New Research and Development Facilities Deduction (R.I. Gen. Laws § 44-32-1)

R.I. Gen. Laws § 44-32-1 provides a taxpayer with an elective, one-year write-off for the total expenditures incurred in constructing or acquiring new, tangible research and development facilities located within the state. This deduction serves as a primary alternative to standard depreciation or investment tax credits, enabling immediate capital recovery to incentivize the establishment of high-technology infrastructure in Rhode Island.

The statutory environment for innovation-based tax incentives in Rhode Island is characterized by a sophisticated interplay between capital asset deductions and operational expense credits. At the center of this framework is R.I. Gen. Laws § 44-32-1, which allows corporate and personal income taxpayers to deduct the entire cost of new, tangible, depreciable property used for research and development from their allocated net income in the year the property is placed in service. Historically, this provision has functioned as a cornerstone of the state’s economic development policy, designed to alleviate the high upfront costs associated with specialized laboratory and experimental facilities. However, this benefit is strictly elective and mutually exclusive; choosing the § 44-32-1 deduction precludes the taxpayer from claiming the investment tax credit under § 44-31-1 or the research and development property credit under § 44-32-2 for the same asset. The regulatory oversight provided by the Rhode Island Division of Taxation, particularly under 280-RICR-20-20-12, ensures that these incentives are reserved for activities that meet the rigorous definitions of “research and development in the experimental or laboratory sense,” while also maintaining strict “situs” requirements to ensure that the economic benefits of the research activity remain within Rhode Island. As the state navigates recent legislative shifts, including the sunsetting of facility-based incentives in 2026 and decoupling from federal R&D expensing rules under H.R. 1, understanding the granular mechanics of these laws is essential for strategic tax planning and compliance.

Statutory Framework and Meaning of R.I. Gen. Laws § 44-32-1

The “New Research and Development Facilities” deduction is an elective modification to federal taxable income that allows a taxpayer to bypass multi-year depreciation schedules in favor of an immediate 100% write-off. This provision applies to taxpayers subject to the Business Corporation Tax (Chapter 11) or the Personal Income Tax (Chapter 30).

Fundamental Qualification Criteria for Property

The availability of the deduction is contingent upon the nature and use of the property. For an asset to qualify, it must meet several distinct statutory requirements:

• Newness and Tangibility: The property must be “new” and “not used,” meaning second-hand or refurbished equipment and facilities are ineligible. It must also be tangible property, including buildings and structural components, as opposed to intangible intellectual property.
• Depreciability: The property must be depreciable pursuant to 26 U.S.C. § 167.
• Method of Acquisition: The asset must be acquired by “purchase” as defined in 26 U.S.C. § 179(d). This generally excludes assets acquired from related parties or affiliates where the basis is determined by reference to the transferor’s basis.
• Situs: The property must have a physical situs in Rhode Island. This requirement ensures that the state’s revenue loss is balanced by physical capital investment and job creation within its borders.
• Qualified Use: The property must be used in the taxpayer’s trade or business for purposes of research and development in the “experimental or laboratory sense.”

Defining “Research and Development” for State Purposes

Rhode Island law and its accompanying regulations provide a precise definition of what qualifies as research and development. Under 280-RICR-20-20-12.4, the term includes the development of experimental or pilot models, plant processes, products, formulas, inventions, or the improvement of existing property of the same types. Conversely, the statute explicitly excludes several activities that might be colloquially viewed as research but do not meet the “experimental sense” threshold:

Excluded Activity	Statutory Context
Quality Control	Ordinary testing or inspection of materials or products for quality control purposes.
Efficiency Surveys	Management studies and surveys regarding operational efficiency.
Consumer Surveys	Market research, consumer surveys, and advertising or promotions.
Literary Projects	Research in connection with literary, historical, or similar academic projects.

The Prohibition Against Leasing

The deduction is specifically designed for taxpayers who own and operate their own R&D facilities. R.I. Gen. Laws § 44-32-1(c) stipulates that a taxpayer is not allowed the deduction for property leased to another person or corporation, or property leased from another person or corporation. This prevents “triple dipping” where multiple entities might attempt to claim benefits on the same physical asset. Any contract or agreement to lease, rent, or license the use of property is treated as a lease unless it is treated as an installment purchase for federal income tax purposes. If a facility is used partially for the taxpayer’s own R&D and partially for leasing, the deduction is allowed only in proportion to the time the taxpayer uses the property for its own qualified research.

Interaction with the Rhode Island R&D Tax Credit (§ 44-32-3)

While § 44-32-1 addresses capital investment in facilities, § 44-32-3 provides a credit against the tax for “qualified research expenses” (QREs). These expenses typically include wages, supplies, and contract research costs rather than the cost of the building or equipment itself.

