One-year Write-off of New Research and Development Facilities

The one-year write-off of new research and development facilities is an elective state tax deduction allowing Rhode Island taxpayers to immediately expense the full cost of qualifying property used for innovation. This provision replaces the standard multi-year depreciation schedule or the alternative ten percent research and development property tax credit, providing a significant front-loaded tax benefit for major capital investments in research infrastructure.

The statutory landscape governing research and development (R&D) in Rhode Island is characterized by a sophisticated tripartite structure designed to incentivize various stages of the innovation lifecycle. While many jurisdictions provide simple tax credits for incremental spending, the Rhode Island General Laws (RIGL) offer a unique choice for capital-intensive projects: the elective deduction under § 44-32-1, commonly known as the “One-year write-off.” This mechanism is not merely a tax preference but a strategic tool for managing corporate liquidity, particularly for firms in the life sciences, biotechnology, and specialized manufacturing sectors where the cost of developing laboratory space and pilot models often exceeds the immediate benefits provided by standard tax credits. By allowing a taxpayer to subtract the entire cost of a new facility from their allocated net income in a single year, the state effectively subsidizes the “bricks and mortar” of innovation. However, the adoption of this deduction triggers a series of mandatory exclusions and long-term compliance requirements, particularly regarding the prohibition of future depreciation and the mandatory add-back of federal amortization. The recent enactment of federal legislation under the “One Big Beautiful Bill Act” and Rhode Island’s subsequent decoupling from these federal standards for the 2025 and 2026 tax years has introduced an unprecedented layer of administrative complexity. Taxpayers must now navigate a dual-track system where federal expensing is neutralized at the state level through complex add-backs, unless the specific state-level elective write-off is properly invoked.

Statutory Architecture of RIGL § 44-32-1 and the Elective Deduction

The legal foundation for the accelerated recovery of R&D facility costs is found in Rhode Island General Laws § 44-32-1. This statute permits a taxpayer subject to the business corporation tax under Chapter 11 or the personal income tax under Chapter 30 to elect a deduction from the portion of its entire net income allocated within the state. This “allocated entire net income” is the critical base upon which the deduction operates, representing the income assigned to Rhode Island after the application of the state’s apportionment formulas. The “one-year write-off” terminology stems from subsection (b), which permits the deduction of expenditures paid or incurred during the taxable year for the construction, reconstruction, erection, or acquisition of any new property used for research and development.

The statute functions as a departure from the general principle of capitalization. In standard accounting and tax practice, buildings and equipment are capitalized and recovered through depreciation over their useful lives. By electing the § 44-32-1 treatment, the taxpayer moves the entirety of that recovery into the year the property is placed in service. This election is irrevocable in the sense that once the deduction is taken, the net income for that year and all succeeding years must be computed without any deduction for depreciation of that same property. Furthermore, the statute explicitly defines “entire net income” as the net income allocated to Rhode Island, ensuring that the deduction directly offsets the income that would otherwise be subject to the state’s tax rate.

Mandatory Exclusions and the Hierarchy of Incentives

The Rhode Island General Assembly constructed the R&D incentive suite with a strictly “either-or” philosophy to prevent the compounding of tax benefits on the same asset. The law dictates that a taxpayer cannot claim the one-year write-off if they have already sought certain other environmental or investment incentives. Specifically, the deduction is disallowed if the taxpayer has exercised an election for the amortization of air or water pollution control facilities for the same property. More importantly for R&D-focused firms, the law prohibits the use of the Investment Tax Credit (ITC) under RIGL Chapter 31 on any research and development property for which the accelerated write-off is adopted.

This hierarchy is further complicated by the existence of the 10% Research and Development Property Credit under RIGL § 44-32-2. While both incentives target the same type of property, they are mutually exclusive. A taxpayer must perform a rigorous net-present-value analysis to determine whether an immediate 100% deduction from taxable income is more valuable than a 10% credit against the actual tax liability, especially given the differing carry-over periods associated with each. The elective write-off deduction allows for a three-year carry-over of any excess amount, whereas the property credit offers a more generous seven-year carry-forward window.

