The Quantum Leap: Maximizing the 13% Illinois R&D Tax Credit for Qualifying Quantum Information Science Expenditures

Qualifying Quantum Information Science Expenditures (QQISE) are R&D costs incurred in Illinois, defined by federal standards (IRC § 41), that are specifically related to the advancement of quantum technologies.1 These qualifying expenses are eligible for an enhanced Illinois Research and Development (R&D) tax credit rate of 13% on incremental spending, significantly higher than the standard 6.5% rate.2

The State of Illinois has proactively leveraged its tax policy to secure a leadership position in the burgeoning quantum information science (QIS) sector. By embedding an enhanced 13% credit rate for QQISE within the Illinois Income Tax Act (IITA) Section 201(k), the state provides a powerful incentive that substantially outweighs standard R&D benefits. This policy is designed not only to attract established technology firms but also to support nascent companies through a unique mechanism that converts the credit into immediate operating capital. Understanding the strict legal definitions, calculation mechanics, and the limited administrative guidance from the Illinois Department of Revenue (IDOR) is essential for maximizing the value of this strategic incentive.

II. Foundational Law and Statutory Context

The enhanced credit for QQISE is codified within the Illinois Income Tax Act (35 ILCS 5/201(k)). This provision serves as a key component of the state’s broader strategy to anchor high-technology research and manufacturing within Illinois.

The Enhanced Incentive Rate and Duration

The legislation specifies that for QQISE, the research and development credit is equal to $13\%$ of the qualifying expenditures for increasing research activities in Illinois, effectively doubling the standard incremental credit rate, which is $6.5\%$.2

Critically, the statute governing the overall Illinois R&D tax credit, including the QQISE provision, was extended. The credit now applies for taxable years ending prior to January 1, 2037, a substantial extension from the prior January 1, 2027 sunset date.2 This long-term legislative commitment is necessary to encourage major capital investment in the QIS field. Research and development in quantum technologies are often long-cycle, capital-intensive endeavors involving the construction of sophisticated facilities.5 Extending the credit window over more than a decade substantially reduces the policy uncertainty for corporations considering multi-million or billion-dollar commitments, thereby increasing the attractiveness of Illinois as a location for establishing global quantum hubs.

The Illinois-Sourced Nexus Requirement

To qualify for the Illinois R&D credit, including the enhanced QQISE rate, the research activities and associated expenditures must be meticulously sourced to Illinois.6 Eligibility mirrors the federal standards under IRC Section 41 but mandates that the activities and expenses occur within state lines. Qualifying expenditures (QREs) include salaries allocated based on the time employees spend performing, supervising, or supporting qualified research in Illinois, as well as supplies and contract research expenses incurred locally.6

Furthermore, for affiliated entities, the calculation must follow Illinois combined reporting rules. Unitary business groups filing an Illinois combined return are required to compute the credit on a consolidated basis, completing one Schedule 1299-D for the entire group and allocating the credit among members based on specific instructions.6

III. Defining Qualifying Quantum Information Science Expenditures (QQISE)

The ability to claim the $13\%$ rate hinges on a rigorous demonstration that the expenditures meet the strict dual definitions of QQISE.

Statutory Definition and Federal Alignment

QQISE must satisfy two simultaneous requirements 1:

1. IRC Section 41 Compliance: The expenditures must qualify as R&D expenditures as defined for the federal credit for increasing research activities under IRC Section 41.1 This involves the application of the federal four-part test, demonstrating technical uncertainty in the development or improvement of a product, process, or software.
2. Quantum Specificity: Beyond federal qualification, the expenditures must be “specifically related to advancing quantum information science research and development in the State of Illinois”.1

This “specifically related” language is the critical differentiator. It implies that expenditures must be segregated based on their direct relevance to quantum mechanics and related applications. Expenses merely related to general high-performance computing or advanced software development, unless they directly involve the manipulation of quantum phenomena, may only qualify for the standard $6.5\%$ R&D credit.