Mechanics of the Research Expense Credit

The Rhode Island R&D tax credit is an incremental credit, meaning it is calculated based on the excess of current-year qualified research expenses over a “base period” amount. The state follows the definitions provided in 26 U.S.C. § 41, but limits the qualifying expenses to those incurred within Rhode Island.

The credit utilizes a tiered rate structure for expenditures paid or accrued after January 1, 1998:

• 22.5% on the first $111,111 of excess QREs (resulting in a maximum credit of $25,000 for this tier).
• 16.9% on the excess QREs above $111,111.

This tiered approach is intended to provide a relatively higher benefit to small and medium-sized enterprises (SMEs) and early-stage biotechnology or technology firms that may have lower overall R&D spending but are critical to the state’s innovation ecosystem.

The 50% Tax Liability Limitation

A critical difference between the § 44-32-1 deduction and the § 44-32-3 credit is the “50% rule.” The credit allowed under § 44-32-3 cannot reduce the taxpayer’s tax liability for the year by more than 50% of the tax that would otherwise be payable. For corporations, the credit also cannot reduce the tax below the fixed statutory minimum, which is currently $400.

If a taxpayer’s available credit exceeds these limits, the unused portion may be carried forward for up to seven years. Recent legislative changes enacted in 2025 have proposed expanding this carryforward period to 15 years for tax years beginning in 2026, while simultaneously reinforcing the 50% limitation.

Comparison of R&D Property Incentives: § 44-32-1 vs. § 44-32-2

Rhode Island offers two primary incentives for R&D property, and the taxpayer must choose between them. While § 44-32-1 provides a deduction from income, § 44-32-2 provides a credit against the tax.

Feature	§ 44-32-1 Deduction	§ 44-32-2 Credit
Type of Benefit	Modification to Net Income (100% write-off).	Tax Credit (10% of cost/basis).
Target Assets	New R&D facilities and buildings.	Tangible personal property and buildings.
Useful Life	No minimum specified beyond depreciability.	Must have useful life of 3 years or more.
Carryforward	3 years (for the deduction).	7 years (for the credit).
Exclusivity	In lieu of depreciation and credits.	Cannot use if § 44-32-1 is taken.

Strategic choice between these two often hinges on the taxpayer’s current profitability. A firm with high current income but low tax liability might prefer the deduction to reduce their overall tax base, while a firm with moderate income but a desire to preserve future tax offsets might prefer the credit due to its longer carryforward period.

Revenue Office Guidance and Administrative Regulations

The Rhode Island Division of Taxation has issued extensive guidance through the Rhode Island Code of Regulations (RICR) and various declaratory rulings to maintain the integrity of the R&D incentive programs.

Recomputation and Recapture (280-RICR-20-20-12.7)

One of the most complex aspects of the § 44-32-1 deduction is the potential for recomputation if the property’s use changes. The law requires a recomputation of the deduction if the property is used for purposes other than research and development to a greater extent than originally reported, unless the property was in qualified use for its entire useful life.

Specific events that trigger a recomputation under 280-RICR-20-20-12.7 include:

• Disposal of Assets: Selling or exchanging the property before the end of its useful life.
• Removal from Rhode Island: Moving the equipment or laboratory out of state.
• Change in Entity Status: Liquidation or legal dissolution of the taxpayer.
• Cessation of Qualified Use: Transitioning a facility from a laboratory to a general administrative office or warehouse.
• Leasing: Beginning to lease the property to a third party.

If a recomputation is triggered, the taxpayer must report the change in its tax return for the first year in which the change occurs. The additional tax resulting from the recomputation is due as a recapture of the previously taken deduction.

Adjustments for Sales and Dispositions (280-RICR-20-20-12.10)

The Division of Taxation provides unique rules for calculating gain or loss upon the sale of a facility that was subject to the § 44-32-1 deduction. Because the taxpayer has already written off 100% of the cost for Rhode Island purposes, the state basis of the property is zero. When the property is sold, the gain or loss used for federal taxable income is disregarded. Instead, the entire proceeds of the sale (adjusted for any non-R&D basis) are typically added to Rhode Island income to ensure that the state recovers the tax benefit previously granted if the asset is monetized before its useful life ends.

Guidance on the “Base Period” for Credits (Ruling 95-05)

In Ruling Request No. 95-05, the Tax Administrator clarified that the term “base period research expense” as used in § 44-32-3 is synonymous with the “base amount” defined in IRC § 41(c). The ruling further established that if a taxpayer’s qualified Rhode Island research expenses are for a period of less than twelve months (such as in a short tax year), the state does not require a formal proration of the base amount; rather, the credit is determined by the actual expenses incurred in Rhode Island after the effective date of the statute (July 1, 1994).

