Research Conducted in This State (Utah)

Research Conducted in This State refers to qualified research activities physically performed within the geographic boundaries of Utah, encompassing in-house labor, supplies, and contract services localized to the region. [cite_start]It serves as a jurisdictional prerequisite that limits the application of federal Internal Revenue Code Section 41 standards specifically to expenses incurred and activities executed within Utah’s borders[cite: 3].

Statutory Framework and the Integration of Federal Conformity

The Utah Research and Development (R&D) tax credit is established through a complex interaction between the Utah Code and the federal Internal Revenue Code (IRC). While many states provide incentives for innovation, Utah’s approach is distinguished by its strict geographical tethering and its multi-component structure. [cite_start]The primary statutes governing these incentives are Utah Code Section 59-7-612 for corporate entities and Section 59-10-1012 for individuals, estates, and trusts, including beneficiaries of pass-through entities[cite: 3]. [cite_start]The legislature has deliberately designed these statutes to mirror the technical requirements of IRC Section 41 while simultaneously narrowing the scope of eligible expenditures to those with a direct economic nexus to the state[cite: 3].

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The fundamental requirement for any credit claim is that the activities must be “conducted in this state”[cite: 3]. This phrase is not merely a geographic descriptor but a legal filter that redefines federal “qualified research” and “qualified research expenses” (QREs) for Utah tax purposes. [cite_start]Under Utah law, the definitions provided in IRC Section 41 apply only to the extent they do not conflict with the state’s requirement for localized activity[cite: 3]. [cite_start]This means that while the federal “Four-Part Test” is utilized to determine the qualifying nature of the research, a secondary geographical test is applied to determine the qualifying location of the expenditure[cite: 3].

Components of the Utah Research Credit

The Utah R&D credit is comprised of three distinct parts, each addressing a different aspect of industrial and academic innovation. [cite_start]Unlike the federal credit, which generally focuses on incremental increases in research spending, Utah provides a hybrid benefit that rewards both growth and total volume of investment[cite: 3].

Credit Component	Percentage	Statutory Basis	Portability
Incremental Research Credit	5%	Qualified research expenses exceeding a calculated base amount	14-Year Carryforward
Basic Research Credit	5%	Payments to qualified organizations for basic research exceeding a base amount	14-Year Carryforward
Volume-Based Research Credit	7.5%	Total qualified research expenses for the current taxable year	Current Year Only

The interaction between these components allows a taxpayer to maximize their benefit based on their specific business lifecycle. [cite_start]A high-growth startup may find more value in the incremental credits, while an established manufacturing firm with stable, high-volume R&D may rely heavily on the 7.5% current-year credit[cite: 3]. [cite_start]However, the 7.5% credit is particularly restrictive in its “conducted in this state” application because it cannot be carried forward to future years; it must be utilized against the tax liability of the year in which the expenses were incurred or it is permanently lost[cite: 3].

Detailed Analysis of “Research Conducted in This State”

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To understand the meaning of “conducted in this state,” one must analyze the specific categories of qualified research expenses defined in IRC Section 41(b) as they are modified by Utah Code Sections 59-7-612(4) and 59-10-1012(3)[cite: 3]. [cite_start]The state revenue office guidance, primarily disseminated through Tax Commission publications and instructions, emphasizes that the burden of proof rests on the taxpayer to demonstrate the physical location of every dollar claimed[cite: 3].

Wages and Personnel Location

Wages typically constitute the largest share of QREs. [cite_start]For wages to be considered for research “conducted in this state,” the employee must be performing “qualified services” while physically present in Utah[cite: 3]. Qualified services, as defined by the IRC and adopted by Utah, include three specific tiers of activity:

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1. Direct Research: The actual conduct of experimentation and technical inquiry[cite: 3].

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2. Direct Supervision: The immediate management of researchers, often involving technical review of their work[cite: 3].

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3. Direct Support: Activities such as laboratory maintenance or data entry that are integral to the research process but do not constitute the research itself[cite: 3].

The Utah State Tax Commission interprets “conducted in this state” to mean that the labor was exerted within state lines. [cite_start]In the modern era of remote work and decentralized teams, this creates significant compliance requirements[cite: 3]. [cite_start]If a Utah-based company employs a software engineer who works remotely from a home office in Colorado, that engineer’s wages are excluded from the Utah credit calculation, even if the research project is managed by a Salt Lake City headquarters and the resulting intellectual property is owned by a Utah entity[cite: 3]. [cite_start]Conversely, an out-of-state corporation that has no physical office in Utah but employs a remote researcher residing in Provo may be eligible for the Utah R&D credit for that researcher’s wages, provided the company establishes nexus and files a Utah tax return[cite: 3].

