Qualified Research Conducted in Oregon

Qualified research conducted in Oregon is defined as research and development activities that satisfy the federal four-part test and are performed physically within the state by an eligible semiconductor firm. For tax purposes, these activities must directly support semiconductor-related business components to qualify for the state’s targeted credit against corporate excise or personal income tax liabilities.

The Statutory Genesis and Evolution of Oregon Research Incentives

The current regulatory landscape for research incentives in Oregon is characterized by a high degree of specialization and sector-specific industrial policy. To understand the meaning of qualified research conducted in Oregon today, one must first consider the dramatic shift in the state’s legislative approach over the last decade. Historically, Oregon maintained a broad-based research and development credit that was available to a wide variety of industries, ranging from agriculture to aerospace. However, this general credit was allowed to sunset in 2017, leaving a significant gap in the state’s toolkit for attracting and retaining high-technology investment. This absence of a state-level incentive persisted until the enactment of the Oregon CHIPS Act, primarily through House Bill 2009 in the 2023 legislative session, which established the Research and Development Tax Credit for Semiconductors.

The policy objective behind this targeted approach is to reinforce Oregon’s position as a global hub for semiconductor manufacturing and design, often referred to as the “Silicon Forest.” By focusing exclusively on the semiconductor industry, the state has moved away from horizontal incentives in favor of vertical integration support, aiming to leverage federal investments from the CHIPS and Science Act of 2022. The meaning of “qualified research” in this context is thus inextricably linked to the semiconductor industry, as codified in Oregon Revised Statutes (ORS) 315.518 through 315.522. This credit applies to tax years beginning on or after January 1, 2024, and before January 1, 2030, providing a finite window for companies to capitalize on these substantial benefits.

The legislative intent, as documented by the Legislative Revenue Office (LRO) and the Joint Committee on Semiconductors, was to create a credit that is scalable and competitive with other states like Arizona while maintaining “sideboards” to ensure that the fiscal impact remains manageable for the state’s general fund. This careful balancing act is reflected in the specific definitions and administrative requirements that govern what constitutes qualified research conducted within the state’s borders.

Defining the Qualified Semiconductor Company

The gateway to claiming the Oregon research credit is meeting the definition of a “qualified semiconductor company” (QSC). Under ORS 315.518(1), a QSC is an entity whose primary business is the research, design, development, fabrication, assembly, testing, packaging, or validation of semiconductors. The definition further extends to entities whose primary business is the creation of semiconductor manufacturing equipment, semiconductor core intellectual property, or electronic design automation (EDA) software.

The inclusion of EDA and manufacturing equipment signifies a legislative understanding of the semiconductor supply chain’s complexity. For a company to determine if its research is “qualified,” it must first demonstrate that its primary business falls within these specified categories. If an entity engages in these activities as a secondary or incidental part of its operations—for example, a general consumer electronics firm that happens to design its own chips—it may not meet the primary business test. This distinction is critical because it prevents the dilution of the incentive across unrelated industries, focusing state resources on the core semiconductor sector.

The Geographic Nexus: Meaning of Conducted in Oregon

The most vital distinction between the federal research credit and the Oregon credit is the strict geographic requirement. Under ORS 315.518(2)(b), “qualified research” and “basic research” consist only of research conducted in Oregon. While the federal credit under Internal Revenue Code (IRC) Section 41 allows for expenses incurred anywhere within the United States, the Oregon statute requires a physical nexus to the state to qualify for the 15% credit rate.

Expense Component	Federal Requirement (IRC 41)	Oregon Requirement (ORS 315.518)
Geographic Location	Anywhere in the United States and its territories.	Physically conducted within the state of Oregon.
Eligible Industry	Any industry meeting the four-part test.	Limited to “qualified semiconductor companies.”
Applicable Rate	Generally 20% of excess QREs.	15% of excess QREs.
Refundability	Limited (only for certain small businesses against payroll tax).	Tiered refundability (25% to 75%) based on employee count.

