Kentucky’s Research Facility Tax Credit: The Credit for Building the Lab, Not Running It
How Is This Credit Different From the Federal R&D Credit?
The Federal R&D tax credit under IRC §41 covers wages for qualified services, supplies used in research, and a portion of contract research costs. Kentucky’s facility credit covers a different pool of money: the cost of the property where the research happens.
The difference is important because many Kentucky businesses already run pilot lines, test equipment, and trial space. That spending is recorded as equipment and buildings on the depreciation schedule and not in the payroll or supply records, so the team that builds the federal credit study should be familiar with what the state credit rewards compared to the federal.
What Does the Kentucky State R&D Credit Cover?
Kentucky ties the credit to tangible, depreciable property that is located in Kentucky. Things that may qualify include:
• Space built or remodeled for experimentation
• Pilot or trial production lines
• Test and measurement equipment
• New equipment that adds research capacity
Things that generally do not qualify include:
• Equipment that runs normal production
• Replacement equipment
• Land
• Anything located outside Kentucky
The credit follows the purpose of the property, and the purpose must hold up under the four-part test; your project still needs documented technical uncertainty and a process of experimentation, such as test plans and trial results.
A Closer Look: Agriculture and Process Improvement
Consider an egg producer that builds a dedicated trial house to test new housing, feed, or ventilation approaches against a control group. The building, the monitoring equipment, and the new capacity added for those trials look like research property. The equipment that collects, washes, and packs eggs for sale every day looks like production property.
Equipment that serves both production and research does not have specific guidelines, so it’s imperative to build a position carefully. If your team is performing R&D with equipment that also runs general production, you’ll need to document activities separately.
How Is the Kentucky R&D Tax Credit Claimed?
The Kentucky state R&D tax credit is claimed on Schedule QR and filed with a normal return. A few mechanics to note:
• Annual filing. Submit a copy of Schedule QR each year until the credit is fully used or the ten-year carryforward window expires, with a list of each asset’s purchase date, in-service date, description, and cost. Complete a separate schedule each year a new project qualifies.
• Timing. The credit becomes available once the property is placed in service, so confirm the in-service year of each asset before filing.
• Where it applies. The credit applies against Kentucky income tax and the limited liability entity tax (LLET), in the order set by KRS 141.0205. The credit cannot reduce the LLET below the $175 minimum, and income tax and LLET credit balances are tracked separately.
• Carryforward. The credit is nonrefundable, but unused credits carry forward for ten years.
• Pass-through entities. These entities report each owner’s pro rata share of the credit on the K-1. Income tax and LLET credit balances cannot be used against each other. Owners can claim it on Schedule TCS or ITC.
How to Claim a Credit You Missed
If you built a Kentucky facility in the past few years and never claimed the credit, you may still be able to recover it by filing an amended return for each open year and a written refund claim, generally within four years of the date the tax was paid. Because the credit is nonrefundable, an amended return will only recover tax you paid in that year, with any excess carrying forward.
Deadlines run year by year and are measured from the date each payment was made, including estimated and extension payments. The oldest open year drops off first, which makes this a case where waiting can cost you real money.
Questions to Ask Before You Claim
• Which Kentucky facilities hold your process-improvement or research projects, and what did you build, remodel, or expand?
• When did each project finish, and when did each asset go into service?
• What equipment did you buy (description, date, cost), and do you capitalize it as depreciable?
• Was each asset new capacity or a replacement for existing equipment?
• Is any equipment used only for experimentation, or is it all part of normal production?
• If equipment serves both purposes, how do you track the split?
• Did you expense any of it (Section 179 or bonus depreciation) on your federal return?
• Which projects have documented uncertainty and experimentation?
• Did any of the spending happen outside Kentucky?
• What is your entity type, and how much Kentucky income tax and LLET did you pay in each open year?
• Have you ever filed Schedule QR, and do you carry a balance forward?
How RK Partners Handles State R&D Tax Credits
Our consultants handle the federal and state R&D tax credits if the state has them available to you. They are well-versed in how to identify the applicable qualifying projects and can compile a study for Kentucky state R&D tax credits for your CPA to file.
Your first discovery call is risk-free. We’re happy to review what your business is doing that may qualify for the federal and Kentucky state credit.
