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A client with engineers in three states asks a simple question: "which states give us a research credit, and how much?" The federal answer is one section of the Code. The state answer is a comparison across statutes that borrow the federal vocabulary while changing the rules underneath it. This article is the map of what changes, so the comparison can be done once and done right.
01The federal baseline
Section 41 allows a credit for qualified research expenses: in-house wages for qualified services, supplies used in research, a share of contract research payments, and amounts paid for the use of computers in conducting research. Research must pass the four-part test in §41(d): it must be intended to discover information that is technological in nature, for a permitted purpose relating to a new or improved business component, and substantially all of it must be a process of experimentation to eliminate uncertainty. The credit is computed either as 20 percent of expenses over a historical base amount or, under the alternative simplified credit, as 14 percent of expenses over half of the prior three years' average. Section 280C(c) requires a reduction in the research deduction (or an election to take a reduced credit) so the same dollar is not both deducted and credited. Qualified small businesses may apply part of the credit against payroll tax under §41(h).
The deduction side changed in 2025. For tax years beginning after December 31, 2024, domestic research or experimental expenditures are again deductible when incurred under new §174A, reversing the five-year amortization that had applied since 2022. Foreign research remains subject to 15-year amortization under §174. Rev. Proc. 2025-28 sets out the procedures for making the related elections, filing amended returns, and changing accounting methods, including retroactive relief for eligible small businesses. Every state question about research now has a second layer: does the state follow §174A, and as of when?
02Seven dimensions that vary by state
| Dimension | The range of state answers | What to pull |
|---|---|---|
| Whether a credit exists | Many states with a corporate or franchise tax offer one; some offer none; a few offer several (for example a general credit plus a basic-research or university-partnership credit). | The state's credit statute and the department's list of credits. |
| Definition of qualified research | Adopt §41 as of a fixed date, adopt it as currently in effect, or define it independently. Most add an in-state requirement: the research must be conducted in the state, or wages must be paid to in-state employees. | The definitional subsection and the state's IRC conformity date. |
| Computation | A percentage of the federal credit apportioned to the state; an incremental credit over a state-specific base; or a flat percentage of in-state qualified expenses with no base. | The computation subsection and the credit form's worksheet. |
| Refundability and transferability | Nonrefundable with carryforward of a set number of years or indefinitely; refundable in whole or for small businesses; transferable or sellable in a few states. | The statute's carryover and refund provisions; any certificate or transfer procedure. |
| Caps and allocations | Per-taxpayer caps, statewide annual allocations awarded first-come or pro rata, and pre-approval or certification requirements with their own deadlines. | The administering agency (sometimes an economic development office, not the revenue department) and its application calendar. |
| Which taxes and which taxpayers | Against corporate income, franchise, or gross-receipts taxes; whether pass-through entities claim it or pass it to owners; whether it applies against individual income tax. | The statute's "allowed against" language and the pass-through provisions. |
| Conformity to §174 and §174A | Rolling-conformity states generally follow the 2025 restoration of expensing; fixed-date states may still require amortization until the legislature updates the date; a few states decoupled from the 2022 amortization rule and never required it. | The state's conformity statute and any 2025 or 2026 legislative update or department notice. |
03Where comparisons go wrong
- Assuming the state definition is the federal definition.A state that adopted §41 as of a 2015 date does not include later federal changes. A state with an in-state requirement excludes research the federal credit counts. Read the definitional language before computing anything.
- Forgetting the §280C analogue.Some states require an addback of the state credit to taxable income, or a reduced-credit election, mirroring the federal rule. Others do not. The difference changes the net value of the credit.
- Missing an application deadline.Where a state allocates a fixed pool, the credit is awarded through an application process with a deadline that has nothing to do with the return due date. Missing it means no credit for the year, however qualified the research.
- Treating the credit and the deduction as one question.A state can offer a generous credit and still require amortization of research costs under a stale conformity date. Both affect the client's state liability; they are researched separately.
- Apportionment.States that start from the federal credit typically apportion it using the state's apportionment factor or an in-state research ratio. The method is in the statute or the form instructions, and it differs.
04A workflow for comparing states
- List the states where research actually happens.In-state requirements make the location of employees and facilities the first filter, before any computation.
- For each state, read the credit statute first, then the form instructions.The statute gives the definition, rate, and limits. The instructions give the practical computation, the required attachments, and the deadline.
- Check the conformity date and any 2025 or 2026 update.This answers both the definition question (which version of §41 applies) and the deduction question (whether §174A expensing is available at the state level).
- Check for a separate administering agency.If certification or an allocation is required, find the agency's calendar and start there; the revenue department's form is the last step, not the first.
- Build the comparison on a single sheet, citing each cell.Definition, computation, rate, cap, refundability, carryforward, application deadline, and conformity, one row per state, with the statute or instruction cited for each value. That sheet is reusable next year with a currency check.
05Research it from the states' own law
The Partnertax library holds the tax statutes, regulations, and forms of all 50 states plus the District of Columbia, alongside the Internal Revenue Code, Treasury Regulations, and the Internal Revenue Bulletin, and every answer the AI Tax Assistant gives cites the specific provision it rests on. Ask the comparison the way the client asked it ("compare the research credit rules for a software company with engineers in these three states") and verify each cell by opening its source. The corpus is listed publicly with the date of its current manifest, so the conformity question can be checked against the current text rather than a summary.
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