Addressing the Capital Gap: A Policy Framework for the Transferability of Research and Development Tax Credits in the State of Iowa

Executive Synthesis of the Innovation Incentive Transition

The State of Iowa stands at a critical juncture in its economic development trajectory, specifically regarding the cultivation of high-growth, technology-driven industries. For decades, the Iowa Research Activities Credit (RAC) served as a foundational pillar for businesses engaging in qualified research and experimentation.¹ However, recent legislative overhauls—most notably the enactment of House File 2317 in 2022 and the subsequent replacement of the RAC with the new Research and Development Tax Credit Program under Senate File 657—have fundamentally altered the liquidity landscape for small to medium-sized businesses (SMBs).³

The core policy challenge identified within this new framework is the explicit prohibition of credit transfers. While the legacy system allowed for substantial refundability, recent reforms have incrementally reduced the portion of excess credits that can be refunded to taxpayers.¹ Under the 2026 paradigm, although credits remain refundable, they are non-transferable.⁶ For pre-revenue startups and R&D-intensive SMBs that possess no immediate tax liability, this restriction creates a “trapped asset” problem. These firms hold valuable tax certificates that cannot be sold to profitable investors or corporations to raise the immediate, non-dilutive capital necessary for survival and scaling.

This whitepaper provides an exhaustive analysis of the current Iowa R&D tax credit framework, identifies the structural deficiencies inherent in the non-transferability clause, and proposes two actionable legislative solutions. By examining successful models in peer states and performing a prospective cost-benefit analysis, this report demonstrates that permitting credit transfers is not a mere tax convenience but a strategic necessity for maintaining Iowa’s competitive edge in the global innovation economy.

The Contextual Evolution of the Iowa Research and Development Framework

To understand the impact of non-transferability, one must first examine the historical and legislative context of Iowa’s research incentives. Historically, Iowa was one of the few states to offer an uncapped, formula-based, and fully refundable research credit, which made it a highly attractive destination for manufacturing and bioscience firms.⁸

The Legacy Research Activities Credit (RAC) Era

The RAC was codified under Iowa Code §15.335 and closely aligned with the federal definition of qualified research under Internal Revenue Code (IRC) Section 41.² It allowed businesses to claim a 6.5% credit on qualified research expenditures (QREs) exceeding a base amount.¹¹ A significant feature of this era was the “Supplemental Research Activities Credit,” available to businesses participating in the High Quality Jobs (HQJ) program, which could provide an additional 3% to 10% credit depending on the business’s revenue size.²

Table 1: Structural Evolution of Iowa’s R&D Credit

Source: 1

The 2022 Reform: House File 2317

Governor Kim Reynolds signed HF 2317 on March 1, 2022, initiating a phased reduction of the R&D credit’s value to the taxpayer.³ This legislation introduced several critical restrictions:

• Refundability Phase-down: The portion of the credit exceeding tax liability that could be refunded was set to decrease by 10 percentage points annually, reaching a floor of 50% by 2027.¹
• Expense Limitations: Payments for supplies and computer lease/rental costs were phased out from the definition of QREs.¹
• Method Consistency: Taxpayers were required to use the same calculation method (regular or alternative simplified) for state purposes as they did for federal purposes.¹

The 2025 Overhaul: Senate File 657 and the 2026 Paradigm

In June 2025, a more radical shift occurred with the passage of Senate File 657. This law repealed the long-standing RAC and replaced it with a competitive, application-based “R&D Tax Credit Program” administered by the Iowa Economic Development Authority (IEDA), effective January 1, 2026.⁴ This new program shifts the philosophy of R&D support from an entitlement-based tax filing to a discretionary economic development grant.⁴

The 2026 program limits eligibility to four targeted industries: advanced manufacturing, bioscience, insurance and finance, and technology and innovation.⁵ Businesses must pre-apply for certification and submit annual, CPA-verified reports of their QREs to the IEDA.⁴ While the credits are once again described as refundable, the statewide cap of $40 million—down from over $77 million in claims in fiscal year 2024—means that credits will likely be awarded on a pro-rata basis.⁵

