Gross Receipts Attributable to Sources Within This State

Gross receipts attributable to sources within this state represent the portion of a taxpayer’s total operational revenue derived from Utah-based customers or activities as determined by the state’s statutory apportionment rules. In the specific framework of the Utah Research and Development credit, these receipts serve as the denominator in the historical spending ratio used to establish the base amount that current research expenditures must exceed.

Theoretical and Statutory Foundations of the Utah Research Activities Credit

The Utah Research Activities Credit is a multi-faceted tax incentive designed to stimulate technological innovation and high-value employment within the state by providing a nonrefundable offset against corporate franchise and individual income taxes. Primarily governed by Utah Code § 59-7-612 for corporations and § 59-10-1012 for individuals and pass-through entities, the credit creates a specific fiscal mechanism that mirrors federal standards while imposing strict geographical boundaries. To understand the role of gross receipts attributable to sources within this state, one must first acknowledge the credit’s three-component architecture, which distinguishes between incremental growth and total volume.

The first component is a 5% credit on the excess of current-year Utah qualified research expenses (QREs) over a base amount. The second is a 5% credit on payments for basic research conducted in Utah that exceed a separate base amount. The third is a 7.5% volume-based credit applied to all current-year Utah QREs, regardless of historical spending. While the 7.5% volume credit provides immediate relief for all research activities, it does not allow for a carryforward. In contrast, the 5% incremental credits allow for a 14-year carryforward period, making the calculation of the base amount—and thus the determination of Utah-sourced gross receipts—a critical long-term tax planning exercise.

The fundamental purpose of incorporating gross receipts attributable to sources within this state into the base amount calculation is to ensure geographical consistency. Utah law requires that both the numerator (Utah QREs) and the denominator (Utah gross receipts) of the historical spending ratio be filtered for Utah nexus. This double sourcing requirement prevents a company with a small Utah footprint from being penalized by its large national revenue, which would otherwise result in an artificially high base amount and a correspondingly low or nonexistent credit. By narrowing the scope of gross receipts to only those sourced to Utah, the state measures incremental growth relative to the taxpayer’s established economic presence specifically within Utah borders.

The Role of IRC Section 41 and State Modification

Utah law explicitly adopts the definitions and calculation methodologies provided in Section 41 of the Internal Revenue Code (IRC), except where state law provides specific modifications. The most significant modification is the substitution of the federal definition of gross receipts with gross receipts attributable to sources within this state as provided in the Utah UDITPA (Uniform Division of Income for Tax Purposes Act) provisions. While the federal credit considers a taxpayer’s total worldwide or domestic gross receipts, Utah limits this to the revenue that would be included in the numerator of the Utah sales factor for apportionment purposes.

For the incremental calculation, the base amount is defined as the product of the taxpayer’s fixed-base percentage and the average annual gross receipts for the four taxable years preceding the credit year. If a taxpayer’s gross receipts are not properly sourced to Utah during those four prior years, the base amount calculation will be flawed, potentially leading to the disallowance of the credit during a state audit. The interaction between federal conformity and state-specific sourcing is summarized in the table below.

Credit Feature	Federal Treatment (IRC § 41)	Utah Treatment (§ 59-7-612 / § 59-10-1012)
QRE Nexus	Anywhere in the United States	Only activities conducted in Utah
Gross Receipts Scope	Worldwide or effectively connected with US	Only receipts attributable to Utah sources
Fixed-Base Percentage	1984-1988 spending or startup rules	Startup rules or election; capped at 16%
Base Amount Floor	Minimum 50% of current QREs	Minimum 50% of current Utah QREs
Calculation Method	Regular or Alternative Simplified	Regular or Alternative Simplified (ASC)

Detailed Analysis of Gross Receipts for Utah Sourcing

To correctly determine gross receipts attributable to sources within this state, a taxpayer must look to Utah Administrative Code R865-6F-8, which provides the regulatory definition of gross receipts, and Utah Code Title 59, Chapter 7, Part 3, which outlines the apportionment of income. The definition of gross receipts for Utah tax purposes is intentionally broad, encompassing the total amounts realized—the sum of money and the fair market value of other property or services received—on the sale or exchange of property, the performance of services, or the use of property or capital in transactions that produce business income.

