Comprehensive Analysis of Research and Experimental Activities within the Nebraska Research and Development Tax Credit Framework

Research and experimental activities comprise investigative efforts conducted in a laboratory or experimental sense to discover information that eliminates technical uncertainty regarding the development or improvement of a business component. Under the Nebraska Advantage Research and Development Act, these activities allow businesses to earn a refundable tax credit calculated as a specific percentage of their federal research credit. 1

This conceptual framework is deeply rooted in the interplay between federal tax law and state-specific economic incentives. While the federal government provides a broad incentive for innovation through Internal Revenue Code (IRC) Sections 41 and 174, the State of Nebraska has constructed a localized overlay designed to stimulate high-tech investment, particularly through collaborations with its academic institutions. The Nebraska Department of Revenue (DOR) provides exhaustive guidance on how these federal definitions are applied within the state’s borders, emphasizing that the “meaning” of these activities is not merely a scientific one, but a legal and administrative designation that carries significant fiscal implications. To navigate this landscape effectively, businesses must understand the evolution of the Nebraska Advantage Research and Development Act, the specific mechanics of on-campus versus off-campus research, and the rigorous compliance standards—such as the mandatory use of the E-Verify system—that act as gatekeepers to these refundable credits. 2

The Statutory Architecture of Nebraska Research Incentives

The Nebraska research and development (R&D) tax credit is governed primarily by the Nebraska Advantage Research and Development Act, which was established in 2005 as part of a comprehensive legislative package (LB 312) to modernize the state’s business incentives. 4 Unlike other tiers of the Nebraska Advantage Act, which often require complex applications and the meeting of specific investment or employment thresholds, the R&D credit is designed for accessibility, allowing any business firm incurring qualified expenditures within the state to claim the benefit directly on its tax return. 2

The state’s approach is fundamentally tied to the federal definition of research and experimental activities. According to Neb. Rev. Stat. § 77-5803, these activities are defined as those described in Section 174 of the Internal Revenue Code of 1986, as amended. 1 This statutory link ensures that Nebraska’s tax policy mirrors federal standards for what constitutes “innovation,” thereby reducing the administrative burden on companies that operate across state lines and already track their expenditures for federal purposes. However, the Nebraska credit is not a simple deduction but a refundable credit equal to 15% (or 35% in specific cases) of the federal credit allowed under IRC Section 41. 2

The Transition from Advantage to ImagiNE Nebraska

In recent years, Nebraska has transitioned its primary incentive programs from the Nebraska Advantage Act to the ImagiNE Nebraska Act. 9 While the ImagiNE Nebraska Act introduces new tiers for wage and investment credits, the Nebraska Advantage Research and Development Act remains an active and distinct program, recently extended by the legislature through 2033. 3 This duality allows businesses to potentially benefit from multiple incentive layers. For example, a firm might qualify for wage credits under an ImagiNE Nebraska agreement while simultaneously claiming the R&D credit for its scientific activities. 10 The 2025 Incentives Annual Report indicates that the state continues to approve significant amounts of R&D credits, with nearly $10 million in income tax credits approved in the most recent reporting period. 13

Defining Research and Experimental Activities under IRC Section 174

Because Nebraska law explicitly adopts the definitions found in IRC Section 174, a deep understanding of this federal statute is essential. Research and experimental expenditures represent costs incurred in connection with a taxpayer’s trade or business which are research and development costs in the experimental or laboratory sense. 8 The defining characteristic of these activities is the presence of “technical uncertainty.” This uncertainty exists if the information available to the taxpayer does not establish either the capability or method for developing or improving a product, or the appropriate design of that product. 6

The scope of eligible expenditures is broad and includes not only the salaries of scientists and engineers but also the cost of supplies, utilities, and a portion of contract research performed by third parties. 14 However, the Tax Cuts and Jobs Act of 2017 (TCJA) significantly altered the treatment of these costs at the federal level, shifting from immediate expensing to mandatory five-year amortization for domestic research. 15 Despite this change in accounting treatment, the Nebraska credit remains calculated based on the underlying qualified research expenses (QREs) as defined for the federal credit. 1

The Federal Four-Part Test: A State Benchmark

To further refine what qualifies for the credit, Nebraska follows the federal “four-part test” established under IRC Section 41. 3 This test serves as a rigorous qualitative filter, ensuring that tax credits are directed toward genuine technological advancement.