The “Substantially All” rule from the federal code is also localized. [cite_start]If an employee spends at least 80% of their total service time in Utah performing qualified research, 100% of their Utah-sourced wages can be treated as QREs for the state credit[cite: 3]. [cite_start]However, if that employee splits their time between Utah and an out-of-state facility, only the portion of their wages attributable to work performed physically within Utah can be considered for the credit[cite: 3].

Supplies and Consumables
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Supplies used in research must be “consumed or used up” in Utah to satisfy the “conducted in this state” requirement[cite: 3]. [cite_start]This typically applies to materials, prototypes, and chemical reagents used during the experimentation process in a Utah-based laboratory or testing site[cite: 3].

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The definition of supplies follows IRC Section 41(b)(2)(C), which excludes land, improvements to land, and any property subject to an allowance for depreciation[cite: 3]. [cite_start]This distinction is critical in Utah, particularly because the state previously offered a separate credit for “machinery and equipment used to conduct research”[cite: 3]. [cite_start]Although that specific credit (Code 13) expired for tax years beginning after 2010, carryforwards of those credits may still be utilized for up to 14 years[cite: 3]. [cite_start]For the current R&D credit (Code 12), the purchase of a high-tech centrifuge or a specialized vehicle for field testing in Utah would not qualify as a “supply” because such items are depreciable assets[cite: 3].

Contract Research Expenses and Contractor Location

Contract research occurs when a taxpayer pays a third party to perform research on their behalf. [cite_start]To qualify for the Utah credit, the third-party contractor must physically perform the research services within Utah[cite: 3].

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Under federal and state law, only 65% of the amounts paid for contract research are generally included in the QRE total (increasing to 75% for certain qualified research consortia)[cite: 3]. [cite_start]The “conducted in this state” provision requires a geographical audit of the contractor[cite: 3]. [cite_start]If a Utah aerospace firm contracts with a wind tunnel facility in Ohio for prototype testing, those expenses are disqualified from the Utah credit[cite: 3]. [cite_start]Taxpayers must therefore obtain certifications or contractual representations from their vendors confirming that the research was performed at a Utah location to ensure these costs survive state revenue office scrutiny[cite: 3].

Basic Research Conducted in This State
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The credit for payments to qualified organizations (such as universities) for basic research is also strictly limited to research “conducted in this state”[cite: 3]. [cite_start]Basic research refers to original investigation for the advancement of scientific knowledge without a specific commercial objective[cite: 3].

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Utah Code Section 59-7-612(6) authorizes the Tax Commission to make rules prescribing a certification process for these qualified organizations to ensure that the funds are truly spent on basic research activities within Utah’s borders[cite: 3]. [cite_start]This localized focus ensures that the tax incentive supports Utah’s higher education system and public research institutions, such as the University of Utah or Utah State University[cite: 3].

Calculation Mechanics: The Utah-Specific Base Amount

A pivotal aspect of the Utah R&D tax credit is the calculation of the “base amount” for the 5% incremental credits. [cite_start]While the state adopts the federal methodology from IRC Sections 41(c) and 41(h), it introduces several critical modifications designed to isolate Utah-specific economic data[cite: 3].

Apportionment of Gross Receipts
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The base amount is generally determined by multiplying the taxpayer’s “fixed-base percentage” by their average annual gross receipts for the four taxable years preceding the credit year[cite: 3]. [cite_start]Utah Code Section 59-7-612(4)(a)(ii) mandates that gross receipts for this calculation include only those receipts “attributable to sources within this state”[cite: 3].

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This requires taxpayers to apply the state’s allocation and apportionment rules (UDITPA) to their historical revenue data[cite: 3]. [cite_start]For corporations with multi-state sales, this means using the sales factor to determine the Utah portion of their total gross receipts[cite: 3]. [cite_start]This localization of the base amount ensures that the credit is not diluted or inflated by out-of-state economic activities[cite: 3].

The Utah Start-up Company Election

Utah provides a unique statutory election for start-up companies that differs from the federal definition. [cite_start]Under federal law, a start-up is strictly defined based on the first years in which a company had both gross receipts and QREs[cite: 3]. [cite_start]In contrast, Utah Code Section 59-7-612(4)(a)(iii) allows any taxpayer to “elect to be treated as a start-up company” for the purpose of the credit, regardless of whether they meet the specific federal requirements[cite: 3].