Combined Reporting and Entity-Level Restrictions

For corporate groups filing under Rhode Island’s combined reporting mandate, the § 44-32-1 deduction is subject to strict “tracing” protocols. The deduction is only permitted against the entire net income of the specific corporation within the combined group that actually incurred the qualifying expenditures. It cannot be shared or used to offset the income of other affiliates, even if those affiliates are part of the same unitary business. This ensures that the incentive stays with the entity performing the research and owning the facility, rather than being moved around the corporate structure to shield the most profitable subsidiaries from taxation.

Incentive Category	Statutory Reference	Primary Benefit Type	Mutual Exclusivity
R&D Facility Write-off	RIGL § 44-32-1	Full immediate deduction from allocated net income.	Cannot claim ITC or § 44-32-2 property credit.
R&D Property Credit	RIGL § 44-32-2	10% tax credit against the corporate or personal income tax.	Cannot claim § 44-32-1 facility write-off.
R&D Expense Credit	RIGL § 44-32-3	Tiered credit (22.5%/16.9%) for incremental wages and supplies.	Can be used alongside § 44-32-1 if expenditures are separate.

Qualification Criteria: Defining Research and Development Property

The eligibility of property for the one-year write-off is governed by both the statute and the Rhode Island Code of Regulations, specifically 280-RICR-20-20-12. To qualify, the property must meet a five-fold test: it must be new, tangible, depreciable, purchased, and located in Rhode Island.

The “New Property” and “Purchase” Requirements

Rhode Island law is explicit that the property must be “new” and “not used.” This distinction is intended to stimulate the creation of new infrastructure rather than the mere transfer of existing assets between taxpayers. Furthermore, the property must be acquired by “purchase” as defined in 26 U.S.C. § 179(d). This federal cross-reference is significant because it imports federal standards regarding related-party transactions and the manner of acquisition. If an asset is acquired in a transaction where the basis is determined by reference to the adjusted basis in the hands of the person from whom it was acquired (such as certain corporate reorganizations or gifts), it may fail the purchase requirement and thus be ineligible for the write-off.

Tangible and Depreciable Assets

The write-off applies to qualifying depreciable tangible property, which includes buildings constructed, reconstructed, or erected during the taxable year. To be eligible, the property must be depreciable pursuant to 26 U.S.C. § 167. This includes structural components of buildings that are essential to the R&D function. The regulatory guidance further clarifies that the research and development deduction is allowed in the year in which the expenditure is paid or incurred, but only for the portion of the expenditures properly attributable to construction or acquisition that occurred after July 1, 1974.

The “Situs” and Principally Used Standard

The property must have a situs in Rhode Island and be used in the taxpayer’s trade or business for purposes of research and development in the “experimental or laboratory sense.” This definition is intentionally narrow. The state follows the general guidelines of the federal R&D tax credit, focusing on the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or the improvement of existing property.

However, the statute provides a robust list of excluded activities that do not meet the “experimental” threshold:

• Quality Control: Ordinary testing or inspection of materials or products for quality control is not research.
• Operational Studies: Efficiency surveys, management studies, and consumer surveys are excluded.
• Promotion: Advertising and promotion activities do not qualify.
• Non-Scientific Research: Research in connection with literary, historical, or similar projects is ineligible.

If property is used for research and development only in part, or only during part of its useful life, the taxpayer is required to calculate a proportionate part of the expenditures for the deduction. For instance, if a building contains both a qualifying laboratory and a non-qualifying administrative wing, only the costs associated with the laboratory space may be written off under § 44-32-1.

Leasing and Rental Restrictions

A critical limitation in Rhode Island tax law is the treatment of leased property. A taxpayer is not allowed a deduction under § 44-32-1 with respect to tangible property leased by it to any other person or corporation, or leased from any other person or corporation. The Division of Taxation interprets any contract or agreement for a license to use the property as a lease, unless that agreement is treated for federal income tax purposes as an installment purchase. This ensures that the tax benefit remains with the entity that is both the owner and the primary user of the R&D facility. Even in the context of consolidated groups, where a parent company might buy property and lease it to a research subsidiary, the deduction will be disallowed because the purchaser is not the user.