Regulatory Definition and Exclusions

Under Utah Admin. Code R865-6F-8(1)(h), gross receipts include amounts such as rents, royalties, interest, and dividends, provided they arise from transactions in the regular course of the taxpayer’s trade or business. These amounts are not reduced by the cost of goods sold or the basis of the property sold, ensuring that the calculation reflects the full volume of economic activity. This differs significantly from taxable income, which is a net figure after deductions.

However, the State Tax Commission (STC) has established a rigorous set of exclusions to prevent the inflation of the base amount by non-operational or capital-shifting events. These exclusions are vital for R&D-intensive firms that may engage in frequent financing or capital transactions to fund their innovation.

Transaction Category	Inclusion in Utah Gross Receipts	Regulatory Context
Sale of Inventory	Included (gross amount)	Regular course of business
Performance of Services	Included (fees/commissions)	Market-based sourcing applies
Rental/Lease of Property	Included	Location of property determines sourcing
Licensing of Intangibles	Included (royalties)	Location of use determines sourcing
Loan Principal Repayment	Excluded	Return of capital, not income
Issuance of Own Stock	Excluded	Capital contribution
Litigation Damages	Excluded	Non-operational realization
Tax Refunds	Excluded	Recovery of prior payments
Forgiveness of Debt	Excluded	Accounting adjustment

The exclusion of an item from the definition of gross receipts is not determinative of its character as business or nonbusiness income; rather, it is a specific rule for the calculation of the sales factor in the apportionment formula. For the R&D credit, this means that if a company receives a $10 million infusion from a venture capital firm in exchange for stock, that $10 million is excluded from the gross receipts base, preventing an artificial spike in the base amount that would otherwise dilute the credit’s value in future years.

Business vs. Nonbusiness Income

In the context of UDITPA, Utah distinguishes between business income, which is apportioned using the sales factor, and nonbusiness income, which is allocated to a specific state. Business income is income arising from transactions and activity in the regular course of the taxpayer’s trade or business, including income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.

This classification is crucial because only gross receipts that generate business income are typically included in the sourcing calculation for the R&D credit base. For example, interest income is considered business income if the intangible property (like a bond or note) arises out of or was created in the regular course of the taxpayer’s business. If a Utah software company holds its cash reserves in a brokerage account, the interest earned may be business income, but the repayment of the principal of the investments in that account would be excluded from gross receipts under R865-6F-8(1)(i)(A).

Market-Based Sourcing for Services and Intangibles

The most significant complexity in determining Utah-sourced gross receipts arises from the state’s transition to market-based sourcing. Historically, many states used a cost of performance model, where receipts were sourced to the state where the majority of the work was performed. Utah has moved toward a market-based approach, specifically for services and the use of intangible property, as codified in Utah Code § 59-7-319.

The Greater Benefit Test

For the performance of services, Utah law dictates that a receipt is considered to be in the state if the purchaser of the service receives a greater benefit of the service in Utah than in any other single state or foreign country. This rule has profound implications for Utah-based companies that perform R&D within the state but sell their resulting services to out-of-state clients.

Guidance from the Utah State Tax Commission and the Multistate Tax Commission (MTC), which Utah largely follows, provides a hierarchy for determining where the greater benefit is received.

Direct Personal Services: For services delivered in person to individuals (e.g., medical or salon services), the benefit is received where the service is rendered.

Services Related to Real or Tangible Property: If the service is performed on or in connection with real property (e.g., architecture or engineering for a building in Utah), the benefit is received where the property is located.

Services Delivered Electronically (SaaS and Data Processing): For data processing or software-as-a-service, the benefit is received where the customer’s computer systems or end-users are located. If a Utah provider hosts a platform used by a company with employees in Utah, California, and Texas, the receipts must be sourced based on the proportionate use or benefit in each state.

Professional Services for Business Entities: For legal, accounting, or advertising services, the benefit is generally received where the client’s operations related to the service are managed or where the specific project is situated.

If the state of the greater benefit cannot be readily determined from the contract or the taxpayer’s books and records, the law allows for a reasonable approximation. If approximation is impossible, the service is sourced to the location from which the customer placed the order, or finally, to the customer’s billing address.

Sourcing of Intangible Property and Digital Goods

Receipts from the sale, lease, or licensing of intangible property (such as patents, copyrights, or trademarks) are considered to be in Utah if the intangible property is used in the state. If the intangible is used both inside and outside Utah, the receipts are apportioned to Utah based on the percentage of use within the state during the taxable year.

