R&D Tax Credits in North Carolina

The North Carolina research and development tax credit adopts the federal definition of qualifying research expenses and they are determined in the same manner as for a federal claim. The R&D activities and expenses must follow federal guidelines for being technology-oriented.

In order to qualify for the R&D credit, North Carolina requires that a taxpayer meet certain criteria, including:

  • meeting the wage standard;
  • providing health insurance for employees;
  • maintaining a good environmental record; and
  • having a good Occupational Safety and Health Act record.

Any taxpayer that meets these criteria is eligible for the tax credit.

North Carolina Credit Rates

North Carolina offers five different types of credit rates depending on business type:

  • Small business rate: 3.25%
  • Low-tier research rate: 3.25%
  • University research rate: 20%
  • Eco-industrial park rate: 30%
  • Other expenses are subject to a  1.25% – 3.25% credit rate depending on the level of expenses.

Credit Limitations

  • Only one credit rate is allowed for the same expense.
  • If more than one category  applies to the same expenses, the higher credit is used.
  • Unused credit can be carried forward for 15 years.
  • The credit allowed cannot surpass 50% of the amount of tax against which it is claimed, reduced by the sum of all other tax credits allowed against that tax. This limitation applies to the cumulative amount of credit, including carry forwards.

Case Study

A software company in North Carolina develops applications for the health tech industry.  The company began claiming both the federal and state R&D credit in 2015.

Summary of credits:

FEDERALNORTH CAROLINA
YearTotal QREsCreditTotal QREsCredit
2016$518,000$31,080$518,000$16,835
2015$327,000$19,620$327,000$10,628
Total$845,000$50,700$845,000$27,463

North Carolina R&D Tax Credit Forms

The form used to apply for the North Carolina research and development tax credit is Form NC-478I.