Navigating the Technological in Nature Requirement of the Nebraska Research and Development Tax Credit

The “Technological in Nature” requirement mandates that a taxpayer’s research and experimentation activities must fundamentally rely on the principles of the physical sciences, biological sciences, engineering, or computer science. This standard serves as a critical boundary, distinguishing eligible scientific innovation from ineligible activities rooted in social sciences, business management, or purely aesthetic design choices.

At the core of the Nebraska Research and Development tax credit is a commitment to incentivizing technical uncertainty resolution through the application of hard sciences. For a business operating within the state, understanding the nuance of this requirement is the difference between a successful, refundable tax claim and a costly audit disallowance. The Nebraska Advantage Research and Development Act, and its successor frameworks like the ImagiNE Nebraska Act, do not operate in a vacuum; they explicitly link state-level tax benefits to the federal definitions established under Internal Revenue Code Section 41 and Section 174.1 This linkage ensures that the “Four-Part Test”—a federal standard—governs the eligibility of Nebraska-based research. Within this test, the “Technological in Nature” prong acts as a gatekeeper, ensuring that the credit supports the advancement of scientific knowledge rather than routine business improvements or cosmetic alterations.5 As Nebraska continues to position itself as a hub for agricultural technology, biotechnology, and manufacturing, the interpretation of what constitutes a “hard science” in the field or on the factory floor has become increasingly sophisticated. This report examines the statutory foundations, the specific guidance issued by the Nebraska Department of Revenue, and the practical application of the technological in nature standard across various industries, supported by legislative data and administrative rulings.

The Statutory Framework of Nebraska Research Incentives

The landscape of Nebraska’s business incentives underwent a significant transition with the introduction of the ImagiNE Nebraska Act, which succeeded the Nebraska Advantage Act on January 1, 2021.8 While the Nebraska Advantage Act (LB 312) is no longer accepting new applications, the Nebraska Advantage Research and Development Act remains a distinct and active program, providing credits for research and experimental expenditures.10 The eligibility for these credits is fundamentally tied to the federal definition of “qualified research”.2

Nebraska’s legislative intent behind these credits is to reward businesses for increasing their research footprint within the state, thereby driving high-wage job growth and capital investment.3 The credit is primarily calculated as a percentage of the federal research credit allowed under Section 41 of the Internal Revenue Code.4 This direct tie-in means that any Nebraska-based business seeking the credit must first satisfy the rigorous standards of the federal “Four-Part Test”.14

Comparison of Primary Incentive Programs

The integration of these programs allows Nebraska to offer a robust suite of incentives for innovative firms. A firm engaged in research may utilize the Research and Development Act for its specialized technical expenses while leveraging the ImagiNE Nebraska Act for its broader infrastructure and workforce expansion.3 However, for the R&D-specific credit, the “Technological in Nature” standard remains the most critical hurdle for qualification.

Deconstructing the “Technological in Nature” Standard

To satisfy the “Technological in Nature” requirement, the process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science.2 This is frequently referred to as the “Hard Science” test, as it explicitly excludes the “soft sciences” such as economics, psychology, and management theory.5

The Core Scientific Disciplines

1. Physical Sciences: This category encompasses physics and chemistry. In Nebraska’s manufacturing sector, this might involve the study of thermodynamics in a new engine design or the chemical properties of a novel lubricant used in industrial shelling equipment.14
2. Biological Sciences: Essential for Nebraska’s burgeoning biotech and agricultural sectors, this includes microbiology, genetics, and biochemistry. Research into new enzyme-based fertilizers or drought-resistant seed varieties through genetic modification fits squarely within this discipline.19
3. Engineering: This is perhaps the broadest category, covering mechanical, electrical, chemical, and civil engineering. Any activity that applies these principles to solve a technical design uncertainty—such as developing a more efficient hydraulic system for farm machinery—is technological in nature.14
4. Computer Science: This refers to the study of algorithms, data structures, and software architecture. It must be distinguished from the mere application of existing software or information technology. Developing a new way to process data or a more efficient encryption algorithm qualifies; simply setting up a database does not.2