This requirement for the research to be “conducted in Oregon” applies to all three categories of Qualified Research Expenses (QREs): wages, supplies, and contract research. For in-house research wages to be eligible, the employees performing the qualified services must be physically located in Oregon while performing those services. This creates a significant compliance challenge in the modern era of remote and hybrid work. Guidance from the 2023 legislative workgroup emphasized that the requirement for individuals to be located in Oregon is essential for achieving the state’s desired return on investment (ROI) in terms of local employment and economic activity.

Consequently, if an Oregon-based semiconductor firm employs design engineers who work remotely from Washington or California, the wages paid to those individuals do not qualify for the Oregon credit, even if they qualify for the federal credit. Firms must maintain robust payroll allocation data to separate Oregon-based research time from out-of-state time to ensure that only the “conducted in Oregon” portion is claimed.

Conformity with Federal Law: The Four-Part Test

Oregon law adopts the federal definitions for “qualified research expenses” and “basic research payments” as found in IRC Section 41, but limits them to those “conducted in Oregon”. To be considered qualified research, an activity must pass the rigorous “four-part test” developed by Congress and interpreted through Treasury Regulations and court decisions.

The Section 174 Test (Permitted Expenditures)

The research must first meet the criteria for a research or experimental expenditure under IRC Section 174. This means the costs must be incurred in connection with the taxpayer’s trade or business and must represent research and development costs in the experimental or laboratory sense. The core of this test is the “elimination of uncertainty.” Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving a product, or the appropriate design of that product. For a semiconductor company, this might involve discovering whether a new lithography technique can achieve a specific gate density or if a new substrate material can withstand required thermal loads.

The Technological in Nature Test

The research must be undertaken for the purpose of discovering information which is “technological in nature”. This requirement is satisfied if the process of experimentation relies on the principles of the physical or biological sciences, engineering, or computer science. Semiconductor research, by its very nature, almost always meets this test as it is grounded in electrical engineering, solid-state physics, and materials science.

The Permitted Purpose Test

The objective of the research must be to develop a new or improved “business component” of the taxpayer. A business component is any product, process, computer software, technique, formula, or invention which is held for sale, lease, or license, or used in the taxpayer’s trade or business. In the context of the Oregon credit, the business component must be “directly related to semiconductors”. This means that while a semiconductor company might conduct research on a new HR software for its employees, such research would not qualify because it is not directly related to the semiconductor trade or business.

The Process of Experimentation Test

Substantially all of the activities must constitute a process of experimentation. This involves a systematic evaluation of one or more alternatives to achieve a result where the capability, method, or design is uncertain at the beginning. This process typically includes modeling, simulation, systematic trial and error, and the testing of prototypes. The Department of Revenue and the IRS look for evidence of a functional hypothesis and testing protocols.

Exclusions from Qualified Research

Even if an activity meets the four-part test, it may be specifically excluded under IRC Section 41(d)(4) and, by extension, the Oregon credit. These exclusions are strictly applied by the Oregon Department of Revenue to ensure that the credit incentivizes true innovation rather than routine business activities.

1. Research After Commercial Production: Activities conducted after a business component has been developed to the point where it is ready for commercial sale or use. This includes routine troubleshooting of existing chip designs or minor tweaks for a specific customer that do not involve technical uncertainty.
2. Adaptation of Existing Business Components: Activities related to adapting an existing business component to a particular customer’s requirement or need.
3. Duplication of Existing Business Components: Research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the component itself or from plans, blueprints, or detailed specifications.
4. Surveys and Studies: Efficiency surveys, management studies, consumer surveys, or advertising and promotion.
5. Foreign Research: Any research conducted outside the United States is excluded from the federal credit. For Oregon, the exclusion is even narrower, as it must be conducted within Oregon to qualify for the 15% state rate.
6. Social Sciences: Research in the social sciences, arts, or humanities.
7. Funded Research: Any research to the extent it is funded by any grant, contract, or otherwise by another person or governmental entity.