For a technology firm, this means that if a patent developed in a Provo R&D lab is licensed to a manufacturer in Ohio, the royalty receipts from that manufacturer are not Utah-sourced gross receipts. This reduces the Utah-sourced gross receipts in the R&D base amount calculation, making it easier for the firm to exceed its base and claim a larger 5% incremental credit. This creates a powerful incentive for Utah firms to export their intellectual property and services while keeping their high-paying R&D operations local.

Calculation Mechanics: The Base Amount and the 50% Floor

The determination of Utah-sourced gross receipts is only one step in the broader incremental credit calculation. Under Utah Code § 59-7-612(4) and § 59-10-1012(3), the base amount must be calculated as provided in IRC § 41(c) and § 41(h), but with Utah-specific inputs.

The mathematical formula for the base amount is:

Base Amount = Fixed-Base Percentage x Average Annual Utah Gross Receipts (Prior 4 Years)

The 50% Floor Rule

A critical statutory safeguard exists in both federal and Utah law to prevent the credit from providing an excessive windfall during years of explosive growth. In no event shall the base amount be less than 50% of the qualified research expenses for the current credit year.

This 50% Floor operates as follows: if a company has $1,000,000 in current-year Utah QREs, its base amount for the 5% incremental credit cannot be lower than $500,000, even if its historical spending and gross receipts would otherwise result in a base amount of zero. This ensures that the state only subsidizes the top half of a company’s research increase in extreme growth scenarios.

Startup Elections and Phase-In Provisions

Utah provides a specific strategic election for startup companies. Under Utah Code § 59-7-612(4)(a)(iii), a taxpayer may elect to be treated as a startup company as provided in IRC § 41(c)(3)(B), regardless of whether they meet the strict federal age or revenue requirements for startup status. Once made, this election is irrevocable.

For startups, the fixed-base percentage is set at 3% for the first five taxable years beginning after December 31, 1993, for which the taxpayer has Utah QREs. Starting in the sixth year, the percentage phases into the company’s actual historical ratio of QREs to gross receipts.

Taxable Year with Utah QREs	Fixed-Base Percentage (Startup Election)
Years 1 through 5	3.0000%
Year 6	1/6 of the aggregate QREs / aggregate GR for years 4 and 5
Year 7	1/3 of the aggregate QREs / aggregate GR for years 5 and 6
Year 8	1/2 of the aggregate QREs / aggregate GR for years 5, 6, and 7
Year 9	2/3 of the aggregate QREs / aggregate GR for years 5 through 8
Year 10	5/6 of the aggregate QREs / aggregate GR for years 5 through 9
Year 11 and thereafter	The aggregate QREs / aggregate GR for any 5-year period selected by the taxpayer from years 5 through 10

The aggregate gross receipts used in these denominators must be solely the receipts attributable to sources within this state. This makes accurate historical record-keeping of Utah-sourced revenue vital, as a mistake in Year 4’s sourcing will ripple through the base amount calculations for a decade.

Local State Revenue Office Guidance and Compliance

The Utah State Tax Commission (USTC) provides guidance through various publications, form instructions, and administrative rules. Unlike some other states, Utah does not require a pre-certification process for the general research activities credit, although the basic research component may require a certification process for the qualified organizations receiving the payments.

Form TC-20 and Schedule J Instructions

For corporate taxpayers, the Utah Corporation Franchise and Income Tax Return (Form TC-20) and its associated schedules are the primary vehicles for reporting the data necessary to determine Utah-sourced receipts. Schedule J (Apportionment Schedule) is where the Sales Factor is calculated. The numerator of this factor—Total Utah Sales—is the figure that must be used as the gross receipts for the R&D credit base amount calculation.

The TC-20 instructions emphasize that for multi-state taxpayers, service income is in Utah if the buyer receives a greater benefit of the service in Utah. This aligns the R&D credit base directly with the taxpayer’s regular apportionment methodology. However, taxpayers must ensure that they are not including non-business income or excluded receipts (like loan repayments) in this figure, as these items might appear on the federal return but are stripped out for Utah sales factor purposes.

