This study exhaustively analyzes the United States federal and Ohio state Research and Development (R&D) tax credit frameworks through the lens of five prominent industries in Columbus, Ohio. By examining the historical economic development of the region alongside current statutory guidelines, case law, and administrative determinations, this analysis illustrates the precise mechanisms by which local enterprises qualify for innovation-based tax incentives.

Columbus Industry Case Studies and R&D Tax Credit Eligibility

The economic resilience of Columbus, Ohio, is fundamentally rooted in its historical ability to transition from a heavy manufacturing center into a highly diversified knowledge and technology economy. During the late nineteenth century, Columbus experienced rapid industrialization driven by the expansion of railroads, which grew from 2,950 to 8,950 miles of track in Ohio between 1860 and 1900. This infrastructure supported massive industrial operations such as the Jeffrey Manufacturing Company, a national leader in coal mining equipment, and Buckeye Steel Castings, which thrived on the city’s South Side under the leadership of prominent figures like Samuel Prescott Bush and Frank Rockefeller. Unlike other Rust Belt cities that suffered catastrophic declines when heavy manufacturing outsourced, Columbus was insulated by the stabilizing presence of state government and massive academic institutions like The Ohio State University, which continuously funneled engineering and scientific talent into the local workforce. This continuous influx of intellectual capital enabled the city to cultivate specialized industries. The following five case studies explore these specialized sectors, detailing their historical genesis in Columbus and evaluating their qualification for federal and state R&D tax incentives.

Case Study 1: Food and Beverage Science and Artificial Intelligence Automation

The commercial food service and restaurant franchise industry is deeply embedded in the historical fabric of Columbus. Because the demographic makeup of Columbus historically mirrored the broader United States population with exceptional accuracy, the city earned the moniker “Test Market USA,” becoming the premier location for consumer brands to trial new products and technologies. It was within this environment that Dave Thomas, recognizing a lack of high-quality lunch options in downtown Columbus, opened the first Wendy’s Old Fashioned Hamburgers restaurant on November 15, 1969. Named after his daughter Melinda’s nickname, the restaurant prioritized fresh ingredients and custom-prepared square hamburgers. Wendy’s fundamentally transformed the quick-service restaurant (QSR) industry in 1970 by pioneering the modern, freestanding drive-thru pick-up window in Columbus, an operational innovation that propelled the company from a local four-store chain into a global foodservice phenomenon. Today, Wendy’s maintains its corporate headquarters in the Columbus suburb of Dublin, Ohio, where it operates a massive Culinary Innovation Center dedicated to food science and restaurant technology.

The research and development activities conducted at the Wendy’s Culinary Innovation Center provide a prime example of how the food and beverage industry can qualify for the United States federal R&D tax credit under Internal Revenue Code (IRC) Section 41, as well as the Ohio Commercial Activity Tax (CAT) R&D credit under Ohio Revised Code (ORC) Section 5751.51. Historically, the Internal Revenue Service (IRS) and the Ohio Department of Taxation (ODT) apply intense scrutiny to the food service sector, aggressively differentiating between non-qualifying routine recipe development (e.g., mixing standard ingredients for aesthetic taste) and qualifying scientific engineering. To qualify, the research must satisfy the strict federal four-part test. Wendy’s achieves this through rigorous food science and advanced software engineering.

Within the realm of food science, Wendy’s employs microbiologists, agricultural experts, and packaging engineers operating under Advanced Hazard Analysis Critical Control Point (HACCP) certifications to develop new menu items that must withstand complex supply chain and thermal degradation challenges. When developing a new product, such as the 1995 introduction of the spicy chicken sandwich or the modern pursuit of consistently hot and crispy french fries, food scientists face technological uncertainties regarding starch gelatinization, moisture retention, and the thermal dynamics of cooking oils. The process of experimentation involves systematically testing hundreds of starch coatings, altering the geometric cut of the potato, measuring moisture loss over transit times using specialized laboratory equipment, and evaluating the thermodynamic results. Because this experimentation fundamentally relies on the principles of biological sciences and chemistry to improve the physical performance and shelf-life of the food product, the associated wages and supply costs constitute Qualified Research Expenses (QREs).