Detailed Analysis of the Policy Issue: The Prohibition of Credit Transfers

The central issue addressed in this whitepaper is the ongoing prohibition of credit transfers within this evolving framework. While the 2026 program restores refundability, it fails to address the “liquidity gap” that plagues early-stage innovation companies. Non-transferability means that a tax credit certificate issued by the IEDA can only be used by the business that earned it, either to offset its own tax liability or to request a refund from the state.⁶

The Liquidity Gap for SMBs

Small and medium-sized businesses in the bioscience and technology sectors are often “pre-revenue” or “low-revenue” for many years as they navigate the lengthy process of research, clinical trials, or software development.¹⁷ These companies typically have high “burn rates” and no state tax liability.¹⁸ For such firms, a tax credit that provides a refund 12 to 18 months after the expenditures were incurred is insufficient to meet immediate operational needs.⁴

Transferability allows a firm to sell its tax credit to a profitable third-party investor or corporation at a small discount (e.g., selling a $100,000 credit for $90,000 in cash).¹⁷ This provides an immediate infusion of capital that can be used for payroll, equipment, or further research, effectively acting as a form of non-dilutive bridge financing.²⁰

The Burden of Pro-Rata Uncertainty

The $40 million statewide cap introduced by SF 657 adds a new layer of complexity. Because total claims have historically exceeded $70 million, the IEDA must allocate the available $40 million pro-rata.⁵ A business will not know the actual value of its credit until the end of the state’s fiscal cycle, when all applications have been processed.⁵

This uncertainty makes it nearly impossible for SMBs to use their R&D credits as collateral for bank loans. Lenders require a certain asset value to extend credit. If the credits were transferable, specialized tax credit brokers could assume this pro-rata risk, providing the SMB with a certain amount of upfront cash and then collecting the final allocated amount from the state later.²⁰

Administrative Complexity and Compliance Costs

The new requirement for CPA verification and annual application to the IEDA increases the “cost of compliance” for small firms.⁴ For a small startup, the expense of hiring a CPA and managing the IEDA application process might consume a significant portion of the credit’s value.⁴ Transferability would allow these firms to recover these costs more quickly by liquidating the asset on the private market rather than waiting for a state-issued refund.

Table 2: Historical Claim Data (2025 Report)

Source: 11

The data indicates that while large corporations like RTX and Deere earn the lion’s share of credits ($38.5M of the $49.7M), hundreds of smaller entities rely on the refund mechanism ($18.5M in total refunds).¹¹ This highlights the sheer volume of SMBs whose liquidity is tied directly to the state’s processing speed and refund policies.

Comparative Market Analysis: Peer State Models for Transferability

Iowa’s current stance on non-transferability places it at a competitive disadvantage. Several peer states have implemented robust transfer or exchange programs that Iowa could emulate to improve the liquidity of its innovation sector.

New Jersey: The Technology Business Tax Certificate Transfer Program

New Jersey allows unprofitable technology and biotechnology companies with fewer than 225 U.S. employees to sell their R&D credits for at least 80% of their value.¹⁷ This program is highly targeted toward pre-revenue firms and has been instrumental in making New Jersey a global hub for the life sciences.¹⁸ The program requires the seller to maintain a headquarters in New Jersey for five years, ensuring that the capital infusion translates into long-term economic presence.¹⁸

Pennsylvania: The R&D Tax Credit Assignment Program

Pennsylvania permits businesses that have not used their R&D credits within one year of issuance to “assign” or sell them to third parties.²⁰ The program includes a $12 million set-aside specifically for small businesses (assets under $5 million), ensuring they are not crowded out by larger firms.²² In 2024, Pennsylvania saw over $167 million in credits sold, with a historical value retention of approximately 92.9%.²²

Connecticut: The Small Business R&D Credit Exchange

Connecticut offers a direct “exchange” mechanism. Qualified small businesses with annual gross income of $70 million or less can exchange their unused R&D credits with the state for a cash refund equal to 65% of the credit’s value.²⁵ For biotechnology companies, this was recently increased to 90%.²⁶ This “buyback” model provides a simplified, non-market alternative to transferability that still achieves the goal of immediate liquidity.

Table 3: Liquidity Mechanisms by State

Source: 4

Proposed Solution 1: Implementing a Regulated Credit Transfer Market

The Iowa Legislature should amend Iowa Code §15.335 to permit the one-time transfer of R&D tax credit certificates issued by the IEDA. This solution leverages private capital to solve the SMB liquidity gap without increasing the state’s total fiscal liability.

