Comprehensive Analysis of Supplies Consumed within the Framework of the Louisiana Research and Development Tax Credit

Supplies consumed in qualified research refer to tangible personal property, excluding land and depreciable assets, utilized directly in a process of experimentation or prototype development. These materials must be exhausted or transformed during the research activity within Louisiana to qualify for the state’s tiered tax credit incentives.1

This definition serves as a cornerstone for businesses seeking to leverage the Louisiana Research and Development (R&D) Tax Credit, a program meticulously designed to foster an environment of innovation and technical advancement within the state. While the concept of a “supply” may appear straightforward in a general accounting context, its application within the specialized domain of tax law—specifically under Louisiana Revised Statute 47:6015—requires an intricate understanding of both federal conformity and state-specific administrative mandates.2 The distinction between a qualifying supply and a non-qualifying capital asset or overhead expense is often the primary focus of state-level audits and expenditure verification reports. For an expenditure to be classified as a qualifying supply, it must not only be tangible in nature but must also satisfy a rigorous “direct use” standard, proving that the material was essential to the conduct of research that passes the federal four-part test for qualified research activities.1

The Statutory Framework of the Louisiana R&D Tax Credit

The legislative intent behind the Louisiana R&D Tax Credit is rooted in the state’s desire to maintain a competitive edge in the global knowledge economy. Under the authority of Louisiana Revised Statute (R.S.) 47:6015, the state offers a powerful incentive for companies to either establish or expand their research footprints within the Pelican State.3 The statute is structured to reward incremental increases in research spending, although the specific mechanics vary significantly based on the size of the taxpayer’s workforce and their history of innovation in the state.7

Louisiana’s R&D tax credit landscape is characterized by its tiered system, which provides disproportionately higher benefits to smaller enterprises and startups. This strategic focus aims to nurture early-stage companies that may lack the extensive capital of larger corporations but possess high growth potential.10

Tiers of Eligibility and Credit Rates

The calculation of the Louisiana R&D credit is predicated on the number of persons employed by the taxpayer, including all affiliated companies. This ensures that the incentive is calibrated to the actual scale of the entity’s operations.3

For businesses with fewer than 50 employees that have no prior history of qualified research expenses in Louisiana, the base amount is calculated as zero, effectively allowing the 30% credit rate to apply to the entirety of the first year’s qualified expenditures.7 This “startup advantage” is a defining feature of the Louisiana program, making it one of the most attractive states for emerging technology firms.

Defining “Supplies Consumed” Under Louisiana Law

At the heart of many research-intensive industries—ranging from aerospace and biotechnology to chemical manufacturing and software development—lies the constant need for physical materials. Whether these are chemical reagents, carbon fiber composites, or electronic components for a drone prototype, the costs can be substantial. In the context of the Louisiana credit, “supplies” are a vital component of Qualified Research Expenses (QREs), alongside qualified wages and contract research costs.2

Tangibility and Direct Consumption

Louisiana’s definition of supplies follows the federal guidelines established under Internal Revenue Code (IRC) Section 41(b)(2)(C). A supply must be tangible property. Intangible assets, such as software licenses (unless used specifically for research purposes under certain lease definitions) or patent acquisition fees, generally do not fall under this category.5 The “consumed” aspect of the definition implies that the material is used up, transformed, or destroyed during the experimental process.1

A supply is considered utilized in the development of a prototype if it becomes a part of that prototype. Even if the prototype is eventually sold or utilized in the business, the materials that went into its initial creation for the purpose of resolving technological uncertainty remain qualifying supplies.10 However, the cost of the labor to build the prototype must be captured under “wages,” and the supplies must be tracked separately as tangible inputs.2

The Exclusion of Depreciable Assets

The most frequent error in R&D credit claims involves the misclassification of depreciable property as a supply. Under both Louisiana and federal law, any property of a character subject to the allowance for depreciation is strictly excluded from the definition of a supply.2

Depreciable property typically has a useful life of more than one year and is subject to wear and tear or obsolescence. Examples include:

• Laboratory equipment and microscopes.
• CNC machines used for prototyping.
• Computers and servers (though a separate credit may apply for the right to use computers for research).
• Reusable molds or specialized tools that are not consumed in a single project.2

The distinction is critical: if an item is capitalized and depreciated on a company’s financial statements or tax returns, it cannot simultaneously be claimed as an R&D supply. This rule prevents the “double-dipping” of tax benefits for the same capital investment.11

Prohibited Indirect and Overhead Costs

To maintain the integrity of the incentive, the Louisiana Department of Revenue and the LED explicitly exclude various indirect costs that do not have a direct physical relationship to the research activity.2

Utilities are specifically excluded even if they are used to power a laboratory.2 While the electricity runs the experiments, it is not “tangible property” in the traditional sense of a raw material input. This exclusion underscores the focus on materials that form the physical substance of the innovation itself.