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Once made, this election is irrevocable[cite: 3]. [cite_start]The primary benefit of this election is that it grants the taxpayer a 3% fixed-base percentage for the first five years, which is then gradually phased into an actual historical percentage over the following five years[cite: 3]. [cite_start]This provides a predictable and often lower threshold for new Utah-based ventures to exceed, thereby maximizing their 5% incremental credit[cite: 3].

The 50% Minimum Base Amount Rule
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Consistent with federal law, the Utah base amount for the incremental credit cannot be less than 50% of the QREs for the current taxable year[cite: 3]. [cite_start]This “minimum base” ensures that even companies with very low historical R&D spending or high historical gross receipts cannot claim an excessively large incremental credit in a single year[cite: 3].

Local Revenue Office Guidance and Documentation

The Utah State Tax Commission (USTC) provides several layers of guidance through administrative rules and official publications. [cite_start]These documents explain how the “conducted in this state” requirement is audited and verified[cite: 3].

Administrative Rules and Ordering of Credits

Utah Administrative Code R865-6F-27 is a critical rule for R&D credit claimants. [cite_start]It establishes the “ordering of credits,” which dictates how various tax incentives must be applied against the corporate franchise tax[cite: 3].

Taxpayers must deduct credits in the following order:

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1. Nonrefundable credits without a carryforward: This includes the 7.5% current-year Utah QRE credit[cite: 3].

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2. Nonrefundable credits with a carryforward: This includes the 5% incremental credit and the 5% basic research credit[cite: 3].

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3. Refundable credits: These are applied last[cite: 3].

This ordering rule is vital for the R&D credit because the 7.5% volume credit must be used first to reduce tax liability. [cite_start]If the volume credit alone reduces the tax to zero, the incremental credits are then carried forward to future years[cite: 3].

Publication 37: Business Activity and Nexus

The concept of “conducted in this state” is deeply intertwined with the concept of “nexus.” [cite_start]Publication 37, Business Activity and Nexus in Utah, clarifies that having employees or representatives working in the state, even in home offices, establishes physical presence nexus[cite: 3].

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This guidance confirms that out-of-state companies can qualify for the Utah R&D credit if they hire remote researchers living in Utah[cite: 3]. [cite_start]However, the physical presence of these employees also subjects the entire corporation to Utah’s tax jurisdiction, requiring the apportionment of its global income to Utah for taxation[cite: 3].

Substantiation and Audit Expectations
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There is no dedicated form for the Utah R&D credit; taxpayers report the credit amount using Code 12 on their TC-20 or TC-40 return and must maintain their own supporting documentation[cite: 3]. The USTC guidance suggests that taxpayers should retain:

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• Employee Time Logs: Granular records showing the percentage of time spent on qualifying activities and the physical location where the work was performed[cite: 3].

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• Project Descriptions: Documentation that proves the research meets the federal Four-Part Test (technological nature, elimination of uncertainty, process of experimentation, and permitted purpose)[cite: 3].

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• General Ledger Detail: Invoices for supplies clearly showing delivery to and use in a Utah facility[cite: 3].

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• Contract Documents: Agreements with third-party researchers that specify Utah-based performance of services[cite: 3].

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In Commission Decision 16-1707, the Commission upheld an audit assessment that denied R&D credits because the taxpayer failed to produce contemporaneous documentation linking specific employee wages to Utah-based qualifying research[cite: 3]. [cite_start]The decision serves as a warning that simply having researchers in Utah is insufficient; the taxpayer must prove that their activities directly constituted qualified research[cite: 3].

The Example Case Study: Multi-State Research Apportionment

To illustrate the practical application of “Research Conducted in This State,” consider the case of Horizon Robotics, Inc. (HRI), a technology company with a primary engineering hub in Salt Lake City, Utah, and a secondary software team in Austin, Texas.

HRI Data for the 2024 Taxable Year

Metric	Amount
Total Global Qualified Research Expenses (QREs)	$5,000,000
Utah-Situs QREs (Wages for SLC Engineers & Labs)	$3,500,000
Texas-Situs QREs (Remote Software Team)	$1,500,000
Utah Gross Receipts (Average 2020–2023)	$20,000,000
Utah Gross Receipts (Current Year 2024)	$25,000,000
Fixed-Base Percentage (Calculated)	4%
Basic Research Payments to Utah State University	$200,000
Historical Base for Basic Research	$50,000

Step 1: Identification of Eligible Expenses

Under the “conducted in this state” rule, HRI must exclude all $1,500,000 of Texas-based expenses from its Utah credit calculation. [cite_start]Only the $3,500,000 spent on Utah-situs QREs is eligible[cite: 3].