Furthermore, Wendy’s engages in heavy software engineering that qualifies for the R&D tax credit. In 2023, the company announced an expansion of its strategic partnership with Google Cloud to develop “Wendy’s FreshAI,” an automated drive-thru ordering system utilizing generative artificial intelligence. The QSR industry has historically struggled to automate the drive-thru at scale due to the technological uncertainties surrounding ambient noise filtration, complex menu permutations, and the interpretation of colloquial human phrasing. Developing proprietary natural language processing (NLP) algorithms that can seamlessly map a customer requesting a “large chocolate milkshake” to the internal point-of-sale system code for a “large chocolate Frosty” requires a rigorous process of software engineering and iterative algorithm training. Because this software is developed specifically to interact directly with the consumer, it is generally exempt from the strict exclusions typically applied to Internal-Use Software (IUS) under federal tax law. Consequently, the software developers and engineers working on this platform in Dublin, Ohio, generate substantial QREs that can be claimed on the federal return and simultaneously utilized to offset the Ohio CAT.

Case Study 2: Life Sciences, Contract Research, and Medical Technology

Columbus serves as a global epicenter for life sciences, a status directly attributable to the historical and ongoing influence of the Battelle Memorial Institute. The foundation of this sector traces back to the 1923 last will and testament of steel industrialist Gordon Battelle, who bequeathed half of his estate to create an institute dedicated to the translation of scientific discovery into practical applications for the greatest good of humanity. Upon the subsequent passing of his mother, the institute’s initial endowment reached $3.7 million, leading to the construction of its first Columbus facility in 1929. Over the ensuing decades, Battelle grew into the world’s largest independent, nonprofit research and development organization, directly employing 3,200 people and managing an additional 29,500 employees across ten United States Department of Energy National Laboratories, including the Oak Ridge National Laboratory and the National Renewable Energy Laboratory. The institute has been instrumental in historic technological breakthroughs, including the development of World War II tank armor, Snopake correction fluid in 1955, automotive cruise control in 1970, the technology underpinning compact discs, and rapid testing deployment during the COVID-19 pandemic.

Today, the density of medical research operations in Columbus is staggering, anchored by Battelle, the Ohio State University Wexner Medical Center, The Research Institute at Nationwide Children’s Hospital, and the corporate headquarters of Fortune 500 pharmaceutical distributor Cardinal Health in nearby Dublin. Battelle’s specific operations in medical device engineering provide a masterclass in R&D tax credit qualification. The organization frequently partners with start-ups and Fortune 100 companies, utilizing a “Human-Centered Design” (HCD) approach where cognitive psychologists, scientists, and engineers collaborate to design devices that minimize human error in critical clinical environments.

For the corporate clients partnering with Columbus-based contract research organizations (CROs) like Battelle, the R&D tax credit implications are highly lucrative. When designing a novel drug delivery mechanism, such as an automated biologic injector for high-viscosity therapies, engineers face severe technological uncertainties. They must determine the exact fluid dynamics required to push a viscous biological fluid through a micro-needle without exerting shear stress that would destroy the protein structures, all while maintaining a mechanical form factor viable for patients with limited dexterity. The process of experimentation involves prototyping various mechanical actuation mechanisms, conducting fluid viscosity simulations, and stress-testing polymer housings based on failure analysis. These activities fundamentally rely on mechanical engineering, materials science, and biological sciences, squarely passing the federal four-part test.

