiana Revised Statute (R.S.) 47:6015.4 It is essential for practitioners to distinguish this from R.S. 47:6005, which pertains to recycling manufacturing equipment, as the two are frequently adjacent in tax guidance but serve entirely different policy objectives.7

Legislative Intent and Evolution

The stated purpose of R.S. 47:6015 is to encourage new and continuing research and development activities within the state to foster private sector growth.4 The program was initially designed to conform generally to the federal research credit provisions enacted under the Small Business Job Protection Act of 1996.1 However, Louisiana has since diverged from federal standards by implementing a tiered system that explicitly favors small enterprises through higher rates and lower eligibility hurdles.

One of the most significant shifts in the history of the program occurred in 2015. Prior to this period, many Louisiana tax credits, including the R&D credit, had refundable components. Under Revenue Information Bulletin (RIB) 15-019 and Act 133 of the 2015 Regular Legislative Session, the credit was transitioned to a non-refundable format for all original returns filed after June 30, 2015.9 This change necessitated the inclusion of a carryforward provision, currently allowing taxpayers to carry unused credits forward for a period of up to five years to offset future income tax liabilities.2

Defining the Taxable Entity

A critical component of the law is the definition of an “entity” for headcount purposes. R.S. 47:6015(C)(1) mandates that the number of employees must be determined based on the aggregate of all affiliated companies.4 This prevents large organizations from spinning off small subsidiaries to capture the 30% small business rate. If a startup with five employees is owned by a parent company with 200 employees, the startup is treated as part of a 205-employee entity and is thus relegated to the 5% credit tier.2

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The Mechanics of the Small Business Credit Rate

The “up to 30%” phrasing often used in state literature refers to the maximum rate achievable by a small business on its incremental increase in R&D spending. The effective rate may vary based on whether the entity is claiming the standard R&D credit or the specialized SBIR/STTR grant credit.

The Headcount Tiers

The Louisiana legislature established a descending scale for credit rates to ensure that state resources are concentrated on the firms with the highest relative innovation costs.

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For small businesses, maintaining an employee count below 50 is vital. Transitioning from 49 to 50 employees results in a “subsidy cliff,” where the credit rate drops from 30% to 10% and the base amount hurdle increases from 50% to 80%.3 This sudden shift can significantly impact the tax planning strategies of rapidly growing technology firms.

The Base Amount Calculation

The Louisiana R&D credit is an incremental incentive, meaning it only rewards spending that exceeds a historical baseline. For entities with fewer than 50 employees, the “base amount” is defined as 50% of the average annual qualified research expenses incurred in Louisiana during the three preceding taxable years.3

If a small business is in its first year of operation and has no prior history of R&D in Louisiana, the three-year average is zero. Consequently, the base amount is zero, and the firm can claim a full 30% credit on the entirety of its first-year Louisiana QREs.2 For established firms, the formula is more complex.

Example Scenario: Established Small Business

An entity with 20 employees has the following Louisiana QRE history:

• Year 1: $100,000
• Year 2: $150,000
• Year 3: $200,000
• Average of Prior 3 Years: $150,000
• Base Amount (50% of Average): $75,000

If this company spends $300,000 on Louisiana R&D in Year 4, the credit calculation is as follows:

$$Credit = 30\% \times (\$300,000 – \$75,000)$$

$$Credit = 30\% \times \$225,000 = \$67,500$$

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Qualified Research Expenditures (QREs) in Louisiana

To qualify for the 30% rate, expenditures must be “qualified” under both federal and state definitions. The most critical requirement for the Louisiana credit is that the research must be physically conducted within the borders of the state.1

The Four-Part Test for Eligibility

A qualified research activity must meet all four tests outlined in Internal Revenue Code Section 41(d):

1. Technological in Nature: The research must rely on principles of the physical or biological sciences, engineering, or computer science.3
2. Permitted Purpose: The research must be intended to develop a new or improved business component, such as a product, process, software, or technique.13
3. Elimination of Uncertainty: The activity must seek to discover information to eliminate uncertainty regarding the capability, method, or design for developing or improving the component.3
4. Process of Experimentation: Substantially all (at least 80%) of the activities must involve a process of experimentation, such as systematic trial and error, modeling, or simulation.1

Categorization of Expenses

Small businesses generally track three types of eligible costs for the credit:

• Wages: Includes salaries and wages for employees directly performing research, as well as those directly supervising or supporting it.2
• Supplies: Tangible items consumed or used during the research, such as materials for prototypes or chemical reagents.2 This specifically excludes land or depreciable property.
• Contract Research: Payments to third parties for research conducted in Louisiana. Only 65% of these payments qualify for the credit.1 For small businesses, it is essential that the written agreement stipulates the research is performed within the state.

Basic Research and University Partnerships

Payments to qualified organizations, such as Louisiana-based universities, for fundamental or basic research are also eligible. Unlike the 65% limitation on standard contract research, 100% of basic research payments may qualify if the research is conducted in-state.2 This encourages small businesses to collaborate with Louisiana’s higher education institutions to solve complex technological problems.