Decoupling from Federal H.R. 1 and the “Section 174A” Add-Back

A transformative change in Rhode Island R&D taxation occurred in 2025 with the state’s response to federal legislation (H.R. 1, the “One Big Beautiful Bill Act”). While the federal government moved to allow accelerated expensing of research and experimental (R&E) expenditures, Rhode Island elected to decouple from this treatment to protect its revenue base.

The Requirement for Five-Year Amortization

Rhode Island law now requires that domestic research and experimental expenditures be amortized over a five-year period for state tax purposes, even if they are fully expensed for federal purposes. This decoupling is retroactive for small businesses for tax years 2022, 2023, and 2024 if they choose to amend their federal returns to take advantage of federal acceleration.

Schedule 174A and Schedule HR1

To manage this discrepancy, the Division of Taxation introduced new reporting forms:

1. RI Schedule 174A: Used to calculate the “Section 174A Amortization Adjustment.” If a taxpayer fully expenses R&D on their federal return, they must use this worksheet to calculate the amount that must be added back to Rhode Island income to reflect five-year amortization.
2. RI Schedule HR1: This schedule acts as a summary of add-backs related to H.R. 1 provisions. For individuals, these add-backs are then reported on RI Schedule M as an increasing modification.

Taxpayers who report an add-back in 2025 or later are entitled to a “decreasing modification” in subsequent years to reflect the ongoing amortization of that expense. This decreasing modification is capped at 20% of the initial add-back per year, ensuring the state’s revenue impact is spread out over time.

The 2026 Sunset of R&D Facility Incentives

The Rhode Island General Assembly has enacted significant sunset provisions that will fundamentally alter the state’s R&D tax landscape starting in 2026.

Expiration Dates for Primary Incentives

According to the Fiscal Year 2026 Budget Bill, several incentives are scheduled to expire:

• § 44-32-1 (Facility Deduction): No deductions will be allowed for expenditures paid or incurred in tax years beginning on or after January 1, 2026.
• § 44-32-2 (Property Credit): No credits will be allowed for research and development property acquired, constructed, or reconstructed in tax years beginning on or after January 1, 2026.
• Jobs Growth Act: Applications for certification will not be accepted after January 1, 2026.

Taxpayers who earned these benefits in tax years ending on or before December 31, 2025, are permitted to carry forward any unused amounts into future years, subject to the original statutory carryforward limits (3 years for the deduction and 7 years for the property credit).

Modification of the § 44-32-3 Expense Credit

The R&D expense credit was not sunsetted, but its terms were modified. While the 50% liability cap remains in place, the carryforward period for unused credits has been extended to 15 years for tax years beginning in 2026. This extension is intended to provide long-term support for the innovation sector while the state phases out the upfront capital investment incentives.

Procedural Administration and Filing Requirements

Compliance with the Rhode Island R&D framework requires meticulous adherence to filing deadlines and the use of specific schedules.

Consolidated and Combined Reporting Rules

For corporations that are part of a consolidated federal return or a Rhode Island unitary combined group, the R&D incentives are subject to strict “entity-level” rules. The research and development deduction and credits are only allowed against the income or tax of the specific corporation that incurred the qualifying expenditures. They cannot be shared with other members of the combined group to offset their respective income or tax liabilities.

Mandatory Forms and Documentation

To successfully claim these incentives, taxpayers must typically include the following in their state filing:

• Form RI-1120C: The Business Corporation Tax Return, identifying the R&D adjustments on Schedule B (Deductions) or Schedule E (Other Deductions).
• Form RI-7695E: The specific form for calculating the R&D Expense Credit, detailing federal QREs and the portion attributable to Rhode Island.
• Schedule B-CR: The Business Entity Credit Schedule, which aggregates all state credits and ensures proper ordering (Investment Tax Credit must be taken before R&D Property Credits, which must be taken before R&D Expense Credits).
• Original Certificates: For certain programs, such as the Jobs Growth Act or contributions to scholarship organizations, the taxpayer must provide an original certificate issued by the Division of Taxation or the Commerce Corporation.

Taxpayer Rights and Audit Guidelines

Under 280-RICR-20-00-4, taxpayers have the right to clear and plain-language explanations of tax law and the right to prompt responses to requests for assistance. During an audit of R&D credits, revenue agents typically look for:

• Documentation tying Rhode Island research activities to the federal Form 6765.
• Records confirming the “new” status of the property and its physical location in the state.
• Evidence of the technological nature of the research to satisfy the “experimental sense” requirement.

Comprehensive Example: Applying § 44-32-1 and § 44-32-3

To illustrate the integrated application of these laws, consider a hypothetical medical device manufacturer, “Ocean State Biologics” (OSB).