The 2025 Federal Decoupling: H.R. 1 and the New Compliance Framework

The landscape for R&D expensing underwent a seismic shift with the federal passage of H.R. 1, also known as the “One Big Beautiful Bill Act” (OBBBA), in July 2025. This federal law introduced IRC Section 174A, which restored the ability for businesses to immediately deduct domestic research and experimental expenditures, reversing the mandatory five-year amortization requirement that had been in place since 2022.

Rhode Island’s Fiscal Decoupling

In its Fiscal Year 2026 Budget, the Rhode Island General Assembly chose to decouple from these federal changes. This means that for Rhode Island tax purposes, the state does not follow the federal treatment of accelerated expensing for R&D expenditures. Instead, Rhode Island continues to require the amortization of these expenditures over a multi-year period, unless the taxpayer specifically elects the § 44-32-1 write-off for qualifying facilities.

This creates a significant compliance gap. If a taxpayer elects to immediately expense R&D costs on their federal return, they must perform an “add-back” on their Rhode Island return to neutralize the federal benefit and then apply the state-mandated amortization rules.

Introduction of Schedule 174A and Schedule HR1

To manage this decoupling, the Rhode Island Division of Taxation introduced several new forms and schedules. The RI Schedule 174A – Section 174A Amortization Worksheet was created to ensure taxpayers properly comply with the state’s requirement to amortize domestic R&D expenditures even if they are expensed federally.

The compliance process for Tax Year 2025 and beyond is as follows:

• Federal Filing: The taxpayer expenses the R&D expenditures under IRC § 174A.
• Rhode Island Add-back: The taxpayer must report an increasing modification on RI Schedule M (for individuals) or RI Schedule HR1-Entity (for corporations) for the amount expensed federally.
• State Amortization: The taxpayer then completes RI Schedule 174A to calculate the allowable Rhode Island amortization deduction for the current year.
• Decreasing Modifications: In future years, the taxpayer is allowed a decreasing modification on Schedule M or the business return to recover the remainder of the cost. This decreasing modification is strictly limited; it cannot exceed twenty percent (20%) of the initial add-back in each subsequent year.

Retroactive Impact for Small Businesses

Small businesses, defined as those with annual gross receipts of $31 million or less for Tax Year 2025, were given the federal option to retroactively accelerate R&D expensing for Tax Years 2022, 2023, and 2024. If a small business chooses this federal election, they are required to file an amended return with Rhode Island for those years. These amended returns must include the new RI schedules to reflect the required state-level add-backs and the conversion to state-mandated amortization.

Compliance Requirement	Relevant Form	Applicability
Federal Expensing Add-back	RI Schedule HR1	All filers expensing R&D under federal PL 119-21.
RI Amortization Calculation	RI Schedule 174A	All filers required to amortize R&D for RI state purposes.
Future Recovery (20% Limit)	RI Schedule M / Bus. Returns	Taxpayers who added back federal expenses in 2025.
Pass-through Reporting	RI Schedule K-1	Entities passing through R&D modifications to owners.

Local State Revenue Office Guidance and Procedural Filing Requirements

The Rhode Island Division of Taxation provides comprehensive guidance on how the § 44-32-1 deduction should be reported across various entity types. For business entities, the adjustment is primarily handled as a modification to federal taxable income.

Guidance for C-Corporations (Form RI-1120C)

For C-corporations, the research and development adjustment is reported on Form RI-1120C. Specifically, Line 7 of the return directs taxpayers to refer to RIGL § 44-32-1 for adjustments to the apportioned taxable income. The Division’s instructions clarify that taxpayers claiming this deduction must compute their “entire net income” for the taxable year and all succeeding years without any other deduction for depreciation on that property.

Furthermore, the Division mandates that if a taxpayer is filing a consolidated return, the R&D deduction is only allowed against the income of the specific qualifying corporation. This requires separate-entity accounting for R&D assets even within a combined group. For 2025 filers, the RI Schedule HR1-Entity must be used to add back federal IRC 174A amortization before determining Rhode Island taxable income.