Disqualifying “Soft Science” and Aesthetic Activities

The law is clear that research must be “undertaken for the purpose of discovering information which is technological in nature”.16 This means that the goal is not just any information, but technical knowledge that was previously unknown to the taxpayer.16

The distinction between “routine engineering” and “qualified research” is a frequent point of contention in audits. If the solution to a problem can be found through standard calculations or existing knowledge available to a skilled professional in that field, it may fail the “Elimination of Uncertainty” and “Technological in Nature” tests.16

Local State Revenue Office Guidance and Applications

The Nebraska Department of Revenue (DOR) provides specific guidance that shapes how the “Technological in Nature” standard is applied at the state level. This guidance is primarily disseminated through Revenue Rulings, Information Guides, and Frequently Asked Questions (FAQs).13

Revenue Ruling 29-10-2: Enhanced Credits for Campus Research

One of the most significant pieces of Nebraska-specific guidance is Revenue Ruling 29-10-2, which addresses the enhanced 35% research tax credit.13 Under Nebraska law, a business can claim a credit equal to 35% of the federal credit (instead of the standard 15%) if the research is conducted on the campus of a Nebraska college or university or at a facility owned by such an institution.4

The DOR clarifies several key points in this ruling:

• Location-Based Eligibility: The phrase “in this state” refers to the physical campus or facility where the research occurs, not the primary location of the university itself. This allows for enhanced credits even if the university is headquartered elsewhere, provided the research facility is in Nebraska.13
• Definition of “College or University”: This refers to institutions of higher learning offering courses of study resulting in bachelor’s, vocational, associate, technical, or professional degrees.13
• Separate Qualification Periods: The five-year period for claiming enhanced research credits is separate from the standard credit periods. A firm can qualify for both standard and enhanced credits simultaneously for different activities.13
• Prevention of Gaming: The ruling explicitly states that a business cannot claim the 35% rate for all of its activities by simply contracting for a small portion of research on a campus. Only the specific activities conducted on-campus qualify for the higher rate.13

Audit and Documentation Mandates

The Nebraska Department of Revenue emphasizes that “contemporaneous documentation” is the only way to prove that an activity was technological in nature.3 During an audit, the DOR looks for evidence that a scientific method was applied.1

The E-Verify requirement is a critical compliance trap. On and after October 1, 2009, all business firms claiming the Nebraska R&D credit must timely verify the work eligibility status of all employees hired in Nebraska during the tax year.10 Failure to use the federal E-Verify system can lead to the total disallowance of the credit, regardless of the technological merit of the research.10

Industrial Applications in the Nebraska Context

Nebraska’s primary industries—Agriculture, Manufacturing, and Biotechnology—provide fertile ground for research that is technological in nature, but each presents unique challenges for credit qualification.

Agricultural Technology (Ag-Tech)

Agriculture is often perceived as a “low-tech” sector by those outside the industry, but modern Ag-Tech involves deep reliance on biological and physical sciences.20 The “Technological in Nature” standard in agriculture requires moving beyond routine farming improvements.20

Research that typically qualifies in Nebraska includes:

• Soil and Nutrient Science: Developing and testing new soil moisture management systems using advanced sensors and hydrologic modeling.20
• Genetics and Crop Science: Experimenting with different seed varieties to achieve drought or heat resistance. This fundamentally relies on biological sciences.20
• Livestock Nutrition and Health: Developing new vaccine delivery methods or testing the biological impact of different feed blends on animal mortality rates.20

Conversely, choosing a new tractor because it has a better “user experience” or switching to a new brand of fertilizer that is already commercially proven would not qualify, as there is no technical uncertainty or discovery of new technological information.18

Manufacturing and Mechanical Engineering

Manufacturing in Nebraska often centers on the development of specialized industrial equipment. The “Technological in Nature” standard here is often satisfied through mechanical or materials engineering.14