Publication 58: Penalties and Interest

The USTC Publication 58 provides exhaustive detail on how the commission assesses penalties and interest for underpayments or errors on returns. Because the R&D credit is often a large dollar-value item, errors in the calculation of the base amount (and thus the Utah-sourced gross receipts) can result in significant audit deficiencies.

Late Filing and Payment: If an R&D credit is disallowed on audit, resulting in an underpayment, the late payment penalty is typically the greater of $20 or 10% of the unpaid tax if paid more than 16 days late.

Interest Rates: Interest on underpayments accrues at a statutory rate, which for 2025 and 2026 is set at 6%.

Automatic Extensions: While corporations have an automatic six-month extension to file, they must still pay any estimated tax due by the original due date to avoid penalties.

Carryforward and Credit Ordering

Under Utah Admin. Code R865-6F-27, there is a specific order in which credits must be applied against the corporate franchise tax. Nonrefundable credits without a carryforward (such as the 7.5% volume R&D credit) must be used first. Nonrefundable credits with a carryforward (such as the 5% incremental R&D credit) are used next.

This ordering is critical for companies with high R&D spending and low current tax liability. If a company generates $100,000 in volume credits (no carryforward) and $50,000 in incremental credits (14-year carryforward), but only has a tax liability of $80,000, it will use $80,000 of its volume credit and lose the remaining $20,000 of the volume credit forever. The $50,000 incremental credit will be carried forward in its entirety. Proper sourcing of gross receipts is therefore most important for the incremental credit, as it determines the longevity of the tax asset on the balance sheet.

Detailed Case Study and Example

To integrate these concepts, let us examine Alta Dynamics, a hypothetical Utah-based aerospace engineering firm. Alta Dynamics develops specialized drone navigation software. In 2025, they conduct significant R&D in Salt Lake City.

Step 1: Determine Utah Qualified Research Expenses (QREs)

Alta Dynamics incurs the following expenses in 2025:

Utah R&D Wages: $1,200,000

Utah R&D Supplies: $300,000

Utah Contract Research: $500,000 (65% eligible per IRC § 41) = $325,000

Total 2025 Utah QREs: $1,825,000

Step 2: Sourcing Gross Receipts for the Base Period (2021-2024)

Alta Dynamics must determine its Utah-sourced gross receipts for the four prior years. They have a global client base.

Year	Total Global Revenue	Utah-Sourced Revenue (Greater Benefit)	Reason for Sourcing
2024	$15,000,000	$2,000,000	Sales to Utah drone manufacturers
2023	$12,000,000	$1,500,000	Consulting for Hill Air Force Base
2022	$10,000,000	$1,000,000	SaaS users located in Utah
2021	$8,000,000	$500,000	Initial Utah pilot contracts

Average Annual Utah Gross Receipts (AAGR):

AAGR = ($2,000,000 + $1,500,000 + $1,000,000 + $500,000) / 4 = $1,250,000

Step 3: Determine Fixed-Base Percentage (FBP)

Alta Dynamics made the irrevocable startup election in 2021. Since 2025 is their 5th year of R&D, their FBP is fixed at 3.00%.

Step 4: Calculate the Base Amount

Tentative Base Amount: 3% x $1,250,000 = $37,500

Minimum Base Amount (50% Floor): 50% x $1,825,000 = $912,500

The Statutory Base Amount is the greater of the two: $912,500.

Step 5: Final Credit Calculation

5% Incremental Credit:
Credit = 5% x ($1,825,000 – $912,500) = $45,625

7.5% Volume Credit:
Credit = 7.5% x $1,825,000 = $136,875

Total 2025 Research Activities Credit: $182,500.

Alta Dynamics will claim $182,500 on Form TC-40A. If their Utah tax liability is only $150,000, they will use the $136,875 volume credit first (as it has no carryforward). The remaining $13,125 of liability will be offset by the incremental credit. The unused portion of the incremental credit ($45,625 – $13,125 = $32,500) will be carried forward to 2026.

Second and Third-Order Insights for Advanced Tax Planning

Beyond the basic mechanics of sourcing and calculation, the definition of gross receipts attributable to sources within this state creates complex ripples across a company’s financial and operational strategy.

The Apportionment Arbitrage

Utah’s market-based sourcing creates a phenomenon where the state’s tax incentives are most effective for export-oriented companies. A company that performs research in Utah but sells its products to a global market will have a very low Utah sales factor. This results in a lower historical gross receipts base, which in turn leads to a higher incremental R&D credit. In essence, Utah has designed its tax code to attract the brains of a company (R&D and management) while being indifferent to where the customers are located.

