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.

Eligibility for the R&D Tax Credit in Illinois is determined by taxpayers having qualified research expenditures (QREs) as defined by IRC §41 within the state during the specific tax period. By meeting this criterion, taxpayers gain the opportunity to claim the R&D Tax Credit as a tax offset, reducing their overall tax liability.

It’s important to note that the R&D Tax Credit in Illinois is non-refundable, meaning it cannot result in a cash refund. However, taxpayers have the advantage of amending their Illinois tax returns as far back as three years to claim this credit. This provision ensures that businesses can retroactively capture the benefits of the R&D Tax Credit, maximizing their tax savings potential and supporting ongoing research and development efforts in the state.

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

For tax years that ended prior to January 1, 2022, the Illinois Research and Development (R&D) tax credit offered a non-refundable credit against standard income tax for businesses enhancing research activities within the state. The credit amount was calculated at 6.5% of eligible expenditures. This financial incentive was designed to promote innovation and technological progress in various industries across Illinois.

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.