The four components of the test require that the research must be:

1. Technological in Nature: The activity must fundamentally rely on principles of physical or biological sciences, engineering, or computer science. 8
2. For a Permitted Purpose: The objective must be to create a new or improved business component’s function, performance, reliability, or quality. 6
3. To Eliminate Uncertainty: The research must be intended to discover information to eliminate uncertainty regarding the capability, method, or design of the business component. 6
4. A Process of Experimentation: Substantially all (typically 80% or more) of the activities must involve a process of experimentation, such as evaluating alternatives, systematic trial and error, or modeling. 14

For a Nebraska manufacturer developing a new agricultural sensor, the design of the circuitry and the development of the embedded software would likely pass all four tests. 3 Conversely, the marketing research to determine the sensor’s price point or the graphic design of the product’s logo would fail, as these activities are not technological in nature and do not involve the elimination of scientific uncertainty. 6

Enhanced Research Credits: The University Collaboration Bonus

Nebraska offers a unique “enhanced” credit that serves as one of its most potent economic development tools. Under Neb. Rev. Stat. § 77-5803(1)(b), the standard 15% credit is more than doubled to 35% if the research and experimental activities are conducted on the campus of a Nebraska college or university. 1 This provision is designed to create a pipeline between the state’s academic talent and its private sector, encouraging firms to leverage university laboratories and expertise.

Defining Campus Locations and Eligibility

The Nebraska Department of Revenue, through Revenue Ruling 29-10-2, provides specific interpretations of what qualifies for the 35% rate. 1 A “college or university” is defined as any institution of higher learning in the state that offers courses leading to a bachelor’s, vocational, associate, technical, or professional degree. 1 This includes the University of Nebraska system, state colleges, and community colleges. 1

The critical factor for the 35% credit is the physical location of the research, not the legal domicile of the parties involved. 1 For instance, if an out-of-state corporation contracts with the University of Nebraska-Lincoln to perform research at a facility owned by the university in Nebraska, the expenditures for that research qualify for the 35% rate. 1 Conversely, if a Nebraska company performs research in its own private lab, it is restricted to the 15% rate, even if its scientists are university alumni. 1

A nuance identified in Revenue Ruling 29-10-2 is that a single business firm can claim both the 15% and 35% credits in the same tax year if it conducts research in both off-campus and on-campus settings. 1 However, the firm must be able to clearly divide and apportion its expenses between these two environments. 1 Furthermore, while the 15% credit can be claimed for up to 21 years (the year first claimed plus 20 years), the 35% enhanced credit is limited to a five-year period (the year first claimed plus four years), provided the business continues to earn the federal credit and continues its campus-based research. 1

Administrative Compliance and the E-Verify Mandate

Securing the Nebraska R&D tax credit requires more than just scientific achievement; it demands rigorous administrative compliance, particularly concerning the legal status of the workforce. Since October 1, 2009, Nebraska has mandated that any business firm claiming the credit must use the federal E-Verify system to verify the work eligibility of its employees. 2

The 90-Day Verification Window

Recent legislative changes under LB 727 (2023) have further refined these requirements. For tax years beginning on or after January 1, 2023, the verification must be performed for any employee hired during or after the first tax year for which the credit is claimed, provided their compensation is included in the QREs. 11 The law stipulates that this verification must occur within 90 days of the employee’s date of hire. 11

The consequences of non-compliance are severe. If a firm fails to verify an employee within the 90-day window, or if an employee is determined to be ineligible to work in the United States, that individual’s compensation must be entirely deducted from the QREs used to calculate the credit. 11 For many technology and engineering firms, where labor costs represent the vast majority of R&D spending, an E-Verify oversight can result in the loss of nearly the entire tax credit. 3 This “compliance gate” ensures that state incentives are only supporting the employment of legally authorized workers, but it also places a significant documentation burden on human resources departments. 3

