Missouri R&D Tax Credit Explained for Companies

Missouri and the R&D Tax Credit

State Credit Name: Qualified Research Expense Tax Credit Program

Expiration Date: The application for tax credits must be submitted to the Department no later than the end of the taxpayer’s tax period immediately following the tax period for which the credits are being claimed.

Credit Carry Forward: Can be carried forward 12 years

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Who Can Apply?:

An eligible taxpayer who has additional qualified research expenses in Missouri in a tax year, as compared to the average of such expenses in the three immediately preceding tax years.
Eligible Taxpayers include: Individuals, partnerships, or any charitable organization which is exempt from federal income tax and whose Missouri unrelated business taxable income, if any, would be subject to the state income tax imposed under chapter 143, or a corporation as described in section 143.441 or 143.471, or section 148.370, is an eligible applicant.
Applicants must have Missouri qualified research expenses incurred in at least one of the last three preceding tax years.

About the Credit:

The Program provides state tax credits for additional qualified research expenses, which is the difference between the Missouri qualified research expenses incurred in a tax year subtracted by the average of the taxpayer’s Missouri qualified research expenses incurred in the three immediately preceding tax years.
The tax credits are equal to the greater of: 15% of additional qualified research expenses, or 20% of additional qualified research expenses if the research is conducted in conjunction with a Missouri public or private college or university.
The tax credit can be applied to: Ch. 143-Income tax, excluding withholding tax, and Ch. 148-Taxation of Financial Institutions.

Thanks to this new state R&D tax credit prograrm, companies in advanced manufacturing, agriculture, biotechnology, healthcare, and transportation will remain competitive in the great state of Missourah!

Special Notes:

The aggregate of all tax credits eligible to be authorized shall not exceed $10,000,000 in any calendar year, with $5,000,000 reserved for minority business enterprises, women’s business enterprises, and small businesses.
If on November first of each year, there are unused amounts from the $5,000,000 reserved for minority business enterprises, women’s business enterprises, and small businesses, the unused amount will be transferred to the overall program cap.
The maximum tax credit available to a single taxpayer under this program for any tax year is $300,000.
If there are applications for the Program’s tax credits that exceed the amounts available, eligible applicants in the general cap will be issued credits on a pro-rata basis, with businesses less than five years old being issued full tax credits first.
No tax credit can be issued on that portion of the taxpayer’s qualified research expenses incurred within Missouri during a tax year to the extent such expenses exceed 200% of the taxpayer’s average qualified research expenses incurred during the immediately preceding three tax years.
An application must be filed with DED no later than September 30 of each year, DED will issue a tax credit certificate authorizing the applicant to claim the tax credits.
The Tax Credit Accountability Act reporting form must be submitted to the Missouri Department of Revenue by June 30 each year for three years following the year of the issuance of tax credits.
Qualified research expenses are defined as they are in federal law at 26 U.S.C. § 41, but must be incurred in Missouri.
Tax credits are available for expenditures including: Wages paid or incurred to an employee for engaging in, directly supervising, or directly supporting qualified research in Missouri; Supplies-tangible property other than land, improvements to land, and depreciable property, used in the conduct of qualified research in Missouri; With some exceptions, amounts paid or incurred to another person for the right to use computers in the conduct of qualified research.
For the above, 100% of in-house research expenses will count, and 65% of the costs for contract research expenses will count as qualified research expenses.

FAQ's

1. What is the Missouri R&D tax credit?

The Missouri Qualified Research Expense (QRE) Tax Credit Program provides incentives for businesses to conduct research and development within the state. It allows eligible taxpayers to claim a credit against their state income tax for a percentage of their additional qualified research expenses. This program was re-authorized by House Bill 2400 and is effective for tax years beginning on or after January 1, 2023.

2. Who is eligible to claim the credit?

A wide range of entities are eligible, including individuals, partnerships, S-corporations, C-corporations, LLCs, sole proprietorships, and certain charitable organizations. To qualify, applicants must have incurred qualified research expenses in Missouri in at least one of the three preceding tax years. Additionally, businesses that are required to register with the Missouri Secretary of State must be in good standing.

3. What types of expenses qualify for the credit?

Qualified research expenses (QREs) are defined similarly to the federal R&D tax credit (IRC §41). They must be for research activities that meet the four-part test:

Permitted Purpose: The activity must relate to a new or improved product, process, or design.
Technological in Nature: The activity must fundamentally rely on the principles of physical or biological science, engineering, or computer science.
Elimination of Uncertainty: The activity must be intended to discover information to eliminate technical uncertainty.
Process of Experimentation: The activity must involve a process of experimentation.

Eligible expenses include wages paid to employees directly involved in, supervising, or supporting qualified research in Missouri, and the cost of supplies used in the research.

4. How is the credit calculated?

The credit is calculated as a percentage of the “additional qualified research expenses,” which is the difference between your QREs in the tax year and the average of your QREs for the three preceding tax years.

The credit is 15% of the additional QREs.
The credit increases to 20% if the research is conducted in conjunction with a public or private college or university in Missouri.

The credit is subject to certain limitations, including a maximum of $300,000 per taxpayer per year. The credit cannot exceed 200% of the taxpayer’s average QREs in the three prior years.

5. What is the application process and deadline?

To claim the credit, businesses must submit an application through the Missouri Department of Economic Development (DED) during the annual application window, which is open from August 1 to September 30. The application must be filed no later than the end of the tax period immediately following the one for which the credits are being claimed.

