R&D Tax Credits


The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits.

In Illinois, businesses have the opportunity to harness the Research and Development (R&D) Tax Credit, which allows for a credit amounting to 6.5% of qualifying expenditures. These qualifying expenditures align with the federal credit for increasing research activities defined under IRC § 41 and must be conducted within the state. The base period, comprising the three years immediately preceding the tax year, determines the average of the qualifying expenditures. By leveraging this Illinois R&D tax credit, aims to stimulate innovation, foster economic growth, and incentivize research and development within the state.

Corporations must complete and file Form IL-1120.

Entities eligible to claim the Illinois R&D tax credit include C-Corporations, S-Corporations, LLCs, and partnerships. C-Corporations, encompassing larger companies, and businesses structured as C-Corporations can claim the credit. S-Corporations, which distribute income to shareholders, can also claim the tax credit. LLCs, irrespective of their tax classification, qualify for the credit in Illinois. This encompasses disregarded entities, partnerships, and S-Corporations.

Additionally, partnerships, functioning as pass-through entities, are eligible for the credit, with individual partners reporting the credit on their personal tax returns.

The Illinois R&D Tax Credit employs the Alternative Simplified Method (ASM), similar to the federal approach, to calculate the credit. With ASM, the credit is determined as 6.5% of qualifying research expenditures (QREs) that exceed the average of QREs incurred in the previous three tax periods. This streamlined calculation method allows businesses in Illinois to efficiently assess and utilize the R&D Tax Credit, fostering innovation and economic development within the state.

R&D Tax Credits in Illinois

Illinois extended a beneficial research and development (R&D) tax credit until January 1st, 2027, incentivizing taxpayers to partake in research initiatives within the state. By engaging in such activities, individuals and businesses can offset their income tax. The credit is equivalent to 6.5% of qualifying expenses that surpass a predetermined base amount. This base amount is determined by averaging the qualifying research expenses (QREs) attributed to Illinois over the previous three years. Additionally, any unused credits can be carried forward for a maximum of five years, granting taxpayers the flexibility to utilize them in future tax periods.


What Goes into the Illinois R&D Tax Credit as a Qualified Research Expense?

The Illinois research and development (R&D) tax credit presents an opportunity for businesses to claim a portion of their eligible research expenses. 

To qualify, expenses must meet specific research criteria, which are as follows:

  1. Innovation Requirement: Products, services, processes, or software must demonstrate novelty or improvements compared to existing solutions.
  2. Technological Nature: The research conducted must have a technological component, where uncertainties are resolved through the application of scientific principles or methods.
  3. Experimentation Element: The research must involve experimentation, encompassing systematic trial and error processes to achieve desired outcomes.

Expenses that are Applicable to Claim Under the Illinois R&D Tax Credit:

The Illinois R&D tax credit encompasses wages disbursed to employees actively involved in conducting research and development activities within the state. This covers payments made to subcontractors who contribute to the execution of such activities. By recognizing the significance of employee compensation in driving innovation, the Illinois R&D tax credit encourages businesses to invest in their workforce and foster research and development endeavors within the state.

Take Advantage of the
R&D Tax Credit with Source Advisors

Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.