Scope of Qualified Quantum Activities

Guidance from related Illinois legislation, such as the statutes authorizing Quantum Computing Campuses (QCC), provides context for activities recognized as QIS.5 Quantum computing activities are defined as the research, development, and use of computing methods that generate and manipulate quantum bits (qubits) in a controlled quantum state.5

Examples of eligible technological focus areas specifically recognized by the state include 5:

• The use of photons, semiconductors, superconductors, or trapped ions for simulating or generating quantum bits.
• Research and development related to quantum computer operators, specialized research facilities, and centers for the manufacturing and assembly of quantum computers and component parts.
• The deployment and use of supporting infrastructure, such as highly specialized cryogenic or refrigeration facilities, that are fundamental to maintaining controlled quantum states.5

Due to the enhanced rate, the documentation required to support the “quantum specificity” criterion faces heightened scrutiny. Taxpayers must ensure that internal project documentation, including technical specifications, lab reports, and time-tracking records, precisely isolates QQISE from general qualified research expenditures (QREs). Failure to explicitly link expenses to the scientific pursuit of quantum phenomena could result in an auditor classifying the expenditure as standard R&D, thereby limiting the credit rate to $6.5\%$. This necessitates proactive adoption of project coding systems that isolate QQISE from standard QREs from the moment of inception.

Categories of Qualified Research Expenditures

The costs included in QQISE align with the federal definition of QREs:

IV. Calculation Mechanics of the 13% Quantum R&D Credit

The calculation of the Illinois R&D credit, regardless of the rate, relies on an incremental approach, rewarding the increase in research spending above a historical baseline.

The Incremental Calculation Model

The 13% credit applies only to the amount of QQISE that exceeds the calculated base amount. The formula applied for the quantum portion of the credit is:

$$\text{QQISE Credit} = 13\% \times (\text{Current Year QQISE} – \text{Base Amount})$$

For taxpayers engaged in both QQISE and standard R&D, the calculation must be performed to separate the $13\%$ incremental portion from the $6.5\%$ incremental portion, ensuring that the total QREs claimed align with the verifiable expenses for the year. The calculation of incremental increase based on a base amount ensures that the credit primarily rewards new investment in QIS activities.

Determining the Base Amount: The Three-Year Average Rule

The base amount is crucial as it determines the level of expenditure that must be surpassed before the credit is generated.

The base amount is calculated as the average of the total Illinois QREs incurred during the three taxable years immediately preceding the credit year.6 If the taxpayer did not incur any QREs in Illinois during those three years, the base amount is considered zero.6

This zero-base rule offers a substantial advantage to new entrants and startups, allowing the 13% rate to be applied to the entirety of the current year’s QQISE, subject only to general IRC limitations.6

For established companies that previously conducted only standard R&D and now shift resources to quantum research, the base amount reflects their prior general R&D spending. The new quantum investment is therefore highly likely to be classified as “increasing research activities,” generating a credit that is calculated at the higher $13\%$ rate for the segregated quantum expenditures. This structure directly incentivizes the strategic reorientation of established R&D operations toward quantum technology.

Credit Application and Carryforward Provisions

The resulting R&D credit is generally nonrefundable, meaning it can only offset the taxpayer’s Illinois income tax liability (IITA Sections 201(a) and (b)).6 If the credit generated exceeds the tax liability for the year, the excess may be carried forward and applied against the tax liability of the five taxable years following the excess credit year.6 This five-year carryforward provides value to large companies that may generate significant credits during years of tax losses, preserving the incentive value until future periods of profitability.

V. Strategic Opportunity for Startups: The Withholding Tax Election

Recognizing the cash-flow challenges facing nascent, high-burn R&D companies that may not achieve tax profitability within five years, Illinois introduced a mechanism allowing certain startups to immediately monetize the credit.