Mechanism of the Transfer Market

The state should adopt a “Vested Certificate” model, similar to Iowa’s existing Innovation Fund Tax Credit, which is already transferable.²⁹ Once the IEDA certifies an SMB’s QREs and issues a tax credit certificate, that certificate would be deemed a vested right that can be sold to any other Iowa taxpayer.³⁰

The transfer would involve three primary steps:

1. Certification: The IEDA completes its current verification process and issues a “Transferable Tax Credit Certificate” to the researching business.⁴
2. Private Sale: The SMB identifies a buyer (e.g., a profitable Iowa manufacturer or financial institution) and negotiates a sale price.
3. Notification and Reissuance: Both parties notify the Iowa Department of Revenue of the transfer. The IDR invalidates the original certificate and issues a new certificate in the name of the purchaser.³⁰

Benefits to the Iowa Economy

A transfer market would foster a “mentor-protégé” relationship between established Iowa corporations and emerging startups. Large firms like Deere or Collins Aerospace could purchase credits from Iowa-based startups, providing those startups with the cash needed to hire researchers from Iowa State University or the University of Iowa.³¹ This keeps capital within the state and accelerates the growth of the targeted industry clusters.

Proposed Solution 2: The Strategic R&D Exchange (State Buyback)

If the legislature prefers a more controlled, non-market approach, it should implement an “R&D Exchange Program” modeled after Connecticut’s system. This would allow SMBs to “exchange” their credits directly with the state for an immediate refund at a discounted rate.

Mechanism of the Exchange

Under this proposal, an SMB in a targeted industry with no tax liability could elect to receive a state refund at 75% or 80% of the credit’s face value in exchange for an expedited payment.²⁶ This discount would provide two benefits:

• Fiscal Buffer: The 20% to 25% discount retained by the state would help offset the administrative costs of the IEDA and Department of Revenue.
• Self-Selection: Only firms with an urgent need for liquidity would choose the discounted exchange, while firms with a longer horizon or their own tax liability would choose to wait for the full refund.

The legislature could further refine this by offering a 90% exchange rate specifically for biotechnology firms, acknowledging the exceptionally long research timelines and capital intensity of that sector.²⁶

Safeguarding the Program: Fraud Prevention and Wastage Control

To ensure that the transferability of credits does not lead to fraud or “ghost” research, the government must implement robust oversight mechanisms.

CPA Verification and IEDA Oversight

The current requirement for a CPA-verified report of QREs is a strong foundational guardrail.⁴ This should be expanded to include a “Contemporaneous Documentation” standard, where businesses must maintain real-time logs of employee time and technical challenges to prove that research actually occurred.²⁴

Presence and Retainment Requirements

The state should adopt a “Recapture Clause” similar to New Jersey’s. Any business that transfers its credits must agree to remain headquartered or maintain its primary research operations in Iowa for at least five years.¹⁸ If the business relocates or ceases operations in Iowa before the five-year period ends, the state should have the authority to recapture the face value of the credit from the seller.¹⁸

Limitations on Buyers and Brokers

To prevent the emergence of an unregulated secondary market:

• One-Time Transfer: Credits should only be transferable once. This prevents the “churning” of credits and ensures they are ultimately used by a taxpayer with a genuine link to the Iowa economy.²⁰
• Broker Registration: Any third party facilitating a transfer must be registered with the IEDA and must disclose all fees and commissions.²²
• Affiliate Prohibition: Taxpayers should be prohibited from selling credits to “affiliated businesses” (e.g., subsidiaries or parent companies) to prevent artificial profit-shifting.³⁵

Economic Cost Analysis and Future Benefits

A common concern among fiscal conservatives is the “cost” of making credits more liquid. However, when framed as a “Capital Velocity” issue rather than a “New Expenditure,” the policy change is fiscally sound.

Initial Outlay vs. Budgetary Ceiling

The total fiscal impact of the R&D credit is already capped at $40 million annually under SF 657.⁴ Allowing transfers does not increase this $40 million ceiling. It merely changes who redeems the credit and when. In a non-transferable system, some credits might go unused because the earning SMB fails before it can receive a refund. While this might result in a short-term “savings” for the state, it represents a catastrophic failure of the policy’s goal to support innovation.