Administrative Guidance from the Louisiana Department of Revenue

The Louisiana Department of Revenue (LDR) provides essential clarity through Revenue Information Bulletins (RIBs). These informal statements of information are general in nature and designed to guide the public and state employees in the consistent application of tax law.16

Evolution of Credit Refundability and Carryforwards

The history of the Louisiana R&D credit is marked by a shift from a refundable to a non-refundable model. Revenue Information Bulletin No. 15-019, issued in response to Act 133 of the 2015 Regular Legislative Session, clarified that for all returns filed on or after July 1, 2015, the R&D credit is to be applied against income or corporation franchise taxes as a non-refundable credit.17

Before this change, many companies could receive a cash refund if the credit exceeded their tax liability. Under the current regime, companies can carry forward any unused portion of the credit for up to five years (or up to 10 years for certain specific historical certifications).7 This transition places a greater emphasis on tax planning, as the benefit of the credit for supplies consumed is only realized against future profits.

Recent Legislative Reforms: Act 11 of 2024

The most significant recent update to the program came via Act 11 of the 2024 Third Extraordinary Session. As detailed in RIB 25-012, the state has moved to establish an annual aggregate cap on the issuance of research and development tax credits.16

Effective for claims allowed on returns on or after July 1, 2025:

• A statewide cap of $12 million per fiscal year is established.
• Credits are awarded on a “first-come, first-served” basis.
• The rollover of any unused portion of the cap to a subsequent year is prohibited.16

This new cap introduces a competitive element to the application process. For companies with substantial material costs for research, the timing of their application to the LED becomes paramount to ensuring they receive their certification before the annual pool of credits is exhausted.7

The Mandate for State-Specific Research

A critical nuance that distinguishes the Louisiana credit from its federal counterpart is the geographic limitation. While the federal R&D credit applies to research conducted anywhere in the United States, the Louisiana credit is strictly limited to expenses incurred for research conducted within Louisiana.2

For “supplies consumed,” this means the materials must be used in a laboratory, testing facility, or manufacturing plant located within the state. If a company buys raw materials in Louisiana but ships them to a testing facility in Texas for the actual experimentation, those expenses would likely be disqualified from the state credit. Conversely, if a company purchases materials from an out-of-state vendor but consumes them in a Louisiana-based research project, those costs are qualifying Louisiana QREs.2

The Role of Louisiana Economic Development (LED) and Certification

The path to claiming the R&D credit in Louisiana is not through the tax return alone; it requires a prior certification from Louisiana Economic Development (LED).2 This two-step process ensures that the state can vet the technical merits of the research activities before the tax benefits are realized.

Application Mechanics and Timing

Businesses must apply for the credit within one year after December 31 of the year in which the expenditure was incurred.2 For a calendar-year taxpayer who incurred supply expenses throughout 2024, the application deadline is December 31, 2025.

The application process requires:

1. Online Submission: Completing the R&D application via the LED portal.2
2. Narrative Description: A detailed explanation of how the project meets the federal four-part test, including how specific supplies were used in the process of experimentation.2
3. Cost Breakdown: Categorizing expenditures into wages, supplies, and contract research.2
4. Application Fee: A fee equal to 0.5% of the proposed tax credit (minimum $500, maximum $15,000) must be paid at the time of filing.7

Expenditure Verification Reports for Small Businesses

A unique safeguard exists for small businesses (fewer than 50 employees) that do not file for the federal research credit (Form 6765) or receive federal SBIR/STTR grants. These entities must undergo an expenditure verification report prepared by an independent CPA or tax attorney assigned by the LED.3

This report is more than a standard audit; it is a specialized attestation that the expenditures—including every dollar claimed for supplies—meet the statutory definitions and were indeed incurred in the state of Louisiana. The taxpayer is responsible for the cost of this report, which is capped at $15,000 for claims up to $1 million and $25,000 for larger claims.3 This process serves to validate the “supplies consumed” by verifying invoices, receipts, and project logs before the LED issues the final credit certificate.