A significant case study involves the design of an “Aspirator System” for pecan shelling.14 This system was designed to replace inefficient blowing methods with a suction-based method to separate shells from meat. The research process involved:

1. Hypothesis Formulation: Stating that a suction-based method could improve separation efficiency and reduce dust.14
2. Materials Testing: Determining that stainless steel, off-fall tanks, and galvanized piping were necessary for durability and hygiene, which relies on metallurgy and chemistry (physical sciences).14
3. Prototyping: Building and testing a series of prototypes to resolve uncertainties about suction pressure and airflow patterns (physics/mechanical engineering).14
4. Field Validation: Retesting the design in actual shelling environments to identify and fix flaws in the design.14

This project qualifies because every step fundamentally relies on engineering and physical science principles to solve a problem where the “appropriate design” was uncertain at the outset.14

Biotechnology and Life Sciences

The biotech sector is perhaps the most straightforward in terms of the “Technological in Nature” test, as its core activities almost always rely on biological sciences.19 In Nebraska, companies working on new pharmaceuticals, medical devices, or agricultural biologics are primary candidates for the credit.19

Specific qualifying activities in biotech include:

• Clinical Trials: Testing new drugs or medical devices to satisfy FDA requirements, which involves biological data collection and analysis.19
• Bioprocess Engineering: Developing new methods for the large-scale production of enzymes or proteins, relying on chemical and biological engineering.19

Nebraska also offers specialized incentives like the Renewable Chemical Production Tax Credit Act, which can sometimes overlap with R&D efforts in the bio-industrial space.9

Statistical Overview of Nebraska’s R&D Incentive Performance

The Nebraska Advantage Research and Development Act has been the subject of rigorous performance audits. These reports provide a quantitative window into how the credit is utilized and the sectors that benefit most from the “Technological in Nature” standard.34

Participation and Credit Allocation (2006–2020)

Between the program’s inception in 2006 and the end of the 2020 tax year, Nebraska awarded a total of $72.3 million in tax credits to 460 different companies.34 This indicates a steady, if not massive, appetite for R&D incentives within the state’s business community.

The data shows that while the program serves a broad range of industries, the “High-Tech” sector—which by definition engages in research that is technological in nature—represents nearly a quarter of all participants and $14.8 million of the total credits.34 Furthermore, the program has demonstrated significant retention; 89% of participating companies are considered “sustained,” meaning they have maintained a presence in Nebraska for five or more years.34

Comparative Regional Competitiveness

While Nebraska’s statutory rate is 15% of the federal credit, an audit by the Legislative Audit Office found that the effective tax benefit is roughly 3% of total qualified expenditures.34 This is tied with Colorado for the lowest in the region. However, the Tax Foundation continues to rank Nebraska as highly competitive for new R&D companies due to the broader tax climate and the refundability of the credit, which is particularly valuable for startups that have no income tax liability.3

Quantitative Modeling of the Credit Calculation

For a professional analyst, understanding the mathematical derivation of the credit is as important as the qualitative requirements. Nebraska uses a specific apportionment method for multi-state businesses to ensure only in-state innovation is rewarded.3

The credit is fundamentally an apportionment of the federal credit. The mathematical expression for the Nebraska Research Tax Credit ($C_{NE}$) for a multi-state firm is:

$$C_{NE} = \left( \frac{\text{Qualified Research Expenditures in Nebraska}}{\text{Total Qualified Research Expenditures}} \right) \times \text{Total Federal R&D Credit} \times \text{Nebraska Statutory Rate}$$

The “Nebraska Statutory Rate” is either $0.15$ (standard) or $0.35$ (enhanced/enterprise zone).4

Consider a scenario where a firm has $1,000,000 in total federal Qualified Research Expenses (QREs), with $400,000 of those expenses occurring in Nebraska. If their federal R&D credit is $100,000, and all Nebraska research was off-campus:

$$C_{NE} = \left( \frac{\$400,000}{\$1,000,000} \right) \times \$100,000 \times 0.15 = \$6,000$$