Future Revenue and Tax Base Growth

The “cost” of the credit is an investment that pays for itself over time through the “Innovation Multiplier.”

• High-Wage Jobs: R&D expenditures in Iowa are heavily weighted toward wages (74.7% of total costs).¹¹ These high-wage jobs generate immediate individual income tax revenue for the state.³¹
• University Return on Investment: For every $1 of public money invested in research and extension at Iowa State University, taxpayers receive $1.80 in return.³¹ This is driven by increased productivity, higher earnings for graduates, and the creation of startups that expand the state’s tax base.³¹
• Capital Leverage: In programs like the Illinois R&D credit, every $1 in tax credits has leveraged $8 in private capital investment.³⁸

Table 4: The Innovation Multiplier

Source: 31

By enabling transferability, Iowa increases the “Velocity of Innovation.” Startups can survive the pre-revenue phase and grow into the large, profitable taxpaying entities of the 2030s.

The Importance of Change and the Consequences of Inaction

The decision to permit credit transfers is more than a technical tax correction; it is a statement of Iowa’s commitment to its emerging technology sectors.

Negative Consequences of Inaction

If Iowa maintains the prohibition on credit transfers, the state risks several negative outcomes:

• Venture Capital Flight: Investors seeking to fund “Series A” rounds in Iowa startups will be deterred if the company’s tax assets are illiquid. They will favor startups in states like Pennsylvania or New Jersey, where tax assets can be leveraged for immediate cash flow.¹⁶
• Increased Startup Failure Rate: SMBs facing a “cash crunch” during late-stage development may fail simply because they could not access the value of their earned tax credits.¹⁸ This leads to the loss of both the research and the high-skilled jobs associated with it.
• Brain Drain: If Iowa-based startups cannot offer competitive salaries or stable operations due to liquidity issues, the graduates of Iowa’s world-class research universities will continue to migrate to coastal “super-hubs”.³¹
• Inefficiency of the $40M Cap: Without transferability, the $40 million pool may be dominated by large incumbents who have the tax liability to use them, while the SMBs—the primary intended beneficiaries of innovation policy—are left with certificates they cannot effectively use.

The Strategic Value of the Policy Change

Permitting transfers transforms the R&D credit from a “deferred benefit” into a “tradable asset.” It signals to the national innovation community that Iowa is “open for business” and understands the unique capital needs of the technology and bioscience sectors.⁹ This policy change aligns Iowa with its neighboring competitors and ensures that the state’s $40 million investment in research yields the maximum possible economic return.¹⁶

Summary and Recommendations for the Iowa Legislature

The transition to the new R&D Tax Credit Program under Senate File 657 provides a golden opportunity to modernize Iowa’s incentive structure. To maximize the benefit of this program for small and medium businesses in advanced manufacturing, bioscience, and technology, the following actions are recommended:

1. Amend Iowa Code §15.335 to allow for the one-time transfer of certified R&D tax credit certificates from certified SMBs to third-party Iowa taxpayers.
2. Establish a “Small Business Set-aside” within the $40 million annual cap, similar to Pennsylvania’s model, to ensure that early-stage firms are not crowded out by large incumbents.²²
3. Implement a 5-year Headquarters Requirement for any business selling its credits, ensuring that the state’s investment translates into long-term residency and job creation.¹⁸
4. Create a State-Managed “Exchange” Option as a fallback for businesses that cannot find private buyers, allowing them to redeem credits at a 75% to 90% discount for immediate cash.²⁶

By taking these steps, the Iowa Government can bridge the capital gap for its most innovative firms, turning “trapped tax assets” into the fuel for Iowa’s future economic growth.