Crucially, the federal tax code provides a specific advantage for corporations that contract with organizations like Battelle. Under IRC Section 41(b)(3)(C), if a corporate taxpayer pays a “qualified research consortium”—defined as a 501(c)(3) or 501(c)(6) tax-exempt organization organized primarily to conduct scientific research—to perform qualified research on its behalf, the taxpayer is permitted to treat 75 percent of those contract expenses as QREs. This is a significant statutory enhancement compared to the standard 65 percent inclusion rate permitted for standard third-party contract research. Therefore, the unique presence of a massive nonprofit research consortium in Columbus allows domestic medical device and pharmaceutical companies to maximize their federal R&D tax credit yields while simultaneously qualifying for the 7 percent Ohio CAT credit for expenses incurred within the state.

Case Study 3: Automotive Manufacturing and Smart Mobility Infrastructure

The automotive industry has long been a pillar of the Central Ohio economy, anchored historically by Honda’s massive manufacturing footprint in Marysville, which employs over 8,200 individuals and supports a vast, dense supply chain of tier-1 and tier-2 parts manufacturers throughout the region. However, the region’s automotive sector recently evolved from traditional heavy manufacturing into advanced software and mobility infrastructure. In 2016, the City of Columbus competed against dozens of municipalities to win the United States Department of Transportation’s (USDOT) first-ever “Smart City Challenge”. Awarded a $50 million grant, the city launched the “Smart Columbus” initiative, a region-wide program aimed at reinventing urban transportation through advanced data analytics and intelligent transportation systems (ITS).

The Smart Columbus initiative required extensive collaboration with private engineering and technology firms, including HNTB, Parsons Brinckerhoff, CDM Smith, and Kapsch TrafficCom, to design and deploy experimental infrastructure. A foundational element of this deployment was the Connected Vehicle Environment (CVE), which sought to integrate connected autonomous vehicles into the city’s transportation grid. The CVE project necessitated the installation of in-vehicle onboard units (OBUs) in over 1,000 vehicles, the deployment of 100 roadside communication units across 85 intersections, and the implementation of the Kapsch Connected Mobility Control Center software platform to gather live data.

For the private technology and engineering contractors executing this deployment, the activities generated massive QREs eligible for both federal and Ohio state R&D tax credits. The permitted purpose of the research was the development of a novel, high-speed wireless communications network capable of providing transit vehicle prioritization and emergency vehicle pre-emption. The engineers faced significant technological uncertainties regarding real-time data latency, the integration of proprietary software with diverse vehicular hardware systems from multiple automotive manufacturers, and the mitigation of radio frequency signal interference in a high-density urban environment. To resolve these uncertainties, the contractors engaged in iterative field testing, simulated network load stress, and analyzed signal transmission failure rates, thereby satisfying the process of experimentation requirement through the application of computer science and systems engineering. The experimental results were highly successful, demonstrating that the CVE increased posted speed limit compliance in school zones from 18 percent to 56 percent.

While the engineering labor performed within Columbus constitutes eligible Ohio QREs under ORC Section 5751.51, these contractors must carefully navigate the “Funded Research” exclusion under IRC Section 41(d)(4)(H). Because the Smart Columbus project was heavily subsidized by the USDOT and local government entities, the IRS dictates that private contractors cannot claim the R&D credit if they are merely performing a service for the government without assuming financial risk. To successfully claim the credit, the engineering firms must prove that their contracts were structured as fixed-price agreements—meaning they bore the economic risk of cost overruns during the experimental phase—and that they retained substantial intellectual property rights to the underlying algorithms and network architectures they developed.

Case Study 4: Financial Technology (Fintech) and Underwriting Algorithms

Columbus possesses the seventh-largest financial services workforce in the United States, employing approximately 255,000 professionals, and features one of the highest densities of Fortune 500 financial headquarters in the nation. This dominance is led by legacy institutions such as Nationwide Insurance and Huntington Bancshares. Huntington Bank, founded in the 1860s, established a culture of aggressive technological adoption within the region; in the 1990s, it became the first bank to utilize electronic check processing and was an early national adopter of online bill pay. The bank’s deep integration with the regional economy was further cemented during the 2008 financial crisis when it launched a $1 billion public-private Job Growth Partnership with the State of Ohio to unfreeze credit markets for local businesses. Today, the massive capital and operational footprints of these legacy banks have birthed a thriving “Fintech” ecosystem in Columbus, attracting operations for modern digital financial companies like Marqeta, Branch, and Bold Penguin.