Kentucky’s Research Facility Tax Credit: The Credit for Building the Lab, Not Running It
How Is This Credit Different From the Federal R&D Credit?
The Federal R&D tax credit under IRC §41 covers wages for qualified services, supplies used in research, and a portion of contract research costs. Kentucky’s facility credit covers a different pool of money: the cost of the property where the research happens.
The difference is important because many Kentucky businesses already run pilot lines, test equipment, and trial space. That spending is recorded as equipment and buildings on the depreciation schedule and not in the payroll or supply records, so the team that builds the federal credit study should be familiar with what the state credit rewards compared to the federal.
What Does the Kentucky State R&D Credit Cover?
Kentucky ties the credit to tangible, depreciable property that is located in Kentucky. Things that may qualify include:
• Space built or remodeled for experimentation
• Pilot or trial production lines
• Test and measurement equipment
• New equipment that adds research capacity
Things that generally do not qualify include:
• Equipment that runs normal production
• Replacement equipment
• Land
• Anything located outside Kentucky
The credit follows the purpose of the property, and the purpose must hold up under the four-part test; your project still needs documented technical uncertainty and a process of experimentation, such as test plans and trial results.
A Closer Look: Agriculture and Process Improvement
Consider an egg producer that builds a dedicated trial house to test new housing, feed, or ventilation approaches against a control group. The building, the monitoring equipment, and the new capacity added for those trials look like research property. The equipment that collects, washes, and packs eggs for sale every day looks like production property.
Equipment that serves both production and research does not have specific guidelines, so it’s imperative to build a position carefully. If your team is performing R&D with equipment that also runs general production, you’ll need to document activities separately.
How Is the Kentucky R&D Tax Credit Claimed?
The Kentucky state R&D tax credit is claimed on Schedule QR and filed with a normal return. A few mechanics to note:
• Annual filing. Submit a copy of Schedule QR each year until the credit is fully used or the ten-year carryforward window expires, with a list of each asset’s purchase date, in-service date, description, and cost. Complete a separate schedule each year a new project qualifies.
• Timing. The credit becomes available once the property is placed in service, so confirm the in-service year of each asset before filing.
• Where it applies. The credit applies against Kentucky income tax and the limited liability entity tax (LLET), in the order set by KRS 141.0205. The credit cannot reduce the LLET below the $175 minimum, and income tax and LLET credit balances are tracked separately.
• Carryforward. The credit is nonrefundable, but unused credits carry forward for ten years.
• Pass-through entities. These entities report each owner’s pro rata share of the credit on the K-1. Income tax and LLET credit balances cannot be used against each other. Owners can claim it on Schedule TCS or ITC.
How to Claim a Credit You Missed
If you built a Kentucky facility in the past few years and never claimed the credit, you may still be able to recover it by filing an amended return for each open year and a written refund claim, generally within four years of the date the tax was paid. Because the credit is nonrefundable, an amended return will only recover tax you paid in that year, with any excess carrying forward.
Deadlines run year by year and are measured from the date each payment was made, including estimated and extension payments. The oldest open year drops off first, which makes this a case where waiting can cost you real money.
Questions to Ask Before You Claim
• Which Kentucky facilities hold your process-improvement or research projects, and what did you build, remodel, or expand?
• When did each project finish, and when did each asset go into service?
• What equipment did you buy (description, date, cost), and do you capitalize it as depreciable?
• Was each asset new capacity or a replacement for existing equipment?
• Is any equipment used only for experimentation, or is it all part of normal production?
• If equipment serves both purposes, how do you track the split?
• Did you expense any of it (Section 179 or bonus depreciation) on your federal return?
• Which projects have documented uncertainty and experimentation?
• Did any of the spending happen outside Kentucky?
• What is your entity type, and how much Kentucky income tax and LLET did you pay in each open year?
• Have you ever filed Schedule QR, and do you carry a balance forward?
How RK Partners Handles State R&D Tax Credits
Our consultants handle the federal and state R&D tax credits if the state has them available to you. They are well-versed in how to identify the applicable qualifying projects and can compile a study for Kentucky state R&D tax credits for your CPA to file.
Your first discovery call is risk-free. We’re happy to review what your business is doing that may qualify for the federal and Kentucky state credit.