Defining a “Qualified Startup Taxpayer” (QST)

Only a taxpayer meeting the strict definition of a “Qualified Startup Taxpayer” (QST) is eligible for the immediate cash-flow benefit.2 The statute defines a QST as a business entity (including corporations, partnerships, or LLCs 2) that meets three criteria 3:

1. Age Limit: The entity must have been incorporated or organized no more than five years before the first day of the taxable year for which the credit is sought.2
2. Tax History: The entity must never have had any Illinois income tax liability.2
3. General Compliance: The entity must otherwise meet the requirements of IITA Section 201(k).3

A provision within the statute specifically excludes any Illinois income tax liability of a related member from being attributed to the QST.2 This allows QSTs that are spun out of larger, tax-liable organizations (such as major universities or corporate parent companies) to retain eligibility.

Mechanics of the Withholding Tax Election

For any taxable year ending after December 31, 2023, a QST may elect to claim the credit against its obligation to pay over withholding taxes under IITA Section 704A, in lieu of the standard credit against corporate income taxes.2

This mechanism is transformative for QIS startups. The quantum sector necessitates the hiring of high-wage, specialized labor, resulting in significant payroll withholding obligations.11 By allowing the substantial 13% QQISE credit to immediately offset this payroll liability, the state is effectively providing a real-time, cash-equivalent subsidy for high-value job creation and research.

The Zero-Liability Prerequisite: A Critical Compliance Check

The QST’s election of the withholding tax offset is conditional on a critical restriction: the taxpayer may not make the election for a taxable year if the entity has an Illinois income tax liability for that same year against which the credit could otherwise be claimed.2

This means that if the QST generates any taxable net income in the election year, that income tax liability must be offset first. If a QST becomes profitable and incurs even a small IITA liability, the statutory restriction is triggered, and the company is required to use the credit against that liability, rendering any substantial excess credit nonrefundable and forcing it into the five-year carryforward period.2 Therefore, companies utilizing this election must maintain rigorous financial forecasting and planning throughout the fiscal year to ensure they avoid taxable net income and maintain the zero-liability prerequisite.

VI. Regulatory Compliance and Claim Procedures: IDOR and DCEO Guidance

The claiming process relies on existing Illinois Department of Revenue (IDOR) tax forms, although specific administrative code detailing the documentation requirements for the quantum distinction remains tied to general R&D rules.

Filing Requirements and Documentation

Taxpayers must follow the guidance provided by the IDOR, claiming the R&D credit via the Schedule 1299 series. Corporate taxpayers generally calculate and claim the R&D credit, including the QQISE, using Schedule 1299-D (Income Tax Credits for Corporations).7 The final credit amount is then entered on Schedule 1299-I (Illinois Credits).7 The IDOR requires that detailed worksheets and calculations supporting the determination of incremental QQISE and the resulting 13% credit be maintained and available for submission upon request.7

While IDOR guidance generally points to Illinois Administrative Code, Title 86, Section 100.9530 for income tax guidance 13, explicit, standalone administrative rules detailing QQISE certification or documentation standards beyond the statutory language have not been promulgated. This necessitates strict adherence to the explicit language defining QQISE found in the IITA amendments (e.g., HB1578, SB1832).2

Coordination with the Department of Commerce and Economic Opportunity (DCEO)

The administration of quantum-related incentives requires coordination, even if indirect, between the IDOR and the DCEO. The DCEO is responsible for implementing other major quantum-related incentives, such as the Quantum Computing Campuses (QCC) Tax Credit (Credit Code 5480), which provides a $20\%$ credit for wages related to the construction of eligible quantum facilities.14

The definitions provided by the DCEO regarding the acceptable scope of quantum computing campuses and eligible facilities (e.g., quantum computer operators, data centers, cryogenic facilities) 5 provide a crucial technical foundation for interpreting what constitutes research “specifically related to advancing quantum information science” for the QQISE R&D credit. Therefore, compliance for the $13\%$ QQISE rate is indirectly reliant upon the state’s technical definitions managed by DCEO, reinforcing the need for technical reports that align with DCEO’s descriptions of QIS activity.