Works Cited

1. Iowa Changes State Research Activities Credit | BDO Insights, acessado em março 17, 2026, https://www.bdo.com/insights/tax/iowa-enacts-substantial-changes-to-states-research-credit
2. Iowa R&D Tax Credits, acessado em março 17, 2026, https://www.striketax.com/state-rd-credits/iowa-r-d-tax-credits
3. Iowa governor signs legislation that changes corporate and individual income tax rates and overhauls the research activities credit, acessado em março 17, 2026, https://taxnews.ey.com/news/2022-0351-iowa-governor-signs-legislation-that-changes-corporate-and-individual-income-tax-rates-and-overhauls-the-research-activities-credit
4. Iowa reshapes R&D tax credit program – RSM US, acessado em março 17, 2026, https://rsmus.com/insights/tax-alerts/2025/iowa-reshapes-r-d-tax-credit-program.html
5. How Iowa’s 2026 Incentive Changes Could Impact Business Decisions – DMA, acessado em março 17, 2026, https://dmainc.com/news-and-insights/iowa-incentive-changes-2026/
6. Fiscal Topics – Iowa.gov, acessado em março 17, 2026, https://www.legis.iowa.gov/docs/publications/FTNO/1544118.pdf
7. Iowa Research and Development Tax Credit Program, acessado em março 17, 2026, https://opportunityiowa.gov/business/financial-assistance/iowa-research-and-development-tax-credit-program
8. Iowa Overhauls Business Tax Incentives: What Companies Need to Know, acessado em março 17, 2026, https://www.brownwinick.com/insights/iowa-overhauls-business-tax-incentives-what-companies-need-to-know
9. The R&D Tax Credit Aspects of Iowa, acessado em março 17, 2026, https://www.rdtaxsavers.com/articles/Iowa
10. Iowa Financial Assistance – 7 Rivers Alliance, acessado em março 17, 2026, https://www.7riversalliance.org/iowa/ia-financial-assistance/
11. Research Activities Tax Credit Annual Report – For the Period …, acessado em março 17, 2026, https://revenue.iowa.gov/media/4457/download?inline
12. Recent Changes 2022 Iowa Acts House File 2317 enacted several changes to the Iowa Research Activities Credit (RAC) that apply to – FTP Directory Listing, acessado em março 17, 2026, https://ftp.zillionforms.com/2025/I2531200898.PDF?cfu=TAA&cpid=WKUS-TAA-AC
13. HIGH QUALITY JOBS PROGRAM – Iowa Economic Development Authority, acessado em março 17, 2026, https://opportunityiowa.gov/media/3230/download?inline
14. Iowa Governor Signs Tax Reform into Law, acessado em março 17, 2026, https://www.calt.iastate.edu/post/iowa-governor-signs-tax-reform-law
15. What Changes are Coming to the Iowa Tax Landscape and When? – BrownWinick Law Firm, acessado em março 17, 2026, https://www.brownwinick.com/insights/what-changes-are-coming-to-the-iowa-tax-landscape-when-they-are-effective
16. 6 States Just Changed Their R&D Tax Credit Rules: What Your Business Needs to Know, acessado em março 17, 2026, https://www.boast.ai/en-ca/blog/rd/6-states-just-changed-their-rd-tax-credit-rules-what-your-business-needs-to-know
17. Technology Business Tax Certificate Transfer (NOL) Program – NJEDA, acessado em março 17, 2026, https://www.njeda.gov/nol/
18. New Jersey Technology Business Tax Certificate Transfer Program, acessado em março 17, 2026, https://www.nj.gov/treasury/pdf/NJ%20Technology%20Business%20Tax%20Certificate%20Transfer%20Program.pdf
19. Measuring the return from pharmaceutical innovation 2024 | Deloitte US, acessado em março 17, 2026, https://www.deloitte.com/us/en/Industries/life-sciences-health-care/articles/measuring-return-from-pharmaceutical-innovation.html
20. R-D Tax Credit Transfer_guide… – DCED, acessado em março 17, 2026, https://dced.pa.gov/download/r-d-tax-credit-transfer-guidelines-04-pdf/?ind=0&filename=R-D%20Tax%20Credit%20Transfer_guidelines-04.pdf&wpdmdl=58127&refresh=67e7c9e7a2ab01743243751
21. Technology Business Tax Certificate Transfer (NOL) Program – Custom Portal, acessado em março 17, 2026, https://programs.njeda.com/en-US/noltt_list/
