Tax Liability Under This Chapter (Corporate or Individual)

Utah Research Tax Credit Overview

The State of Utah offers a valuable incentive for businesses engaged in qualified research activities. This credit, known as the Tax Credit for Research Activities in Utah, generally follows the federal regulations under Internal Revenue Code (IRC) Section 41, with specific modifications tailored to the state's economic goals. The credit is non-refundable but offers a significant carryforward period, making it a powerful tool for tax planning and cash flow management for innovative companies operating in Utah.

To qualify for the Utah R&D Tax Credit, a taxpayer must engage in Qualified Research Activities (QRAs) within the state. The eligibility is based on the federal "Four-Part Test." All four requirements must be met for the activity to qualify.

The activity must relate to a new or improved business component's function, performance, reliability, or quality. Activities relating to style, taste, cosmetic, or seasonal design factors are not eligible.

The research must fundamentally rely on principles of the hard sciences, such as engineering, physics, biology, or computer science. The issuance of a patent is often conclusive evidence that this test is met.

At the outset of the activity, there must be uncertainty regarding the capability or method of developing or improving the business component, or the appropriate design of the business component.

Substantially all of the activities must constitute elements of a process of experimentation designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities.

Calculating the Credit

Utah provides distinct methods for calculating the credit, allowing taxpayers to maximize their benefit based on their expenditure history.

Taxpayers may claim a credit equal to 5% of the taxpayer's qualified research expenses for the current taxable year that exceed the base amount. The base amount calculation generally mirrors the federal regular research credit method, involving a fixed-base percentage and average annual gross receipts.

Alternatively, taxpayers may claim a credit equal to 7.5% of the taxpayer's qualified research expenses for the taxable year. This method does not require a base amount calculation based on historical data, making it beneficial for companies without a significant history of research spending or gross receipts.

A credit is also available for 5% of payments made to qualified organizations for basic research in Utah that exceed the base amount for the taxable year.

Qualified Research Expenses (QREs)

The credit is calculated based on Qualified Research Expenses incurred in Utah. These expenses generally fall into three categories.

Taxable wages paid to employees for performing qualified services. This includes engaging in qualified research, directly supervising qualified research, or directly supporting qualified research.

Amounts paid for supplies used in the conduct of qualified research. This excludes land, improvements to land, and property of a character subject to the allowance for depreciation.

65% of amounts paid to non-employees (contractors) to perform qualified research on behalf of the taxpayer. If the research is performed by a qualified research consortium, 75% of the amount may be claimed.

Glossary of Terms

A calculated figure used in the incremental credit method to determine the threshold above which current year research expenses are eligible for the credit. It is the product of the fixed-base percentage and the average annual gross receipts for the four preceding taxable years. The base amount cannot be less than 50% of the current year's qualified research expenses.

Any product, process, computer software, technique, formula, or invention which is to be held for sale, lease, or license, or used by the taxpayer in a trade or business of the taxpayer.

A tax provision that allows a taxpayer to apply unused tax credits to a future tax year's liability. In Utah, the R&D tax credit generally has a carryforward period of 14 years.

A requirement that the research must be undertaken for the purpose of discovering information that is technological in nature. This information must be intended to be useful in the development of a new or improved business component.

The percentage of aggregate qualified research expenses to aggregate gross receipts for a specific period of time. For start-up companies, this is fixed at 3% for the first five taxable years in which they have QREs and gross receipts.

Software developed by the taxpayer for use in general and administrative functions that do not interact with third parties. IUS is subject to a higher standard of eligibility known as the "High Threshold of Innovation" test.

Certain educational institutions, scientific research organizations, and grant organizations that are eligible to receive payments for basic research which may qualify for the credit.

The section of the Internal Revenue Code (IRC) that defines the federal Credit for Increasing Research Activities. Utah statutes reference this section for definitions of qualified research and expenses.

Final Thoughts

The Utah R&D Tax Credit serves as a critical mechanism for fostering technological advancement and economic growth within the state. By effectively reducing the after-tax cost of research and development, it enables businesses to reinvest in their operations, hire technical talent, and remain competitive in a global market. Companies operating in Utah should carefully evaluate their activities and expenses to ensure they are capturing the full benefit of this program.