VII. Case Study and Calculation Example: A Quantum Enterprise

This scenario demonstrates the calculation and application of the $13\%$ QQISE credit for an established technology firm investing in a new QIS division in Illinois.

Scenario: Aurora Quantum Corp.

Aurora Quantum Corp. (AQC) is an established technology firm that launched a new, dedicated QIS research division in Illinois in 2024. AQC is not a Qualified Startup Taxpayer.

AQC Financial Data:

• Tax Year: 2024
• Projected 2024 Illinois Income Tax Liability: $800,000
• Illinois-Sourced QREs (General R&D and QIS) by Year:

• 2021: $500,000
• 2022: $900,000
• 2023: $1,000,000

• 2024 Total Illinois QREs: $4,000,000
• 2024 Classified QQISE (verified quantum expenditures): $3,000,000

Step 1: Calculate the Base Amount

The base amount is the average of the total Illinois QREs from the three preceding years.6

$$\text{Base Amount} = \frac{\$500,000 + \$900,000 + \$1,000,000}{3}$$

$$\text{Base Amount} = \$800,000$$

Step 2: Separate and Calculate Incremental Expenditures

The current year QREs ($4,000,000) are greater than the base amount ($800,000). The total incremental QREs are $3,200,000. This incremental amount is split between standard R&D and QQISE based on current-year activity. Since $75\%$ of the current year’s QREs are QQISE $(\$3,000,000 / \$4,000,000)$, the incremental amount must be allocated proportionally to the quantum activity to determine the 13% credit base.

Table 1: Illinois R&D Credit Calculation for Aurora Quantum Corp. (2024)

Note: For simplicity, the incremental calculation applies the base amount first against the quantum portion, maximizing the 13% rate. Total Incremental QREs $ = $3,200,000$. If the taxpayer only increased QREs by $2,400,000, the allocation of the base amount must be proportionally applied, but this example assumes a calculation structure that prioritizes the 13% spend.

Step 3: Application of the Credit

AQC’s total R&D credit generated for 2024 is $299,000. Since AQC is projected to have an IITA liability of $800,000, the credit is fully utilized to offset the income tax liability.

• IITA Liability Offset: $\$800,000 – \$299,000 = \$501,000$
• Result: AQC’s final income tax due is reduced to $501,000. Since the credit is nonrefundable 6, and the liability exceeds the credit, there is no carryforward.

VIII. Conclusion

The Illinois incentive for Qualifying Quantum Information Science Expenditures represents a critical policy tool designed to solidify the state’s status as a leader in advanced technological research. By doubling the R&D credit rate for QIS activities and providing a direct, payroll tax-offset mechanism for eligible startups, Illinois addresses both the scale and the liquidity needs of the quantum ecosystem.

Successfully capitalizing on the 13% QQISE credit requires taxpayers to demonstrate a nuanced understanding of the intersection between federal R&D standards and strict, quantum-specific state statutory requirements.1 The longevity of the credit, extended until 2037 2, provides essential stability for long-term strategic investment planning. However, this high-value incentive carries a corresponding compliance burden: all expenditures must be meticulously segregated and documented to explicitly prove their “specifically related” nature to quantum advancement, a point likely to face intense scrutiny during IDOR audits.

For new QIS ventures, the Qualified Startup Taxpayer (QST) withholding election is transformative, converting a nonrefundable, potentially lost credit into immediate cash flow for operations.3 Companies must, however, vigilantly manage their financial positioning to ensure they maintain the zero-IITA-liability prerequisite, as even minimal profitability would trigger a reversion to the standard nonrefundable carryforward and undermine the economic purpose of the election.2 The effective utilization of the QQISE credit is therefore a matter of sophisticated tax and legislative planning, not merely accounting compliance.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/