Department of Revenue Guidance and Administrative Rules

The Oregon Department of Revenue (DOR) provides the primary guidance on how to interpret and apply the R&D tax credit laws. Administrative rules, specifically Oregon Administrative Rule (OAR) 150-315-0195, provide the operational definitions for calculating and claiming the credit.

Calculating Oregon Gross Receipts

A significant point of guidance in OAR 150-315-0195(5) relates to the definition of “gross receipts” for purposes of the credit calculation. Under IRC Section 41, the “base amount” for the regular credit method is determined, in part, by the taxpayer’s average annual gross receipts for the four preceding years. The Oregon rule clarifies that “gross receipts” means the total sales of the taxpayer in Oregon as calculated under the state’s apportionment statutes (ORS 314.665).

This is a critical distinction for multinational semiconductor firms. For federal purposes, they use their total U.S. gross receipts. For the Oregon credit, they must use only their Oregon-apportioned sales. This ensures that the credit is appropriately scaled to the company’s economic footprint within the state.

Election of the Alternative Simplified Credit (ASC) Method

OAR 150-315-0195(2) and (4) allow taxpayers to elect the Alternative Simplified Credit (ASC) method, providing an alternative to the complex “fixed-base percentage” calculation required by the regular method. This election must be made on Schedule OR-RESEARCH (Form 150-102-130) and is generally irrevocable for the year it is made.

The guidance specifies that taxpayers electing the ASC method must use the percentages specified in IRC Section 41(c)(4), but applied only to Oregon-sourced QREs. This provides a more accessible pathway for newer companies or those without the decades of historical records required to calculate a traditional fixed-base percentage.

Interaction with the Corporate Minimum Tax

A unique provision in ORS 315.518(9) and clarified in OAR 150-315-0195(7)(b) is that the refundable portion of the semiconductor R&D credit can be used to satisfy the corporate minimum tax imposed under ORS 317.090. This is significant because most other Oregon tax credits are prohibited from reducing the corporate tax liability below the statutory minimum. By allowing the refundable R&D credit to offset the minimum tax, the state provides an even greater benefit to R&D-intensive firms that may not yet have a large income tax liability.

Calculation Methodologies: Regular vs. ASC

The Oregon semiconductor R&D credit is an “incremental” credit, meaning it is intended to reward companies for increasing their research spending over a historical baseline. Taxpayers must choose between two primary methods for determining this baseline and the resulting credit.

The Regular Method

Under the Regular Method, the credit is 15% of the current year’s Oregon QREs that exceed the “base amount”.

The base amount is calculated as:

Base Amount = Fixed Base % x Average Oregon Gross Receipts (Prior 4 Years)

The Fixed Base Percentage is the ratio of Oregon QREs to Oregon gross receipts for a historical period (usually 1984-1988), capped at 16%. For “start-up” companies (defined as those without both gross receipts and QREs in certain historical years), a statutory fixed base of 3% is used for the first five years, after which it is calculated based on more recent history. Importantly, the base amount cannot be less than 50% of the current year’s QREs.

The Alternative Simplified Credit (ASC) Method

The ASC method is often preferred by companies that lack historical data or have seen significant growth.

If the company has Oregon QREs for the three preceding years:

Credit = 0.14 x (Current Oregon QREs – (50% of Average Oregon QREs for Prior 3 Years))

If the company does not have Oregon QREs for each of the three preceding years:

Credit = 0.06 x Current Oregon QREs

Refundability Tiers and Employee Counts

A distinctive feature of the Oregon semiconductor credit is its partial refundability. This is designed to provide immediate cash flow to smaller, pre-revenue, or early-stage firms that are investing heavily in innovation. The degree of refundability is determined by the number of employees the taxpayer has in Oregon as of the last day of the tax year.

Number of Oregon Employees	Refundable Percentage	Non-Refundable Percentage (Carryforward)
Fewer than 150	75%	25%
150 to 499	50%	50%
500 to 2,999	25%	75%
3,000 or more	0% (Carryforward only)	100%

Any portion of the credit that is not refundable may be carried forward for up to five tax years. For large corporations with over 3,000 employees, the credit functions purely as a non-refundable carryforward credit, mirroring the traditional structure of R&D incentives.