However, this creates a potential pitfall for companies that undergo a merger or acquisition. If a Utah firm with a low gross receipts base is acquired by a company with a massive Utah retail presence, the combined group’s Utah-sourced gross receipts will skyrocket. This can effectively zero out the incremental R&D credit for the Utah-based division in future years as the base amount rises, unless the group can maintain its startup election or utilize specific successor rules found in IRC § 41(f)(3), which Utah generally follows.

The Impact of Legislative Changes (HB 106 and HB 219)

As of 2025, the Utah legislature has actively modified the corporate tax landscape. HB 106 lowered the corporate income tax rate from 4.55% to 4.5%. While a lower tax rate is generally positive for business, it reduces the absolute value of nonrefundable credits like the R&D credit, as there is less tax liability to offset. This makes the 14-year carryforward of the incremental credit even more valuable, as it may take longer for a company to fully utilize its earned credits in a lower-rate environment.

Furthermore, HB 219 (effective 2026) significantly revises how financial institutions source their receipts. Receipts from investment and trading activities will generally not be sourced to Utah for financial institutions. For a fintech company conducting R&D in Utah, this change in the definition of gross receipts attributable to sources within this state will likely lower their Utah sales factor and their R&D base amount, potentially increasing their incremental credit. This demonstrates how changes in general apportionment law have immediate, often unintended, consequences for R&D credit calculations.

Documentation and Audit Vulnerabilities

In a state audit, the STC frequently focuses on the Sales Factor numerator to ensure that the taxpayer is not under-reporting Utah revenue to lower their tax. However, in the context of the R&D credit, the taxpayer has the opposite incentive for the historical years: they want their Utah-sourced gross receipts to be as low as possible to minimize the base amount.

This creates a double-edged sword during audits. If a taxpayer successfully argues for a lower sales factor in 2022 to reduce their tax liability, they have simultaneously lowered their R&D base amount for the 2025 credit. Conversely, if the STC audits the 2022 return and increases the Utah-sourced receipts, they have inadvertently reduced the taxpayer’s R&D credit for the next four years. Taxpayers must ensure that their sourcing methodology is consistent across all filings to avoid whipsaw effects where a win in one area of the audit leads to a loss in another.

Final Thoughts

The concept of gross receipts attributable to sources within this state is the pivot point upon which the Utah Research Activities Credit balances. It is not merely a revenue figure; it is a specialized metric that integrates Utah’s market-based sourcing philosophy with the federal incremental credit model. By limiting the base amount calculation to Utah-sourced revenue, the state provides a tailored incentive that favors companies that anchor their high-value research activities in Utah while serving a broader geographic marketplace.

For taxpayers to maximize this incentive and withstand administrative scrutiny, the following recommendations are suggested:

1. Rigorous Market-Based Sourcing: Companies should conduct a detailed analysis of their revenue streams under the greater benefit test of Utah Code § 59-7-319. This includes identifying the location of end-users for digital products and the management location for professional services.

2. Irrevocable Startup Election: New or expanding firms in Utah should carefully evaluate the 3% startup election under § 59-7-612(4)(a)(iii). This election provides five years of certainty and a low fixed-base percentage, which is particularly beneficial for companies expecting rapid revenue growth in Utah.

3. Clean Gross Receipts Data: Taxpayers must maintain records that distinguish between business income and excluded receipts, such as loan principal repayments or intercompany transfers within a unitary group. These exclusions are vital for preventing an overstatement of the base amount.

4. Credit Component Optimization: Because the 7.5% volume credit has no carryforward, companies should prioritize its use in the current year and manage their incremental credits as long-term tax assets.

5. Audit Defense Preparation: Since the R&D credit is reported using a simple code (Code 12) on Form TC-40A, the underlying calculations are not immediately visible to the STC. Taxpayers should proactively prepare credit study documentation that links their Utah QREs and their Utah-sourced gross receipts to the specific statutory and regulatory authorities discussed in this report.

Through the careful application of these principles, Utah businesses can effectively leverage the state’s tax framework to subsidize their innovation, ensuring that gross receipts attributable to sources within this state acts as a bridge, rather than a barrier, to technological advancement.