Guidance for Pass-Through Entities (S-Corps and Partnerships)

Pass-through entities do not pay the income tax at the entity level but must calculate the R&D modifications to be passed through to their owners. These entities use RI Schedule K-1 to communicate each owner’s pro-rata share of the elective deduction under § 44-32-1. The owner then reports this as a decreasing modification on their own individual or fiduciary return.

Under the newer pass-through entity election tax (effective 2019 and updated for 2025), the entity may pay tax at the entity level, but the credit passed to owners is now limited to ninety percent (90%) of the amount paid by the entity. Each owner must still include the increasing modification amount for the beneficiary on their respective returns to ensure the state’s decoupling rules are maintained.

Guidance for Individuals and Fiduciaries (Schedule M)

Individual residents and non-residents, as well as estates and trusts, utilize RI Schedule M to report modifications to federal income.

• Individuals: The elective deduction for new R&D facilities is reported as a modification decreasing federal AGI on RI-1040 Schedule M.
• Fiduciaries: Similar reporting is required on the RI-1041 Schedule M, where the deduction is subtracted from federal total income.

The Division emphasizes that if a modification is not listed on Schedule M, it is not an allowable Rhode Island adjustment. This underscores the importance of correctly identifying the § 44-32-1 deduction on the specifically designated line for “Elective deduction for new research and development facilities.”

Recomputation and the Recapture of Benefits

The accelerated tax benefit provided by the one-year write-off is contingent on the facility maintaining its status as a qualifying R&D property. If the use of the property changes, or if the property is sold or disposed of, the law requires a “recomputation” of the tax for the year the deduction was originally taken.

Triggering Events for Recomputation

According to 280-RICR-20-20-12.7, a recomputation is necessary if the property is used for purposes other than research and development to a greater extent than originally reported. The phrase “purposes other than research and development” is broadly defined to include any change in use, whether in whole or in part.

Specific events that mandate a recomputation include:

• Corporate Dissolution: Liquidation or legal dissolution of the entity.
• Disposition: Sale, exchange, or termination of ownership interest.
• Foreclosure: Foreclosure of a security interest in the R&D property.
• Cessation of Use: Retirement of the property prior to the expiration of its useful life or its removal from Rhode Island.
• Leasing: Leasing the property to any other party.

Calculation of Recapture and Additional Tax

When a trigger event occurs, the tax resulting from the recomputation is due as an additional tax for the year the property ceased to qualify. The Tax Administrator has the authority to assess this additional tax within three years of the taxpayer reporting the change in use.

In cases of sale or disposition, the federal gain or loss is disregarded in computing Rhode Island’s allocated net income. Instead, the taxpayer must adjust the basis of the property to reflect the Rhode Island deduction already allowed. This ensures that the state “recaptures” the benefit of the accelerated write-off to the extent the asset was not used for its intended long-term R&D purpose. If the disposition is to a person whose acquisition is not a “purchase” under federal law, the taxpayer is prohibited from recognizing any loss on the transaction for state tax purposes.

The 2026 Sunset: A Major Policy Shift

A critical development for long-term tax planning is the enactment of sunset dates for several of Rhode Island’s primary R&D incentives. This legislation represents a pivot in the state’s economic strategy, moving away from permanent capital-based incentives toward more time-limited or performance-based programs.

Expiration of the § 44-32-1 Deduction

For the elective deduction for new research and development facilities, deductions are no longer allowed against a taxpayer’s personal or corporate income tax for tax years beginning on or after January 1, 2026. This applies to expenditures paid or incurred for the construction, reconstruction, or acquisition of property during such taxable years.

Expiration of the § 44-32-2 Property Credit

The 10% research and development property credit shares the same sunset date. Credits for research and development property acquired, constructed, or reconstructed after July 1, 1994, will not be allowed for tax years beginning on or after January 1, 2026.