Unitary Groups and Pass-Through Treatment

The Nebraska Department of Revenue also provides specific guidance for complex business structures. In the case of unitary groups, the research credit is calculated and apportioned at the entity level. 3 For pass-through entities such as S-corporations, partnerships, and LLCs, the credit “flows through” to the individual owners based on their share of income or ownership. 3

However, a critical distinction exists regarding the refundability of these credits:

• Entity Level: At the partnership or corporate level, the credit can be used as a refundable income tax credit or to obtain a direct refund of sales and use taxes paid. 2
• Owner Level: When the credit is distributed to individual owners via Schedule K-1N, it becomes non-refundable at the owner level. In this scenario, the individual can only use the credit to offset their own Nebraska income tax liability, though they may carry forward unused portions for up to 20 years. 3

This structure makes the credit particularly attractive for corporate-level entities and startups that may be in a loss position but still pay sales and use taxes on equipment and supplies. 3

Methodologies for Calculating the Credit

The Nebraska Department of Revenue provides two primary methods for businesses to determine the Nebraska-sourced portion of their federal research credit. These are detailed on Form 3800N Worksheet RD. 18

Method I: Apportionment Using Property and Payroll Factors

This method is rooted in traditional corporate tax apportionment. It calculates the credit based on the average of the business firm’s property and payroll factors for each location. 1

• Nebraska Property Factor: The ratio of the average value of research-related property owned or rented and used in Nebraska to the total of such property everywhere. 18
• Nebraska Payroll Factor: The ratio of total compensation paid in Nebraska for research activities to the total compensation paid everywhere for such activities. 18

For a company that operates exclusively in Nebraska, these factors would both be 100%, allowing them to claim the full 15% (or 35%) of their federal credit. 1 For multi-state entities, Method I provides a stable, asset-based way to justify the Nebraska credit claim. 3

Method II: Apportionment Using Actual Expenditures

Method II is often more direct and is frequently preferred by smaller firms or those with fewer fixed assets. 1 It calculates the credit by dividing the actual amount of research expenses incurred at a specific Nebraska location by the total research expenses incurred by the firm. 1

$$Credit = Federal Credit \times \frac{\text{Actual Nebraska QREs}}{\text{Total Federal QREs}} \times \text{Nebraska Rate}$$

A key administrative rule is that the taxpayer must use the same method (Method I or Method II) to calculate both the regular 15% credit and the enhanced 35% credit. 1 This consistency prevents businesses from alternating between methods to artificially inflate their credit amount. 3

Practical Example: Integrated R&D Credit Application

To illustrate the interplay of these rules, consider the case of “Husker Innovation Labs,” a fictional Nebraska-based biotech company.

In the current tax year, Husker Innovation Labs reported the following:

1. Total Federal Research Credit Allowed (Form 6765): $200,000.
2. Total Qualified Research Expenses (QREs): $2,000,000.
3. Nebraska Off-Campus Research Expenses: $1,000,000 (spent at their private lab in Omaha).
4. Nebraska On-Campus Research Expenses: $500,000 (spent at a facility at the University of Nebraska Medical Center).
5. Out-of-State Research Expenses: $500,000.

Step 1: Apportionment of Federal Credit

Using Method II (Actual Expenditures), the company calculates the portion of the federal credit attributable to each Nebraska activity:

• Off-Campus Portion: $(\frac{1,000,000}{2,000,000}) \times \$200,000 = \$100,000$.
• On-Campus Portion: $(\frac{500,000}{2,000,000}) \times \$200,000 = \$50,000$.

Step 2: Applying the State Rates

• Standard Nebraska Credit (15%): $100,000 \times 0.15 = \$15,000$.
• Enhanced Nebraska Credit (35%): $50,000 \times 0.35 = \$17,500$.