Administrative Compliance: The Certification Process

Unlike the federal R&D credit, which is self-certified on Form 6765, the Oregon semiconductor R&D credit requires an annual application and certification from Business Oregon (the Oregon Business Development Department) before it can be claimed on a tax return.

Certification Deadlines and Requirements

For the 2025 tax year and beyond, the application deadline is October 15th of the calendar year in which the tax year begins. Taxpayers must submit a written application that includes:

• A description of how the company meets the “qualified semiconductor company” definition.
• A description of the research activities and how they support the semiconductor trade or business.
• An attestation that the research is conducted in Oregon.
• A projection of QREs for the current tax year and a report of QREs for the three preceding tax years.
• An application fee (set at $3,000 for 2025).

Business Oregon reviews these applications and, if approved, issues a certification. The department processes applications chronologically and is subject to biennial statewide caps on the total amount of credits that can be certified.

Statewide Credit Caps

The legislature has established a ceiling on the total credits available each biennium to protect the state’s financial stability. If the total requested credits exceed these amounts, the department may need to prorate certifications.

Biennium / Fiscal Period	Statewide Certification Cap
July 1, 2023 – June 30, 2025	$35 Million
July 1, 2025 – June 30, 2027	$80 Million
July 1, 2027 – June 30, 2029	$90 Million
Fiscal Year 2029-30 (Partial)	$50 Million

The 2025 annual allocation within the biennium cap was set at $38.25 million. Due to the high demand for these credits—with reported 2025 QREs hitting nearly $3.9 billion—the certification process is competitive, and early application is advised for large firms.

Practical Example: Silicon Litho Systems Corp.

To illustrate the application of these rules, consider Silicon Litho Systems Corp. (SLSC), an Oregon-based company that designs and fabricates advanced lithography equipment for the semiconductor industry.

Company Profile and Data

In the 2024 tax year, SLSC has 120 full-time employees, all based at their Hillsboro, Oregon headquarters. They have no prior history of Oregon QREs because they previously conducted research in another state.

• 2024 Oregon QREs (Wages + Supplies + In-state Contracts): $5,000,000.
• Qualified Semiconductor Company: Yes, they create semiconductor manufacturing equipment.
• Conducted in Oregon: Yes, all personnel and activities are based in Hillsboro.
• Business Component: Advanced lithography optics directly related to semiconductors.

Step 1: Certification

SLSC applies to Business Oregon by the October 15, 2024 deadline. They pay the application fee and provide projections showing $5,000,000 in QREs. Since they have no prior Oregon QRE history, they project a credit using the 6% ASC rate for firms without history.

Projected Credit = 0.06 x $5,000,000 = $300,000

Business Oregon issues a certification for $300,000.

Step 2: Calculation on Tax Return

When SLSC files its Oregon Corporation Excise Tax Return (Form OR-20), it includes Schedule OR-RESEARCH.

1. Current Year QREs (Part II, Line 4): $5,000,000.
2. ASC Method (Part III, Line 19): $5,000,000 x 6% = $300,000.
3. Maximum Credit (Part III, Line 17): $4,000,000.
4. Final Credit (Part III, Line 20): Lesser of $300,000 or $4,000,000 = $300,000.

Step 3: Refundability Determination

SLSC reports 120 Oregon employees (Part IV, Line 22).

1. Refundable Percentage: 75% (for <150 employees).
2. Refundable Portion: $300,000 x 75% = $225,000.
3. Non-Refundable Portion: $300,000 – $225,000 = $75,000.

SLSC uses the $225,000 as a refundable credit on their return, which can even reduce their corporate minimum tax to zero. The remaining $75,000 is used to offset any additional tax liability, with any unused amount carried forward for up to 5 years.

Interaction with Federal IRC Section 174 Amortization

One of the most complex areas of research tax law currently is the interplay between the R&D credit (Section 41) and the mandatory capitalization of research expenses (Section 174). For tax years beginning after December 31, 2021, companies can no longer immediately deduct R&D expenses. Instead, they must capitalize them and amortize them over 5 years (for domestic research) or 15 years (for foreign research).