Financial services and insurance companies do not manufacture physical goods; their products are complex digital platforms, predictive models, and high-frequency processing algorithms. Fintech firms operating in Columbus claim substantial R&D tax credits by developing these novel backend architectures. Under the federal four-part test, the permitted purpose is the development of a new algorithmic underwriting system or a secure, scalable transaction processing architecture. Software engineers face deep technological uncertainty regarding the system’s capability to process millions of concurrent requests without latency, or the optimal architectural design required to integrate modern machine learning fraud detection models across legacy mainframe banking databases. The process of experimentation involves agile software development cycles, algorithmic stress testing, architectural data modeling, and load balancing analysis, all fundamentally rooted in computer science.

A critical legal hurdle for Fintech companies seeking the R&D credit is the Internal-Use Software (IUS) exclusion codified under IRC Section 41(d)(4)(E). Generally, software developed solely for a taxpayer’s internal administrative functions—such as human resources routing or basic financial accounting—is excluded from QREs. However, software developed by financial services firms is often dual-use or core to the delivery of the service provided to third parties. To exempt internal-use software from this exclusion, the Columbus-based firm must prove that the software satisfies the “High Threshold of Innovation Test”. This rigorous standard requires the taxpayer to demonstrate that the software is highly innovative (resulting in a substantial and measurable reduction in cost or improvement in speed), that its development entails significant economic risk due to technical challenges, and that the software is not commercially available off-the-shelf. Financial technology firms that successfully navigate this administrative hurdle generate massive tax benefits; for instance, public filings reveal that digital payment processor Marqeta maintains nearly $40 million in federal research and development tax credit carryforwards and extensive state tax credits derived from algorithmic software engineering. By incurring these software development wages in Ohio, local Fintech firms successfully offset their Commercial Activity Tax liability through ORC Section 5751.51.

Case Study 5: Fashion, Retail, and Merchandise Logistics Engineering

Because Columbus served historically as the ultimate demographic microcosm of the United States consumer base, it naturally evolved into the headquarters for several of the world’s most recognizable retail and apparel holding companies, including L Brands (parent of Bath & Body Works and Victoria’s Secret), DSW, Express, and Abercrombie & Fitch. The operational scale of these corporations is immense. Abercrombie & Fitch, for example, operates a 500-acre forested corporate campus in the Columbus suburb of New Albany that functions as a self-contained corporate village. The campus houses 2,600 employees who work among massive corrugated metal structures containing distribution warehouses, photography studios, and experimental design labs. This dense concentration of retail infrastructure is supported by a continuous pipeline of logistics and merchandising talent from local institutions like the Columbus College of Art and Design (CCAD) and organizations such as the Columbus Fashion Council.

When evaluating the retail and fashion industry for R&D tax credit eligibility, tax practitioners must draw a strict legal boundary between aesthetic design and technical engineering. Under IRC Section 41(d)(4)(F), the IRS explicitly excludes “research in the social sciences, arts, or humanities”. Consequently, the labor associated with sketching the aesthetic look of a new garment, selecting seasonal color palettes, or conducting consumer market research on fashion trends is strictly excluded from QREs.

However, behind the aesthetic design, Columbus retail giants engage in significant physical chemistry and software engineering that fully qualifies for the credit. In textile chemistry, companies often seek to achieve a specific structural aesthetic, such as the “perfect fade” in denim, without destroying the tensile strength and durability of the fabric. To achieve this, researchers experiment with varying chemical washes, pumice rock abrasives, and thermal treatments. This process of experimentation relies strictly on physical chemistry and materials science, navigating technological uncertainties regarding fabric degradation and dye saturation limits, thereby satisfying the federal four-part test.