The Federal Four-Part Test as Applied to Supplies

Because Louisiana law conforms to IRC Section 41, the eligibility of a supply is inherently tied to the eligibility of the project it supports. A supply cannot be a qualifying expense if the activity it was used for fails any part of the federal four-part test.5

Section 174 Test (Permitted Purpose)

The expenditure must relate to a “business component” and be intended to improve its functionality, performance, reliability, or quality.2 Supplies used for the routine repair of existing equipment or for market research do not qualify. In the context of “supplies consumed,” this means the material must be part of an effort to solve a technical problem or create a new capability.

Technological in Nature

The research must rely on the principles of physical or biological science, engineering, or computer science.2 Supplies used in a sociological study or for economic research are ineligible. This “hard science” requirement is a primary filter during LED reviews.

Elimination of Uncertainty

At the project’s outset, the taxpayer must face technological uncertainty regarding the capability, method, or design of the business component.2 If a company uses supplies to build a standard product that is already well-understood in the industry, the “supplies consumed” will not qualify, even if they were physically exhausted in the build process. The consumption must be in the pursuit of resolving that uncertainty.

Process of Experimentation

The project must involve a systematic trial-and-error approach, evaluating one or more alternatives.2 Supplies are most clearly qualifying when they are used in “trial runs” or “iterations.” For example, if a chemical manufacturer uses three different catalysts to see which yields the highest purity, the cost of all three catalysts is a qualifying supply expense because they were part of the experimental process.14

Audit and Compliance: Documenting Supplies Consumed

The burden of proof rests entirely with the taxpayer. Given that the LED is required to perform a detailed examination of at least 10% of all applications, businesses must be prepared to defend their supply claims with contemporaneous documentation.2

The Documentation Checklist for Supplies

To survive a state audit, a company must move beyond simple ledger entries. The LED and LDR expect a robust trail of evidence that links the purchase of a supply to its specific use in a qualified research activity.2

Common Audit Red Flags

LDR auditors often look for “mixed-use” items that serve both research and general production purposes. If a company buys a pallet of aluminum and uses 20% for R&D prototypes and 80% for regular sales, they must have a system for accurately allocating and tracking the 20% consumed in research.14 Failure to track this allocation is a primary reason for the denial of supply claims during state examinations.

Furthermore, any supply that appears to have a useful life beyond the research project will be challenged. Reusable tools, durable containers, and electronic hardware that can be repurposed for general office use are frequently flagged and removed from the QRE total.12

Economic Impact and Statistics

The R&D tax credit is a significant fiscal tool for Louisiana, but its efficiency is constantly under review by the state’s fiscal authorities. Data from the 2022 and 2023 ROI reports reveals a complex picture of how the credit—including the portion for supplies—impacts the state economy.26

Fiscal and Economic Return on Investment

The jump in total credits from 2022 to 2023 was driven largely by the Chemical Manufacturing sector, which increased its share of credits from under 10% to over 33%.27 Chemical manufacturing is a supply-heavy industry, often requiring large volumes of catalysts, feedstocks, and reagents for research trials. The “negative” ROI reported in 2023 does not necessarily indicate a failure of the program; rather, it reflects a high volume of credit issuance relative to the immediate taxable value-added in that specific fiscal period. Such investments often have long lead times before they translate into full-scale production and employment growth.26

Detailed Industry Example: Precision Chemical Formulations

To bring the legal and administrative definitions into focus, we can examine a hypothetical case study based on a Louisiana business.

Scenario: Bayou Bio-Catalysts, Inc.

Bayou Bio-Catalysts is a Baton Rouge-based chemical firm with 35 employees. They are developing a new bio-degradable solvent for use in oil refinery maintenance.

The Research Project

The company identifies a technological uncertainty regarding whether a new enzyme-based catalyst will remain stable at the high temperatures required for industrial cleaning. They plan to conduct a series of 20 lab-scale experiments using various concentrations of the catalyst and different base solvents.