Since the Oregon R&D credit is based on expenses that qualify under Section 174, companies must be careful to ensure their state credit claims are consistent with their federal capitalization treatment. Revenue Procedure 2025-28 and subsequent IRS guidance provide rules on how to make elections for unamortized amounts from prior years, which may impact the “base period” calculations for the Oregon credit in 2024 and 2025. This federal change has significantly increased taxable income for many firms, making the Oregon credit even more valuable as a tool for managing cash flow.

Comparison with Other Economic Incentives

While the semiconductor R&D credit is a primary incentive, it is part of a larger ecosystem of economic tools in Oregon. Companies conducting “qualified research” often also utilize Enterprise Zone (EZ) or Long-Term Rural Enterprise Zone (LTREZ) property tax exemptions.

Incentive Program	Primary Benefit	Eligibility Criteria
Semiconductor R&D Credit	Income/Excise Tax Reduction or Refund.	Qualified semiconductor research in Oregon.
Enterprise Zone (EZ)	3 to 5-year property tax exemption on new equipment/facilities.	New investment in a designated zone with job creation.
Rural Enterprise Zone	7 to 15-year property tax exemption.	Exceptional investment in rural areas with economic hardship.
Strategic Investment Program (SIP)	Capped property taxes on large investments.	Investments exceeding $150M (urban) or $40M (rural).

A company building a new fabrication plant in Hillsboro might simultaneously benefit from an Enterprise Zone property tax exemption on the building and equipment, a Strategic Investment Program cap on future property taxes, and the Semiconductor R&D credit on the wages of the engineers working inside that facility. However, coordination is required, as some programs have overlapping reporting requirements or may limit “stacking” of credits in specific circumstances.

Future Outlook and Sunset Provisions

The Research and Development Tax Credit for Semiconductors is currently set to sunset on January 1, 2030. This means that for tax years beginning on or after that date, the credit will no longer be available unless the Oregon Legislature acts to extend it.

The Legislature has tasked the Legislative Revenue Office with preparing a report by October 2034 on the potential use and economic impact of the credit. This report will likely influence whether the credit is renewed or modified. In the interim, firms must navigate annual changes to the statewide cap and the application fee, which increased to $3,000 for the 2025 cycle.

Implications for Compliance and Documentation

The Oregon Department of Revenue and Business Oregon emphasize the importance of meticulous documentation. Because the credit is certified based on projections but claimed based on actuals, companies must be prepared for audits that bridge these two values.

Essential documentation includes:

• Project Lists: Detailed descriptions of research projects, including the technical uncertainties being addressed.
• Payroll Records: Documentation showing employee wages, job titles, and, most importantly, their physical work location to satisfy the “conducted in Oregon” test.
• General Ledgers: Invoices and payment records for supplies and contract research, with specific notes on the location where the contractor performed the work.
• Technical Evidence: Lab notebooks, prototypes, test results, and modeling data that prove a process of experimentation occurred.

Recent federal court cases, such as Little Sandy Coal Company, Inc. v. Commissioner and Leonard L. Grigsby v. United States, have heightened the IRS’s focus on “business components” and the “substantially all” requirement of the process of experimentation test. The Oregon Department of Revenue is likely to follow this trend, requiring more granular data on which specific activities within a project qualify for the credit. Starting in tax year 2024, the IRS has revised Form 6765 to require detailed business component information, and while Oregon’s Schedule OR-RESEARCH is currently less detailed, the underlying documentation requirement for a state audit remains high.

The meaning of “qualified research conducted in Oregon” is thus a blend of federal innovative standards and strict state geographic and industrial filters. For the semiconductor industry, it represents one of the most significant tax incentives in the state’s history, providing a crucial mechanism for offsetting the high costs of innovation in a globally competitive market. Successful utilization of this credit requires an integrated approach that combines engineering-level project tracking with sophisticated tax accounting and rigorous administrative filing discipline.

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