Step 3: Total Credit and Compliance

Husker Innovation Labs’ total Nebraska R&D credit is $32,500. 1 To claim this, the company must:

1. Verify through E-Verify that all employees hired in Omaha during the year were legally eligible to work. 3
2. Maintain records showing the UNMC facility’s campus address for the enhanced 35% credit. 1
3. File Form 3800N and Worksheet RD with their Nebraska income tax return. 2

If the company has a low income tax liability, they can elect to receive the $32,500 as a direct refund of the sales taxes they paid on lab equipment throughout the year, providing vital cash flow for their ongoing experiments. 3

Statistics and Economic Performance of the R&D Act

A 2022 performance audit by the Nebraska Legislative Audit Office provides a data-driven look at the program’s impact since its inception. 4 These statistics reveal a program that, while relatively small in terms of the number of participants, is highly utilized by the state’s burgeoning high-tech sector.

The audit highlights that the R&D credit has been particularly effective at supporting “sustained” companies. Approximately 89% of participants remained in Nebraska for five or more years after their first year of earning credits. 4 However, the report also noted that the program’s annual cost often exceeded the legislature’s initial $5 million estimate, reaching over $10 million in 2020. 4 This higher-than-expected usage demonstrates the strong appetite for R&D incentives in the Nebraska business community, particularly as sectors like agriculture and biotech become increasingly technology-driven. 3

Regional Competitiveness: Nebraska vs. The Midwest

Nebraska’s effective R&D tax credit rate—approximately 3% when considering the 15% state portion of the federal credit—is competitive within the region. While some states like Iowa or Kansas may offer higher nominal percentages for incremental research spending, Nebraska’s decision to make its credit fully refundable is a significant differentiator. 4

The Tax Foundation has rated Nebraska as one of the most competitive states for new R&D companies when considering the broader tax climate, including sales tax exemptions on manufacturing machinery and equipment. 4 The ability for a loss-making startup to receive a 15% to 35% “match” of its federal credit in the form of a cash refund provides a liquidity bridge that non-refundable credits cannot match. 3

Recent Legislative Changes and the 2033 Sunset

The Nebraska R&D tax credit has recently undergone a period of legislative renewal. Originally scheduled to sunset in 2022, the program was extended through December 31, 2033, by the passage of LB 491 and LB 727. 3 This decade-long extension provides critical certainty for businesses engaged in long-term research cycles, such as pharmaceutical development or advanced manufacturing.

In addition to the sunset extension, the 2023 legislative session introduced:

• Refined E-Verify Rules: Codifying the 90-day verification timeline for compensation used in credit calculations. 11
• Foreign Adversary Restrictions: As of October 1, 2025, foreign adversarial companies are ineligible to receive any benefits under any Nebraska incentive program, including the R&D Act. 13
• Audit Protections: Taxpayers who file automatic accounting method changes related to federal Section 174 amortization for 2024 will receive certain audit protections, which Nebraska will likely mirror in its treatment of the underlying QREs. 15

These changes reflect a dual-track strategy by the Nebraska Legislature: maintaining a competitive incentive environment while tightening compliance and security standards to protect state revenues. 4

Conclusion: Strategic Implications for Nebraska Businesses

The Nebraska Advantage Research and Development Act represents a sophisticated, if administratively demanding, opportunity for businesses to subsidize their innovative efforts. By leveraging the federal definition of research and experimental activities, the state provides a recognizable framework, but its unique 35% enhanced credit for university collaborations and its commitment to refundability set it apart as a leader in regional tax policy. 1

For business leaders, the “meaning” of R&D in Nebraska is synonymous with a commitment to both technological progress and rigorous administrative discipline. Success in claiming these credits requires more than just scientific breakthroughs; it requires a proactive approach to human resources, careful physical location of research activities, and precise accounting of expenses. As the program enters its next decade, it remains a cornerstone of Nebraska’s efforts to transform its economy into a hub for biotechnology, advanced agriculture, and high-tech manufacturing. Companies that can master the nuances of Revenue Ruling 29-10-2 and the E-Verify mandate will find the Nebraska R&D tax credit to be a powerful engine for their long-term growth and technical superiority. 1

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