6. What documentation is required for the application?

The DED requires specific documentation, which may include:

Federal Employer Identification Number (FEIN) or Social Security Number
Missouri Tax ID Number
E-Verify Memorandum of Understanding (MOU)
Articles of Incorporation
Certificate of Good Standing with the Missouri Secretary of State
Missouri Tax Clearance Certificate
Copies of IRS Form 6765, which is used for the federal R&D tax credit.

7. What happens if the total claims exceed the annual cap?

The program has an annual cap of $10 million for all taxpayers. Of this, $5 million is reserved for minority businesses, women’s business enterprises, and small businesses. If total eligible claims exceed the annual cap, credits are allocated on a pro-rata basis. However, new businesses (operating for less than five years) are issued their full credits first before the pro-rata distribution to other applicants.

8. Is the credit refundable, and can it be carried forward?

The credit is non-refundable, but any unutilized credits can be carried forward for up to 12 years.

9. Can the credit be transferred or sold?

Yes, the tax credits can be fully transferred, sold, or assigned to another entity. This is done by completing and submitting a notarized endorsement to the DED.

10. Are there any other related tax benefits for R&D in Missouri?

Yes. In addition to the tax credit, the purchase of Missouri-qualified research and development equipment is exempt from state and local sales and use tax.

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed’s office location at 12747 Olive Boulevard, St Louis, Missouri provides R&D tax credit consulting and advisory services to Kansas City, St. Louis, Springfield, Columbia, Independence, Lee’s Summit, O’Fallon, St. Joseph, St. Charles and Blue Springs.

If you have any questions or need further assistance, please call or email our local Missouri Partner on (314) 492-3920.
Feel free to book a quick teleconference with one of our Missouri R&D tax credit specialists at a time that is convenient for you. Click here for more information about R&D tax credit management and implementation.

Schedule a Teleconference

Live Webinar: R&D Tax Credit Training for MO CPAs

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identify Qualifying Research Activities
Define the 4-Part Test
How to substantiate activities through documentation
Identify Qualifying Research Expenses

Cost: FREE

CE/CPE credits: Worth one hour

Knowledge Level: Basic*

Field of Study: Taxation

R&D Tax Credit Training for CPAs

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R&D Tax Credit Training for MO CPAs

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R&D Tax Credit Training for MO CFPs

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R&D Tax Credit Training for MO SMBs

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Missouri Patent of the Year – 2024/2025

TripleBlind Inc. has been awarded the 2024/2025 Patent of the Year for their breakthrough in privacy-preserving AI. Their invention, detailed in U.S. Patent No. 11895220, titled ‘Systems and methods for dividing filters in neural networks for private data computations’, introduces a novel approach to secure data processing in machine learning.

This patented method enables the secure execution of neural networks by dividing their filters into separate sets, each processed independently. This division ensures that no single party has access to both the data and the algorithm, preserving the confidentiality of both. The process involves aggregating outputs from these separate computations, allowing for accurate results without compromising privacy.

TripleBlind’s innovation addresses a critical need in fields like healthcare, finance, and insurance, where sensitive data must be analyzed without exposure. By enabling secure multiparty computations, this technology facilitates collaborative data analysis while safeguarding proprietary algorithms and personal information.

With this advancement, TripleBlind Inc. is setting a new standard for privacy in AI, paving the way for more secure and ethical applications of machine learning across various industries.

Study Case

Business Scenario

IVO Tech (IVO) is a leading software company specializing in employment screening software. The company was founded to provide new and innovative technologies to employment screening firms to help them improve productivity, reduce overhead, and have technological competitive advantages over otherwise similar firms.

IVO incurred qualified research expenses relating to the development of numerous innovative features in 2011-2013. IVO had never claimed the R&D tax credit before and was unaware it was performing qualified activities. After meeting with a specialist and learning more about R&D, IVO realized it was eligible for the credit.

Eligible R&D Activities

The R&D tax credit specialist helped IVO determine its qualifying R&D activities, many of which were part of the company’s daily operations. IVO’s qualified research expenses (QRE) included:

Development of new or improved software features to meet changing consumer preferences;
Improvement to processing speeds
Improvements for storage
Testing across all supported releases to determine exposure
Experimentation with possible fixes until an adequate solution was determined
Creating and executing test cases to eliminate uncertainty prior to releasing software to customers

After adding up labor and supplies costs from 2011-2013, IVO spent $1.95 million on R&D for those three years. IVO claimed the Federal R&D Tax Credit and received a $45,000 tax credit.

After realizing the benefits, a sustainable methodology was also established to help IVO identify, document and substantiate eligible R&D projects and costs on an ongoing basis.

Qualified Research Defined

Qualified research consists of research for the intent of developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities that are eligible for the R&D Credit are described in the “Four-Part Test” which must be met for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must undergo a systematic process 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 at the beginning of the taxpayer’s research activities.
Technological in Nature: The process of experimentation used to discover information must fundamentally rely on principles of hard science such as physical or biological sciences, chemistry, engineering or computer science.

What records and specific documentation did IVO Tech keep?

Similar to any tax credit or deduction, IVO had to save business records that outlined what it did in its R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. IVO saved the following documentation as evidence:

Innovation Log
Records of changes and bug fixes
Photographs/ videos of testing
Testing protocols
Results or records of analysis from testing/ trial runs
Tax invoices
Receipts
Labor time sheets

By having these records on file, IVO confirmed that it was ‘compliance ready’ — meaning if it was audited by the IRS, it could present documentation that illustrated the progression of its R&D activity, therefore proving its R&D eligibility.

Click here to view the PDF version of this case study.