Furthermore, managing a global retail inventory requires highly complex logistics software. Developing proprietary predictive algorithms to route merchandise from international manufacturing hubs to distribution centers and retail mock-stores to minimize fuel costs and optimize shelf stocking relies entirely on computer science. The iterative coding, simulation, and testing of this software architecture generates massive QREs, provided it clears the aforementioned IUS High Threshold of Innovation standard. By carefully bifurcating their labor tracking to separate artistic design from material science and software engineering, Columbus retail corporations generate defensible QREs that offset millions of dollars in federal income tax and Ohio CAT liability.

United States Federal R&D Tax Credit Laws and Administration

The United States federal R&D tax credit, codified under IRC Section 41, is a general business tax credit designed to incentivize domestic corporations to invest in technological innovation and retain highly skilled labor within the country’s borders. Originally introduced in the Economic Recovery Tax Act of 1981, the credit was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015. Navigating the federal credit requires a comprehensive understanding of the statutory four-part test, the explicit exclusions from qualified research, and the complex interaction with IRC Section 174 regarding the capitalization and amortization of research expenditures.

The Statutory Four-Part Test

For research activities to generate QREs, they must satisfy the rigorous “Four-Part Test” defined under IRC Section 41(d). The IRS mandates that this test must be applied independently and separately to each specific business component (defined as a product, process, computer software, technique, formula, or invention) developed or improved by the taxpayer.

Statutory Exclusions from Qualified Research

Even if an engineering or software development activity seemingly meets the Four-Part Test, it may be entirely disqualified if it falls under one of the specific exclusions enumerated by Congress in IRC Section 41(d)(4). The IRS aggressively audits these exclusions.

IRC Section 174 Capitalization and the 2025 OBBBA Revisions

The eligibility of QREs under IRC Section 41 is inextricably linked to their treatment under IRC Section 174, which governs the accounting methods for research expenditures. Historically, taxpayers were permitted to fully expense domestic research and experimental (R&E) costs in the year they were incurred. However, the Tax Cuts and Jobs Act (TCJA) of 2017 fundamentally altered this dynamic. The TCJA mandated that, for taxable years beginning after December 31, 2021, all domestic R&E expenditures had to be capitalized and amortized over a five-year period, while foreign R&E costs had to be amortized over a fifteen-year period. This capitalization requirement severely impacted the cash flow of innovative companies, causing significant disruption in the technology and manufacturing sectors.

In 2025, the enactment of the One Big Beautiful Bill Act (OBBBA) significantly revised this restrictive landscape. Through the addition of IRC Section 174A, the OBBBA permanently restored the immediate expensing of domestic research and experimental expenditures for taxable years beginning after December 31, 2024. Crucially, while the OBBBA reinstated full expensing for domestic R&E expenditures, foreign R&E expenditures must still be capitalized and amortized over the restrictive 15-year period, consistent with the original TCJA provisions. Furthermore, IRC Section 174(d) prohibits the immediate recovery of the unamortized basis in foreign capitalized R&E expenditures even upon the disposition, retirement, or abandonment of the property. This stark legislative divergence between the treatment of domestic and foreign research creates a powerful, permanent economic incentive for multinational corporations to onshore their R&D operations to domestic hubs like Columbus.

To manage the transition, the IRS released Revenue Procedure 2025-28, providing procedural guidance for implementing Section 174A. This guidance is particularly beneficial for small businesses. Eligible Small Businesses (ESBs)—defined as businesses with average gross receipts of less than $31 million on a controlled group basis for the 2025 tax year—are permitted to retroactively deduct domestic SREEs incurred during the capitalization period (tax years 2022 through 2024) via an election attached to amended returns. Larger taxpayers are permitted to elect to accelerate the remaining deductions for such expenditures over a one-year or two-year period, providing vital flexibility in managing corporate taxable income.

