R&D Tax Credit Program
Under the new R&D Tax Credit Program, businesses must formally apply, submitting CPA-verified Qualified Research Expenditures (QREs) reports to the IEDA. Credits will be allocated pro rata from an annual pool of $40 million. Eligibility is more narrowly defined, restricted to businesses in advanced manufacturing, bioscience, finance, insurance, technology and innovation sectors, explicitly excluding real estate, agriculture, construction, retail and wholesale industries.
Key changes to the R&D tax credit regime include:
- A new credit rate of up to 3.5% of qualifying in-state QREs, reduced from the previous rate of 6.5%.
- Credits can be secured for up to five consecutive years, with annual reapplication and certification required.
- Credits remain refundable but are non-transferable, requiring independent CPA validation of claims.
Businesses must carefully manage these program adjustments, adhering to application deadlines, with the initial deadline set at Jan. 31, 2027, for 2026 claims. The current RAC program is set to expire Dec. 31, 2025.
R&D tax credit planning points
The R&D tax credit program amends the once‑routine tax form entry into a grant‑like program, ultimately limiting participation and adding timing risk to cash‑flow planning. Businesses historically eligible for the RAC may no longer qualify for incentives under the new regime. Businesses will need to closely review the law for eligibility and perform diligence around the application qualification, understand increased uncertainty for credit awards and prepare for increased and ongoing compliance costs.
Businesses should also consider taking full advantage of the RAC while it is still available for 2024 and 2025. This could include confirming eligibility for the new program as early as possible, implementing new systems to help more accurately track QREs to satisfy CPA-approved procedures, planning to file returns on extension due to applications dates and exploring alternative incentives to help offset lost R&D tax credit amounts.
Other incentive changes
Senate File 657 brings targeted changes to several additional incentive programs. Notably, the Business Incentives for Growth (BIG) Program replaces the High-Quality Jobs (HQJ) initiative, offering comprehensive incentives, including refundable credits, sales and use tax refunds and property tax exemptions. The Seed Investor Tax Credit now provides an enhanced refundable credit ranging from 20% to 35% for early-stage investments, limited to $100,000 per investor annually. The legislation also caps annual awards for both the Seed Investor Tax Credit and the Innovation Fund Investment Credit to $10 million, but leaves the 25% refundable credit of the Innovation Fund Investment Credit unchanged. Iowa's film industry also benefits, with the Iowa Film Production Rebate reinstating a 30% rebate on qualifying expenses, though this benefit is capped at $4 million statewide through 2027.
Other incentive programs phased out or repealed by the legislation include the following, although note previously received awards carried forward generally may continue to be taken as provided by statute:
- Employer-Provided Child Care Credit, repealed Dec. 31, 2025.
- Assistive Device Credit, repealed effective Dec. 31, 2024.
- Investments in Qualifying Business Tax Credit, repealed June 30, 2025.
Takeaways
Businesses impacted by the R&D tax credit changes under the bill must strategically navigate tighter eligibility requirements, a capped credit pool, and mandatory certification processes. Companies should consult with their state and local tax advisers and promptly evaluate eligibility, conduct comprehensive compliance reviews and consult incentive specialists to optimize their positions.