Identifying Supplies Consumed

During the tax year, the company incurs the following expenses:

1. Experimental Enzymes: $15,000 for a batch of high-purity enzymes that are transformed during the reaction. (Qualifying Supply)
2. Base Solvents: $8,000 for various chemical bases used in the experiments. (Qualifying Supply)
3. Glass Beakers and Test Tubes: $1,200 for laboratory glassware. (Ineligible: These are durable, reusable items subject to depreciation/wear.)
4. Heating Elements: $2,500 for specialized heaters. (Ineligible: These are depreciable equipment.)
5. Electricity: $4,000 for the lab’s climate control. (Ineligible: Utility exclusion.)
6. Disposable Gloves and Filters: $500 for single-use safety and filtration items. (Qualifying Supply: Consumed directly in the research.)

Calculation of the Credit

The company’s total QREs for the year (including wages for the three researchers and the qualifying supplies) come to $300,000. Their prior three-year average QREs in Louisiana was $200,000.

1. Base Amount: As a small business (<50 employees), the base is 50% of the average.

• $Base = 0.50 \times \$200,000 = \$100,000$.

1. Increased QREs: $\$300,000 – \$100,000 = \$200,000$.
2. Credit Amount: $\$200,000 \times 30\% = \$60,000$.

Compliance and Certification

Bayou Bio-Catalysts must file its application with the LED within the statutory window. Because they have fewer than 50 employees, they will be required to pay for an expenditure verification report. The CPA assigned by the LED will examine their chemical purchase orders (invoices) and their lab notebooks to ensure that the $23,000 claimed for enzymes and solvents was actually consumed in the 20 experiments described in their narrative. Once certified, they will claim the $60,000 credit on Louisiana Form R-620 attached to their state tax return.20

Ineligible Businesses and Patent Requirements

Louisiana law imposes a significant barrier for certain industries. Professional services firms, custom manufacturers, and custom fabricators are generally ineligible for the R&D credit unless they have a pending or issued United States patent directly related to the research expenses.2

This rule is designed to prevent the credit from being used for routine “job shop” work where a company is simply building to a customer’s specifications. For a custom fabricator to claim “supplies consumed,” they must be able to demonstrate that those supplies were used to develop a novel, patentable process or product that overcomes a technological challenge. If they are merely building a custom trailer using standard industry techniques, the materials used are not qualifying research supplies, even if they are physically consumed in the fabrication process.28

Special Case: SBIR and STTR Grants

Louisiana offers a specific “bonus” for companies that receive federal Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants. Taxpayers who receive these grants are allowed a tax credit equal to 30% of the award amount received during the year.6

While this grant-based credit is separate from the standard R&D credit based on expenditures, it provides a streamlined way for companies to monetize their research activities. Importantly, only this SBIR/STTR portion of the Louisiana R&D credit is transferable or sellable to other Louisiana taxpayers.10 This provides a critical source of liquidity for early-stage companies that have high “supplies consumed” but no current tax liability to offset.

Future Outlook: The Sunset and Beyond

The Louisiana Research and Development Tax Credit is currently scheduled to sunset on December 31, 2029.7 This means that unless the state legislature acts to renew the program, no new credits will be earned for expenditures incurred after that date.

Furthermore, the introduction of the $12 million statewide cap in 2025 signals a move toward more conservative fiscal management of tax incentives.10 For businesses, this translates to a need for:

• Early Filing: Completing research and applying for certification as early as possible in the calendar year to secure a place under the cap.
• Enhanced Documentation: As the credit pool becomes limited, the scrutiny of claims for “supplies consumed” is likely to increase as the state seeks to ensure that every dollar of the $12 million is spent on high-quality, high-impact research.7

Conclusion: Strategic Value of the Supplies Credit

The Louisiana R&D Tax Credit remains a vital instrument for attracting and retaining innovative enterprises. The provision for “supplies consumed” provides a tangible, dollar-for-dollar reduction in the cost of physical experimentation, making the state an ideal home for manufacturing and industrial research.

To successfully navigate the program, businesses must maintain a precise distinction between consumable research materials and depreciable capital assets, guided by the formal directives of the LDR and LED. With the impending arrival of the 2025 statewide cap and the ultimate sunset in 2029, the time for Louisiana innovators to maximize these benefits—and to institutionalize the robust documentation practices required to defend them—is now. By aligning their material procurement and tracking systems with state mandates, companies can ensure that their pursuit of the “next big thing” is fully supported by the Pelican State’s legislative commitment to innovation.

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