22. Pennsylvania R&D Tax Credits, acessado em março 17, 2026, https://www.striketax.com/state-rd-credits/pennsylvania-r-d-tax-credits
23. FREQUENTLY ASKED QUESTIONS – NJEDA, acessado em março 17, 2026, https://www.njeda.gov/wp-content/uploads/2024/10/NOL-FAQ.pdf
24. Pennsylvania R&D Tax Credits 101: Your Complete Guide to State-Level Innovation Funding – Boast, acessado em março 17, 2026, https://www.boast.ai/en-ca/blog/rd/pennsylvania-rd-tax-credits-101-your-complete-guide-to-state-level-innovation-funding
25. Connecticut R&D Tax Credit Guide – Source Advisors, acessado em março 17, 2026, https://sourceadvisors.com/map/rd-tax-credit/connecticut/
26. Connecticut R&D Tax Credits – Strike Tax Advisory, acessado em março 17, 2026, https://www.striketax.com/state-rd-credits/connecticut-r-d-tax-credits
27. CT small businesses hope their latest R&D tax credit push pays off – CT Mirror, acessado em março 17, 2026, https://ctmirror.org/2026/03/05/research-development-tax-credit-small-business-biotech-ct/
28. Nebraska R&D Tax Credits – Strike Tax Advisory, acessado em março 17, 2026, https://www.striketax.com/state-rd-credits/nebraska-r-d-tax-credits
29. Innovation Fund Tax Credit – Fiscal Topics – Iowa.gov, acessado em março 17, 2026, https://www.legis.iowa.gov/docs/publications/FTNO/1544181.pdf
30. 15E.52 Innovation fund investment tax credits. 1. For purposes of this section, unless the context otherwise requires, acessado em março 17, 2026, https://www.legis.iowa.gov/docs/code/15e.52.pdf
31. Iowa State’s impact on state economy grows to $6 billion – News Service, acessado em março 17, 2026, https://www.news.iastate.edu/news/iowa-states-impact-state-economy-grows-6-billion
32. The U.S. Bioscience Industry: – Biotechnology Innovation Organization | BIO, acessado em março 17, 2026, https://www.bio.org/sites/default/files/2025-12/BIO%20CSBA_2025%20Best%20Practices%20Report.pdf
33. R&D Tax Credit & KIZ Services – FAQ – Exton, PA Accounting Firm, acessado em março 17, 2026, https://www.toronicpa.com/rd-tax-credit-faq.php
34. Iowa City R&D Tax Credit Explained for Businesses – Swanson Reed, acessado em março 17, 2026, https://www.swansonreed.com/research-tax-credit/iowa/case-studies/iowa-city/
35. NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY TECHNOLOGY BUSINESS TAX CERTIFICATE TRANSFER (NOL) PROGRAM CEO CERTIFICATION Applica – NJEDA, acessado em março 17, 2026, https://www.njeda.gov/wp-content/uploads/2021/05/NOL_Exhibit_J_2020_CEO_Certification-1.pdf
36. Transfer Pricing in Transition Mitigating state tax risk while preserving value, acessado em março 17, 2026, https://www.taxexecutive.org/transfer-pricing-in-transition/
37. Tax Advantages & Incentives | Des Moines, Iowa, acessado em março 17, 2026, https://www.dsmpartnership.com/economic-development/doing-business-in-des-moines/tax-advantages-and-incentives
38. The Core Drivers of Economic Growth and Role of Incentives – Illinois General Assembly, acessado em março 17, 2026, https://www.ilga.gov/documents/house/committees/98Documents/RevenueAndFinance/Hearing20140117/Department%20of%20Commerce%20and%20Economic%20Opportunity%20Testimony%201%2011714.pdf
39. 2025 State of Startups in the Southeast – BIP Ventures, acessado em março 17, 2026, https://www.bipventures.vc/state-of-startups/2025
40. New Report Highlights State and Regional Strategies Powering U.S. Biotech | VirginiaBio, acessado em março 17, 2026, https://www.vabio.org/new-report-highlights-state-and-regional-strategies-powering-u-s-biotech/
41. Business Incentives for Growth Program – Economic Development & Finance Authority, acessado em março 17, 2026, https://opportunityiowa.gov/media/7484/download?inline
42. Nebraska’s Tax Code Lets It Compete for Data Center Investment, acessado em março 17, 2026, https://platteinstitute.org/nebraskas-tax-code-lets-it-compete-for-data-center-investment/