Scenario Data

In the 2024 tax year, OSB makes the following investments and incurs the following expenses:

1. New Laboratory Construction: $1,500,000 (qualified tangible property).
2. Laboratory Equipment: $500,000 (purchased, new, in RI).
3. Qualified Research Wages in RI: $800,000.
4. Federal Base Amount (per IRC § 41): $650,000.
5. Allocated Rhode Island Net Income: $4,000,000.
6. Corporate Tax Rate: 7%.

Step 1: Evaluating § 44-32-1 vs. § 44-32-2 for Property

OSB must decide whether to use the one-year deduction or the property credit for their $2,000,000 in property ($1.5M building + $500K equipment).

Option A: The § 44-32-1 Deduction

• Total Deduction: $2,000,000.
• Revised Net Income: $4,000,000 – $2,000,000 = $2,000,000.
• Tax Before Credits: $2,000,000 \times 7% = $140,000.
• Benefit: Immediate reduction of $140,000 in tax. However, OSB forfeits all depreciation on this property for Rhode Island purposes and cannot claim any other property credits.

Option B: The § 44-32-2 Property Credit

• Net Income: $4,000,000.
• Tax Before Credits: $4,000,000 \times 7% = $280,000.
• Credit Amount: $2,000,000 \times 10% = $200,000.
• Benefit: Immediate reduction of tax by $200,000. OSB can still claim the federal depreciation (though they may have a state add-back if they used federal accelerated expensing).

In this case, OSB chooses Option B to maximize their tax benefit.

Step 2: Calculating the § 44-32-3 Expense Credit

The credit is calculated on the “excess” QREs.

• Current Year QREs: $800,000.
• Base Amount: $650,000.
• Excess QREs: $150,000.

Tiered Credit Calculation:

• Tier 1 (First $111,111): $111,111 \times 22.5% = $25,000.
• Tier 2 (Remainder over $111,111): ($150,000 – $111,111) \times 16.9% = $38,889 \times 16.9% \approx $6,572.
• Total Calculated Credit: $31,572.

Step 3: Final Tax Liability and Limitations

OSB must now apply the credits in the correct order while respecting the 50% liability cap.

1. Initial Tax Liability: $280,000.
2. Apply Property Credit (§ 44-32-2):
   • Amount: $200,000.
   • Tax After Property Credit: $80,000. (Note: The property credit itself does not have a 50% cap, but it cannot reduce the tax below $400).
3. Apply Expense Credit (§ 44-32-3):
   • Maximum Usable Credit Limit: The credit cannot reduce the tax due for that year by more than 50% of the liability that would be payable.
   • Base for 50% Limit: $280,000.
   • 50% Cap: $140,000.
   • Credit Available: $31,572.
   • Tax Payable after prior credits: $80,000.
   • Since the available credit ($31,572) is less than the 50% cap ($140,000) and leaves the tax above the $400 floor, it is fully usable.
4. Final Tax Due: $80,000 – $31,572 = $48,428.

Step 4: Long-term Carryforward Monitoring

If OSB had a lower tax liability—for example, only $50,000—the 50% cap would have limited their use of the expense credit to $25,000, forcing a carryforward of the remaining $6,572. Similarly, if they sold the laboratory equipment in 2026, they would be subject to a recomputation and add-back of the 10% credit taken on that equipment for the portion of its useful life not spent in Rhode Island.

Summary of Key Takeaways

The Rhode Island research and development tax framework is currently in a state of transition. While R.I. Gen. Laws § 44-32-1 remains a powerful tool for immediate capital recovery for 2024 and 2025 investments, the impending sunset of facility-based incentives in 2026 places a premium on current-year projects. Concurrently, the state’s decoupling from federal H.R. 1 requires a more nuanced approach to reporting R&D expenditures, necessitating the use of the new Schedule 174A to manage mandatory amortization.

For businesses operating in Rhode Island, the strategy should focus on:

• Accelerating planned facility investments to qualify before the January 1, 2026 cutoff.
• Carefully choosing between the § 44-32-1 deduction and the § 44-32-2 credit based on projected multi-year profitability and tax capacity.
• Maintaining rigorous documentation of the Rhode Island situs of research to support § 44-32-3 incremental credit claims.
• Ensuring that any change in property use is promptly reported to avoid penalties associated with recomputation and recapture.

By integrating these facility-based incentives with the permanent R&D expense credit, Rhode Island continues to offer a competitive, albeit complex, environment for technological innovation. The extension of the expense credit carryforward to 15 years signal’s the state’s long-term commitment to the research sector, even as it pivots away from subsidizing the initial construction of the facilities themselves.