The SBIR and STTR Grant Credit

A distinct and powerful provision within R.S. 47:6015 is the credit for recipients of federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants.

Direct Award Credit

Small businesses that receive Phase I or Phase II grants from these federal programs are entitled to a state tax credit equal to 30% of the total award amount received during the tax year.4 This is not an incremental credit; it is a flat 30% of the grant revenue, providing a massive non-dilutive funding boost to research-heavy startups.

Transferability and Liquidity

The SBIR/STTR credit is uniquely valuable because it is transferable.2 While standard R&D credits can only be used by the entity that earned them to offset their own taxes, SBIR credits can be sold to other Louisiana taxpayers. This allows pre-revenue startups with no tax liability to monetize the credit immediately by selling it through the Louisiana Tax Credit Registry managed by the Department of Revenue.16

Transfer Requirements:

• The seller must notify LDR within 10 business days of the sale.6
• Form R-6135 (Credit Utilization Form) is used to track the transfer.16
• The transfer does not extend the 5-year carryforward period, which begins when the credit was originally earned.6

Administrative Guidance: The Role of LED and LDR

The administration of the Louisiana R&D credit involves a mandatory pre-certification process through Louisiana Economic Development (LED) before a claim can be made on a tax return with the Louisiana Department of Revenue (LDR).

LED Certification Process

The taxpayer must submit an online application via the LED portal within one year after December 31 of the year in which the expenditures were incurred.1

Application Components:

• Detailed narrative of the research activities.1
• Breakdown of costs by expenditure category and activity.1
• Federal Form 6765 if the company has filed for the federal R&D credit.1
• Documentation of SBIR/STTR grant awards and bank statements showing fund distribution.1

Fee Structure

Applying for the credit requires an application fee of 0.5% (0.005) of the requested tax credit, with a minimum of $500 and a maximum of $15,000.2 This fee supports the administrative review conducted by LED staff.

The Expenditure Verification Report (EVR)

Small businesses face a unique regulatory requirement if they have not filed for a federal R&D credit or received an SBIR grant. Under R.S. 47:6015(B)(3)(i), these entities must undergo an expenditure verification process.4

Key EVR Provisions:

• LED assigns an independent CPA or tax attorney to prepare the report.4
• The taxpayer is responsible for the actual cost of the report, capped at $15,000 for expenditures up to $1 million and $25,000 for expenditures over $1 million.4
• An up-front deposit ($7,500 or $15,000) is required at the time of application.4
• The CPA must meet specific Louisiana licensure and continuing education requirements (e.g., 8 hours of LED-approved tax credit attestation training).21

Claiming the Credit with the Department of Revenue

Once the LED issues a certification letter, the small business can claim the credit on its state income tax return.

Filing Procedures

The credit is claimed using Form R-620, which is attached to the corporate or individual income tax return.13 For corporations filing Form CIFT-620, the R&D credit is typically reported as a non-refundable “Priority 1” or “Priority 3” credit depending on the year it was earned.23

Revenue Information Bulletins (RIBs)

The LDR issues RIBs to provide informal guidance on the application of the law.

• RIB 13-010: Detailed significant changes to the R&D credit structure in 2013.17
• RIB 15-019: Confirmed the non-refundable status of the credit and the five-year carryforward rule.9
• RIB 25-012: Explains the impact of Act 11 (2024), which establishes a $12 million aggregate cap on the R&D credit program starting in 2025.25

Recent Legislative Reforms: Act 11 and the Future of the Credit

The 2024 Third Extraordinary Session of the Louisiana Legislature introduced transformative changes to the state’s tax landscape, specifically targeting the R&D credit through Act 11.

The $12 Million Aggregate Cap

Starting July 1, 2025, the total amount of R&D tax credits allowed statewide will be capped at $12 million per fiscal year.2 This is a radical departure from the previous “uncapped” nature of the program.

Implications of the Cap:

• First-Come, First-Served: Credits will be awarded based on the order in which returns are filed and allowed by the LDR.2
• Priority for Disallowed Claims: Taxpayers who are denied a credit because the cap was reached may use those credits on a return filed in the next fiscal year, where they will receive priority status.2
• No Rollovers: Unused portions of the $12 million cap cannot be carried forward to increase the following year’s aggregate limit.25

Franchise Tax and Flat Rates

Beginning January 1, 2026, the R&D credit will no longer be applicable against corporation franchise taxes.4 It will only be used to offset income tax. Additionally, the move toward a flat 3% individual income tax rate and a flat 3.5% corporate rate may reduce the immediate tax liability of many firms, making the carryforward provision even more critical.25

The 2029 Sunset Date

The current statute includes a sunset clause. No credits may be earned for R&D expenditures incurred or federal grant funds received after December 31, 2029.3 This creates a definitive window for small businesses to maximize their innovation-related tax benefits.