Carry-Forward Survival Post-2026

Crucially, the sunset provision does not immediately eliminate the value of existing deductions or credits. The law stipulates that deductions or credits allowed for tax years ending on or before December 31, 2025, may be carried forward into tax years beginning on or after January 1, 2026. The original statutory carry-forward periods remain in effect:

• § 44-32-1 Deduction Carry-forward: Up to 3 years.
• § 44-32-2 Property Credit Carry-forward: Up to 7 years.

This means that a company that finishes a laboratory in late 2025 and generates a large deduction can still use that deduction to offset its income in 2026, 2027, and 2028.

Incentive Provision	Generation Sunset Date	Carry-forward Window
Elective Write-off (§ 44-32-1)	Jan 1, 2026	3 Years
R&D Property Credit (§ 44-32-2)	Jan 1, 2026	7 Years
R&D Expense Credit (§ 44-32-3)	Not Scheduled	7 Years

The R&D Expense Credit under § 44-32-3 was not included in this specific sunset list, although it was recently modified to cap the tax reduction at 50% of the liability and to ensure that corporations do not pay less than the statutory minimum tax.

Interaction with the R&D Expense Credit (§ 44-32-3)

While the facility write-off and the property credit are mutually exclusive, they both interact with the Research and Development Expense Credit under § 44-32-3. This credit focuses on “qualified research expenses” (QREs), which primarily encompass wages for researchers, laboratory supplies, and certain computer usage costs.

Different Bases of Calculation

The expense credit is calculated using an incremental approach tied to federal Form 6765 and Section 41 rules, but it is strictly limited to the portion of excess QREs incurred within Rhode Island after July 1, 1994. The rates are:

• 22.5% on the first $111,111 of RI excess QREs.
• 16.9% on any amount exceeding $111,111.

The 50% Liability Cap and Credit Ordering

Rhode Island imposes a strict limit on the use of the expense credit. It cannot reduce the tax due for any year by more than 50% of the tax liability that would otherwise be payable. Furthermore, the credit cannot reduce the corporate tax to less than the $400 minimum.

For purposes of determining the order in which carry-overs are applied, Rhode Island regulation 280-RICR-20-20-2 provides the following sequence:

1. Investment Tax Credit (§ 44-31-1) must be used first.
2. R&D Property Credit (§ 44-32-2) must be used second.
3. R&D Expense Credit (§ 44-32-3) is applied third.

This ordering is vital. Because the expense credit is limited to 50% of the remaining tax, any credits used before it reduce the base upon which that 50% is calculated. However, because the § 44-32-1 elective write-off is a deduction that reduces the initial taxable income (rather than a credit applied to the tax), it essentially “front-loads” the benefit, potentially allowing a taxpayer to maximize their use of the expense credit in a way that the property credit might not allow.

Comprehensive Example: Financial Impact of the § 44-32-1 Election

To illustrate the meaning of the one-year write-off in context, consider “Rhode Island BioTech (RIB),” a C-corporation that has just completed a new $5,000,000 laboratory facility in Providence. RIB must decide whether to take the 10% Property Credit or the § 44-32-1 Elective Write-off.

Assumptions for RIB’s 2024 Tax Year:

• Facility Cost: $5,000,000.
• Rhode Island Apportionment Ratio: 70% (reflecting high in-state concentration).
• Rhode Island Taxable Income (pre-R&D adjustments): $4,000,000.
• Rhode Island Corporate Tax Rate: 7%.
• Federal Depreciation Life (for building): 39 years.

Scenario A: Electing the One-Year Write-off (§ 44-32-1)

Under this election, RIB deducts the Rhode Island portion of the facility cost directly from its income.

1. Calculate RI-Allocated Deduction: $5,000,000 × 0.70 = $3,500,000.
2. Apply Deduction to RI Taxable Income: $4,000,000 – $3,500,000 = $500,000.
3. Calculate Initial Tax: $500,000 × 0.07 = $35,000.
4. Immediate Cash Benefit: Without the deduction, the tax would have been $280,000. The write-off provides an immediate savings of $245,000.
5. Future Impact: RIB can take no further depreciation on this facility for state purposes. In future years, it must add back any federal depreciation taken on this building.