Step 2: Calculate the 7.5% Volume Credit

The volume credit is a non-incremental benefit based on total current-year Utah activity.

Credit_7.5 = 7.5% * Utah QREs

Credit_7.5 = 0.075 * $3,500,000 = $262,500

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This credit must be used in 2024; it cannot be carried forward[cite: 3].

Step 3: Calculate the 5% Incremental Credit

First, HRI must determine its base amount using Utah-specific gross receipts.

Calculated Base = Fixed-Base % * Avg. Utah Gross Receipts

Calculated Base = 0.04 * $20,000,000 = $800,000

The minimum base amount rule is then applied:

Minimum Base = 50% * Current Utah QREs = 0.50 * $3,500,000 = $1,750,000

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Since the calculated base ($800,000) is lower than the minimum base ($1,750,000), HRI must use $1,750,000 as the base amount[cite: 3].

The incremental credit is calculated on the excess:

Excess QREs = $3,500,000 – $1,750,000 = $1,750,000

Credit_Incremental = 5% * $1,750,000 = $87,500

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This credit may be carried forward for 14 years[cite: 3].

Step 4: Calculate the 5% Basic Research Credit

This credit applies to the payments made to Utah State University for research conducted in the state.

Excess Basic Research = $200,000 – $50,000 = $150,000

Credit_Basic = 5% * $150,000 = $7,500

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This credit may be carried forward for 14 years[cite: 3].

Step 5: Total Credit Summary

HRI generates a total of $357,500 in Utah R&D credits. If HRI’s total Utah tax liability for 2024 is $300,000, the following occurs under R865-6F-27:

• The $262,500 volume credit is applied first, reducing tax liability to $37,500.
• The incremental and basic research credits ($87,500 + $7,500 = $95,000) are applied next. $37,500 of these is used to reduce the tax to zero.

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• The remaining $57,500 of incremental credits are carried forward to 2025[cite: 3].

Implications of Remote Work and Future Outlook

The term “research conducted in this state” is facing increasing scrutiny as the traditional laboratory model evolves into a distributed digital model. [cite_start]The Utah legislature and the Revenue and Taxation Interim Committee periodically review these credits to ensure they continue to benefit the state’s economy[cite: 3].

Remote Workers and the “Physical Presence” Test

Current guidance suggests a strict physical presence test. However, as more technology firms move toward permanent remote work, the state may face pressure to adapt. [cite_start]Currently, the rule serves as a competitive advantage for Utah’s physical tech hubs, such as the “Silicon Slopes” area, by effectively penalizing companies that outsource their high-value engineering roles to other states[cite: 3].

Impact of Federal Section 174 Amortization
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As of 2022, federal law requires R&D expenses to be amortized over five years for domestic research and fifteen years for foreign research[cite: 3]. This federal change has significant implications for Utah. [cite_start]Because the Utah tax rate (recently lowered from 4.55% to 4.5% by HB 106) is applied to a base that no longer allows full expensing of R&D, the value of the nonrefundable credit becomes more vital for corporate liquidity[cite: 3]. [cite_start]The “conducted in this state” requirement ensures that while companies face the burden of federal amortization, they receive the full localized benefit of the Utah credit for their domestic activities[cite: 3].

Final Thoughts

The Utah Research and Development Tax Credit is a nuanced incentive that requires a sophisticated understanding of both federal IRC Section 41 and localized Utah modifications. [cite_start]The “conducted in this state” requirement acts as the ultimate gatekeeper, ensuring that the state’s tax expenditures are directly linked to local economic activity[cite: 3].

For taxpayers to successfully utilize this credit, they must move beyond a simple adoption of their federal R&D study and conduct a “Utah-specific” geographical audit. This includes:

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• Geographical Payroll Apportionment: Precisely identifying the physical location of all research staff and excluding all out-of-state wages[cite: 3].

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• Supply Chain Localization: Verifying that research supplies are delivered to and consumed within Utah facilities[cite: 3].

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• Contracter Audits: Ensuring that third-party research partners are performing their work within Utah borders[cite: 3].

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• UDITPA Gross Receipt Sourcing: Applying Utah’s apportionment rules to correctly calculate a localized base amount[cite: 3].

The nonrefundable nature and unique carryforward rules (particularly the use-it-or-lose-it nature of the 7.5% volume credit) necessitate strategic tax planning. [cite_start]By aligning their innovation activities with the state’s geographical requirements, Utah businesses can significantly offset their corporate or individual income tax burdens, thereby fueling further investment in the state’s burgeoning technology sector[cite: 3].