Compliance, Audit, and Documentation Standards

Small businesses are subject to rigorous oversight to ensure that the 30% credit is only applied to legitimate activities.

The 10% Audit Rule

LED is statutorily required to perform a detailed desk audit or examination of at least 10% of all R&D applications.1 Companies selected for audit must provide:

• W-2s or K-1s for R&D employees.1
• Invoices and receipts for all research supplies.1
• Project logs, diagrams, and notes related to business components or prototypes.1
• Employee interviews to verify their role in the research process.1

Common Pitfalls for Small Businesses

Small firms often fail to segregate R&D activities from general business operations. LED guidance emphasizes that “substantially all” (80%) of the activities must be experimental.1 If an employee spends 50% of their time on sales and 50% on coding a new algorithm, their entire wage cannot be claimed unless the company can provide precise time-tracking data isolating the R&D hours.1

Statistical Performance and Sector Analysis

The R&D tax credit is a significant component of Louisiana’s economic development toolkit. Annual performance reports provide insight into how the credit is utilized across different sectors.

Economic and Fiscal ROI

The state evaluates the return on investment (ROI) for the program by comparing the economic growth generated against the loss of tax revenue.

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The sharp increase in credits issued in 2023 suggests that more businesses, particularly in the chemical manufacturing and professional services sectors, are utilizing the program. However, the negative fiscal ROI reflects the direct cost to the state treasury, which likely influenced the decision to implement the $12 million aggregate cap in the 2024 legislative session.25

Comparison: Louisiana vs. Federal R&D Standards

While Louisiana law generally conforms to IRC Section 41, several key differences exist that small businesses must navigate.

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The most significant divergence is Louisiana’s lack of a payroll tax offset. At the federal level, a startup with no income tax liability can use the R&D credit to offset the employer portion of Social Security taxes. Louisiana small businesses do not have this option; they must either carry the credit forward or, in the case of SBIR credits, sell them to another entity.22

Practical Scenarios for Small Business Applicants

To better understand the application of these rules, the following scenarios illustrate the interplay of headcount, base amounts, and credit rates.

Case 1: The “Subsidy Cliff” Transition

A software firm has 48 employees and $1,000,000 in Louisiana QREs. Their base amount is $400,000.

• Credit: 30% of $600,000 = $180,000.

If they hire 3 more employees (total 51), they move to the middle tier.

• New Base Amount: 80% of average (Assume $640,000).
• New Credit: 10% of $360,000 = $36,000.

The hiring of three additional employees results in a $144,000 reduction in tax credits, highlighting the importance of strategic growth planning.3

Case 2: New Startup with SBIR Grant

A biotech startup with 5 employees receives a $250,000 SBIR Phase II grant and spends $100,000 of its own funds on additional Louisiana R&D.

• SBIR Credit: 30% of $250,000 = $75,000 (Transferable).
• Standard R&D Credit: 30% of $100,000 = $30,000 (Carryforward).
• Total Benefit: $105,000.

Because the startup is new, its base amount for the standard credit is zero, allowing it to capture the full 30% on its internal spending.2

Strategic Outlook and Recommendations

The Small Business Credit Rate in Louisiana remains a premier incentive for innovation, but the shifting legislative landscape requires proactive management.

Proactive Documentation

Small businesses should implement contemporaneous time-tracking systems that categorize labor hours by specific R&D projects. Given the 10% audit mandate, the ability to produce these logs during an LED examination is often the difference between credit certification and denial.1

Early Filing Strategy

With the $12 million aggregate cap taking effect in July 2025, the timing of tax filings will become a competitive factor. Small businesses should aim to file their state returns as early as possible in the fiscal year to ensure their certified credits are “allowed” before the cap is exhausted.3

Monetizing SBIR Credits

For pre-revenue startups, the transferability of SBIR credits is a vital liquidity tool. Engaging with specialized tax credit brokers or consultants to navigate the LDR Registry can help these firms convert their credits into working capital at a rate of 80-90 cents on the dollar, providing essential cash flow for ongoing research.2

Conclusion

The Louisiana Research and Development Tax Credit, particularly the 30% Small Business Credit Rate, is a cornerstone of the state’s efforts to cultivate a knowledge-based economy. By providing a tiered incentive structure that prioritizes smaller, high-growth entities, the state effectively lowers the cost of innovation and encourages the establishment of high-tech operations within its borders. While the transition from refundability to carryforward and the introduction of a statewide aggregate cap reflect a move toward greater fiscal discipline, the program remains highly competitive. For small businesses, success in utilizing this credit depends on a deep understanding of the statutory hurdles, meticulous compliance with LED and LDR documentation standards, and a strategic approach to the evolving legislative environment. As the program heads toward its 2029 sunset, it continues to offer a powerful mechanism for Louisiana companies to transform technological uncertainty into tangible business value.

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