Scenario B: Claiming the 10% R&D Property Credit (§ 44-32-2)

In this scenario, RIB maintains its standard income calculation but applies a credit to the resulting tax.

1. Calculate RI Tax (before credit): $4,000,000 × 0.07 = $280,000.
2. Calculate Total Credit Amount: $5,000,000 × 0.10 = $500,000.
3. Apply Credit (limited by minimum tax): RIB can reduce its tax to the $400 minimum.
4. Tax Due: $400.
5. Current Year Savings: $280,000 – $400 = $279,600.
6. Carry-forward: RIB has $500,000 – $279,600 = $220,400 in credit remaining to be used over the next 7 years.
7. Future Impact: RIB can still take state-level depreciation deductions in future years, as they did not elect the § 44-32-1 write-off.

Strategic Final Thoughts from Example

While Scenario B (the credit) provides a higher total tax reduction ($500,000 vs. $245,000), Scenario A (the write-off) is a modification to income. If RIB had significant other tax credits that were already reducing its tax liability near the 50% cap or the minimum tax, the write-off might be the only way to realize a current-year benefit. Additionally, if RIB expects the 7% corporate tax rate to decrease in the future, taking the full deduction now while the rate is higher provides a greater mathematical advantage than spreading depreciation over 39 years.

Summary of Local Revenue Office Forms and Guidance

The successful utilization of the R&D write-off requires precise documentation and the use of current-year forms. The Division of Taxation has emphasized that incomplete documentation will result in processing delays and potential disallowance of the modification.

Essential Documentation for Audit Protection

• Invoices and Placed-in-Service Records: Taxpayers must retain documentation showing the date the facility was ready for its assigned function and the exact costs incurred.
• Apportionment Spreadsheets: Since only the RI-allocated portion is deductible, taxpayers must provide a detailed breakdown of the apportionment factors (Property, Payroll, Sales) used to calculate the deduction.
• Federal Alignment: Records must tie the state-level claim to federal Form 6765 and Form 4562 where appropriate.
• Research Purpose Log: To defend the “principally used for R&D” requirement, taxpayers should maintain a narrative description of the activities occurring in the facility, specifically how they satisfy the “four-part test” (Technological in Nature, Permitted Purpose, Elimination of Uncertainty, and Process of Experimentation).

Mathematical and Administrative Rates Reference

The Division also enforces specific interest and penalty rates that apply if a recomputation or late filing occurs.

Rate Category	Current Standard	Applicability
Standard Interest Rate	12% per annum (1.0% per month)	Applied to any tax not paid when due after Jan 1, 2023.
Failure to File Penalty	5% of tax per month (max 25%)	Applied to returns filed after the deadline/extension.
Failure to Pay Penalty	0.5% of tax per month (max 25%)	Applied to unpaid balances after the due date.
Underpayment of Estimate	12% per annum	Applied if total advances are less than 80% of tax due.

Final Compliance Check for 2025 Filers

For the transition period of 2025, the Division has mandated an electronic filing protocol for “Larger Business Registrants” (those with over $5,000 in annual liability or $100,000 in gross income). These taxpayers must use the Division’s online portal or approved software to submit the RI-1120C and the associated Schedule HR1-Entity. If the filing software does not yet support the Section 174A Amortization Worksheet (Schedule 174A), the Division provides a specific email address (tax.corporate@tax.ri.gov) for the manual submission of these required attachments.

The convergence of the 2025 federal decoupling and the 2026 sunset of the facility write-off creates a “closing window” for Rhode Island innovation incentives. Businesses that have invested in the state’s R&D infrastructure must ensure they have meticulously documented their 2024 and 2025 expenditures to maximize their recovery before these long-standing provisions expire. As the state moves toward the 2026 sunset, the administrative focus of the Division of Taxation is shifting toward ensuring that the decoupling add-backs are properly captured, making the use of Schedule 174A the single most important compliance task for R&D-intensive firms in the current biennium.