Evolving Federal Case Law and IRS Administration

The federal R&D tax credit is currently the subject of intense litigation regarding substantiation requirements and the application of statutory exclusions. These judicial rulings directly impact how Columbus-based companies must structure and document their claims.

A critical piece of evolving litigation in 2025 is Park-Ohio Holdings Corp. v. United States. In 2022, the IRS issued a Chief Counsel memorandum that enforced an exceptionally strict, granular standard of documentation for Section 41 refund claims. Under this controversial policy, the IRS refused to even consider or formally deny refund claims unless the taxpayer submitted an incredible amount of detailed, project-level information at the exact time of filing, effectively treating incomplete claims as if they were never filed. Park-Ohio, a major industrial holding company, filed suit in federal court arguing that this policy was issued in violation of the Administrative Procedure Act (APA). The taxpayer further argued that the policy contradicts established case law, specifically Burlington Northern Inc. v. United States, which established that a refund claim need only “fairly apprise” the IRS of the grounds for recovery to be considered valid. Additionally, Park-Ohio asserted that Treasury Regulations (1.41-4(d)) explicitly prohibit the IRS from demanding that taxpayers create entirely new, unreasonable accounting records solely for the purpose of claiming the credit. The outcome of this litigation is highly anticipated, as it will dictate the baseline standard for R&D refund documentation across all federal and state jurisdictions.

Beyond substantiation, the courts continue to refine the definitions of the statutory exclusions. In Smith v. Commissioner, the United States Tax Court evaluated the “funded research” exclusion under IRC 41(d)(4)(H) regarding an architectural firm. The IRS routinely denies credits to contractors by asserting that their clients funded the research. To overcome this exclusion, a taxpayer must prove two distinct elements: first, that their payment is entirely contingent upon the success of the research (demonstrating financial risk), and second, that they retain substantial rights to the intellectual property developed during the project. The Tax Court ruled against the IRS’s motion for summary judgment, allowing the case to proceed to trial to analyze the specific economic risks embedded within the taxpayer’s client contracts. This case highlights the critical nature of contract language for any Columbus-based engineering or scientific firm performing third-party services.

Conversely, in Phoenix Design Group, Inc. v. Commissioner, the Tax Court completely denied research credits to a professional engineering firm. Despite employing qualified, credentialed professional engineers, the court found after a full trial that the firm failed to substantiate that their daily activities constituted a true process of experimentation. Routine engineering—defined as applying known parameters to standard designs without facing technical uncertainty—does not satisfy the statutory requirement for systematic hypothesis testing and the evaluation of alternatives. This ruling serves as a stark warning for the Columbus manufacturing and engineering sectors that general design work does not automatically equate to qualified research under the law.

Ohio State R&D Investment Tax Credit Framework and Administration

The State of Ohio provides a highly robust state-level incentive designed to complement the federal credit and stimulate domestic investment within the state. Administered by the Ohio Department of Taxation (ODT) and the Development Services Agency, the Ohio Research and Development Investment Tax Credit functions primarily as a nonrefundable offset against the Commercial Activity Tax (CAT) under Ohio Revised Code (ORC) Section 5751.51, with corresponding provisions for financial institutions under ORC Section 5726.56.

Calculation and Application of ORC 5751.51

The Ohio R&D tax credit directly piggybacks onto the federal IRC Section 41 definition of QREs. ORC 5751.51(A) states that “qualified research expenses” has the exact same meaning as in section 41 of the Internal Revenue Code. However, the state credit restricts eligibility solely to those expenses physically incurred within the geographic boundaries of Ohio.

Unlike the regular federal credit, which relies on a highly complex fixed-base percentage calculated from gross receipts dating back to the 1980s, Ohio adopts a simplified calculation methodology similar to the federal Alternative Simplified Credit (ASC). The Ohio credit is calculated as seven percent of the excess of the taxpayer’s current year Ohio QREs over the average of their annual Ohio QREs incurred in the three immediately preceding calendar years.

