Can Companies Claim
R&D Tax Credits in Kentucky?
Yes. Kentucky offers a Research and Development (R&D) Tax Credit for businesses that invest in facilities used for research, thereby allowing them to qualify for a state income tax credit.
Key Details of the Kentucky R&D Credit
The nonrefundable income tax credit equals 5% of the qualified costs for constructing research facilities used for “qualified research,” as defined under Internal Revenue Code Section 41.
Construction of research facilities” includes building, remodeling, equipping, or expanding facilities in Kentucky specifically for qualified research.
The credit applies only to tangible, depreciable property and does not cover costs for replacement property.
Unused credits can be carried forward for up to 10 years.
Kentucky R&D Tax Credit Case Study
A company built a new research facility in Lexington, Kentucky, designing and manufacturing components for the automobile industry. Alongside its usual federal R&D Tax Credits, the company claimed state credits for the construction of the facility. The project spanned multiple years, covering tax years 2021–2024.
The company qualified for federal R&D Tax Credits totaling $327,833 and an additional $210,000 in Kentucky state R&D credits.
FEDERAL | KENTUCKY | |||
Year | Total QREs | Credit | Total QREs | Credit |
2024 | $1,300,000 | $135,333 | $4,200,000 | $210,000 |
2023 | $900,000 | $91,100 | NA | NA |
2022 | $650,000 | $63,000 | NA | NA |
2021 | $450,000 | $38,500 | NA | NA |
Total | $3,300,000 | $327,833 | $4,200,000 | $210,000 |
Federal R&D Tax Credit Summary
| Year | Total QREs | Federal Credit |
|---|---|---|
| 2024 | $1,300,000 | $135,000 |
| 2023 | $900,000 | $91,100 |
| 2022 | $650,000 | $63,000 |
| 2021 | $450,000 | $38,500 |
| Total | $3,300,000 | $327,833 |
Kentucky R&D Tax Credit Summary
| Year | Kentucky Credit |
|---|---|
| 2024 | $210,000 |
| 2023 | NA |
| 2022 | NA |
| 2021 | NA |
| Total | $210,000 |
Criteria for Qualifying Research Activities
The four-part test below defines what counts as qualified research activities
Purpose of the Research
The activity should develop or improve a business component, such as a product, process, software, formula, technique, or invention, by enhancing functionality, performance, reliability, or quality.
Resolving Uncertainty
The work must address technical uncertainties, such as determining the optimal design, method, or approach to achieve the desired outcome. The results should not be known in advance
Systematic Experimentation
Eligible research must follow a structured experimentation process, including trial and error, modeling, simulation, or testing alternatives to reach the intended improvement.
Technological Basis
The activity must rely on hard sciences such as engineering, physical or biological sciences, or computer science. Artistic, social science, or routine data collection work does not qualify.
Why the R&D Tax Credit Matters ?
Since 1981, the R&D Tax Credit has helped businesses save billions in federal and state taxes. The credit enables companies to hire more staff, expand R&D, invest in facilities, and drive innovation. Thousands of businesses across multiple industries take advantage of this benefit each year.