If that same Nebraska research were conducted on the University of Nebraska-Lincoln campus, the credit would more than double:

$$C_{NE} = (0.40) \times \$100,000 \times 0.35 = \$14,000$$

This modeling illustrates why the “Technological in Nature” requirement is so significant during an audit. If a single large project is disqualified for being “routine design” or “aesthetic,” the numerator in the apportionment fraction shrinks, leading to a direct and often substantial reduction in the refundable credit.3

Audit Risks and Legal Precedents

The “Technological in Nature” standard is one of the most frequently challenged areas during tax audits. Both federal and Nebraska examiners focus on whether the taxpayer has proven a reliance on hard science through a systematic process.7

Lessons from Phoenix Design Group, Inc. v. Commissioner (2024)

Although a federal case, Phoenix Design Group (T.C. Memo 2024-113) provides a roadmap for how Nebraska auditors will likely evaluate “Technological in Nature” claims.26 In this case, the court disallowed credits for several engineering projects because the taxpayer failed to demonstrate:

1. Objective Technical Uncertainty: The firm relied on standard calculations and historical data. The court held that if the necessary information was already known or could be determined through routine procedures, no qualified research existed.26
2. A Systematic Process of Experimentation: The firm used a linear design process rather than an iterative one. Experimentation requires hypothesis formation and testing of alternatives, not just a “six-stage design”.26
3. Reliance on Engineering Principles: For some activities, there was insufficient evidence of how scientific or engineering principles were actually applied to resolve the uncertainty.26

For Nebraska businesses, this case underscores the importance of the “Shrinking-Back Rule”.7 If an entire project cannot meet the four-part test, a taxpayer should “shrink back” the claim to the specific subcomponents or discrete technical challenges that can meet the test. Documentation must be mapped to the specific activity level rather than the project level.26

Internal Use Software (IUS) Exclusions

Another high-risk area for Nebraska firms is software developed for internal use.18 Generally, if software is developed to support a company’s own administrative tasks (like accounting or HR), it is excluded from the R&D credit unless it meets the “High Threshold of Innovation” test.18 This test requires the software to be:

• Innovative: It must result in a reduction in cost or improvement in speed that is substantial and economically significant.18
• Economically Risky: The taxpayer must commit substantial resources and there must be significant uncertainty that those resources will be recovered.18
• Commercially Unavailable: The software cannot be purchased or leased in the open market.18

Firms often fail the “Technological in Nature” test here by confusing “IT configuration” with “Computer Science”.7

Conclusion and Strategic Recommendations

The “Technological in Nature” requirement is more than a legal definition; it is a fundamental design principle for Nebraska’s innovation economy. By anchoring state credits to the hard sciences, Nebraska ensures that its fiscal incentives support genuine technical progress that can provide a long-term competitive advantage. For businesses, the path to compliance involves moving beyond the “what” of their products and focusing on the “how”—the specific scientific and engineering principles that allow them to overcome technical uncertainties.

As the Department of Revenue continues to refine its audit techniques and as the ImagiNE Nebraska Act matures, businesses should adopt a proactive stance toward their R&D claims. This involves:

• Technical Substantiation: Ensuring that project descriptions are written by engineers or scientists, not just accounting staff, to clearly articulate the reliance on hard sciences.1
• Iterative Documentation: Capturing the “failed” paths of research, as these are the strongest evidence of a process of experimentation.22
• Rigid Compliance: Maintaining impeccable E-Verify records to avoid administrative disqualification.10
• Strategic Collaboration: Exploring university partnerships to take advantage of the 35% enhanced credit rate, which effectively subsidizes more of the technical risk.4

In conclusion, while the Nebraska Research and Development tax credit offers a powerful refundable incentive, its benefits are reserved for those who can prove their work is fundamentally technological. By mastering the nuance of this standard, Nebraska firms can successfully reinvest in the technical innovations that drive both their own growth and the state’s economic future.

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