If the generated credit exceeds the taxpayer’s CAT liability for the period (after allowing for any other preceding credits in the statutory order), the excess credit amount may be carried forward for up to seven years. Taxpayers can claim the credit directly on their quarterly CAT returns without any prior approval or special application process. Furthermore, in the case of a consolidated elected taxpayer or combined taxpayer group, each entity within the group must separately calculate the credit using the QREs incurred specifically by that person, on a form prescribed by the tax commissioner.

The Qualified Research and Development Loan Payments Credit (ORC 5751.52)

Beyond the standard credit for QREs, Ohio offers a parallel, highly specialized credit under ORC Section 5751.52 for qualified research and development loan payments. This credit is designed to assist businesses that have taken on debt specifically to finance major R&D operations. The aggregate credit claimed by a borrower against the CAT (and individual income tax under ORC 5747.02) as a result of qualified R&D loan payments during a calendar year cannot exceed $150,000 per loan.

Crucially, for taxpayers who are not subject to the CAT—such as those operating as sole proprietorships or investors in pass-through entities (PTEs) like S-corporations and partnerships—this specific loan payment credit can flow through and be applied against the individual income tax under ORC Section 5747.331. The statute explicitly prohibits a taxpayer from “double-dipping” by claiming the credit against the income tax if it has already been utilized against the CAT at the entity level.

Hierarchical Ordering of Ohio Credits (ORC 5751.98)

Under ORC Section 5751.98, taxpayers are not permitted to randomly apply their available tax credits against their CAT liability. The state mandates that taxpayers must claim any entitled CAT credits in a strict, uniform statutory order. This hierarchy dictates that a taxpayer must first exhaust their general R&D expense credits (the 7% credit) before applying the R&D loan payment credit. This structure is strategically beneficial for the taxpayer because the loan payment credit carries an indefinite carryforward provision, whereas the general R&D expense credit is restricted to a 7-year carryforward window.

Aggressive State Auditing and Administrative Determinations

While ORC 5751.51 was originally designed by the Ohio General Assembly in 2005 to simply adopt the federal calculation for in-state expenses—theoretically limiting the state’s audit scope merely to verifying the geographic location of the expenses—the Ohio Department of Taxation (ODT) has adopted an increasingly aggressive and independent audit posture. Under ORC 5751.09, the tax commissioner possesses broad statutory authority to audit a representative sample of a taxpayer’s gross receipts and QREs over a representative period to verify the claimable credit amount.

Recent legislative amendments in the Ohio budget bill (Am. Sub. HB 33) codified specific record retention and audit sampling procedures that the ODT now cites to justify its intense scrutiny. Instead of relying on federal IRS acceptance, the ODT now routinely undertakes the highly complex job of independently determining whether the taxpayer’s expenses fall within the parameters of IRC Section 41.

This aggressive posture is clearly documented in recent ODT Final Determinations. For example, in a December 2020 Final Determination, the Tax Commissioner explicitly rejected a taxpayer’s argument that the state should honor their QREs simply because the IRS had granted the federal credit for the exact same activities. The determination stated that “the Ohio QRE credit operates independently of the federal QRE credit,” and that while an IRS audit might be persuasive, it is “not binding on a determination of the Tax Commissioner”. The ODT required the taxpayer to affirmatively and independently establish that their Ohio activities satisfied all elements of the federal four-part test, resulting in a denial when the taxpayer failed to meet the state’s evidentiary burden.

Similarly, in a January 2022 Final Determination, the ODT denied an R&D credit claim despite the taxpayer submitting a comprehensive federal credit study. The state ruled that while the activities undisputedly occurred in Ohio, the taxpayer failed to demonstrate that the activities constituted qualified research under the stringent definitions of the Section 174 and Process of Experimentation tests. These administrative rulings emphasize that Columbus-based businesses cannot solely rely on their federal documentation; they must be prepared to defend the technological uncertainty and scientific merit of their operations directly to state auditors to secure the 7 percent CAT offset.

Final Thoughts

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.