Effective for tax years beginning on or after Jan. 1, 2026, Iowa has significantly redesigned its R&D tax credit program.
The state is transitioning from the long-standing Research Activities Credit (RAC) to a new application-based program administered by the IEDA.
The redesigned program introduces new eligibility restrictions, a statewide annual cap on credits, and a required verification of qualified expenditures by an independent CPA. These changes will require many businesses to reassess both eligibility and the expected value of the credit.
Key Changes at a Glance
- Application-based program administered by the IEDA; credits are no longer automatically claimed on the tax return.
- Eligibility limited to specific targeted industries and sectors.
- Statewide annual cap of $40 million, with pro-rata reductions if claims exceed the cap.
- Two-step process requiring both business certification and an annual credit application.
- Mandatory CPA verification of eligible Iowa R&D expenditures.
- Credits remain refundable but are no longer transferable.
Eligibility: Targeted Industries Only
To qualify for the credit, a business must first be certified by the IEDA as a "Qualified Business." Eligibility is limited to businesses primarily engaged in designated industries, including advanced manufacturing, bioscience, insurance and finance, and technology and innovation. Eligible sectors within these industries are also identified in Iowa code...
Businesses that perform otherwise qualifying R&D activities, such as software development, may still be excluded if their primary business operations fall outside the approved industries. Certain activities, such as agricultural production and ethanol biorefining, are explicitly excluded.
New Two-Step Application Process
Step 1: Qualified Business Certification.
Before claiming any credit, a business must apply to the IEDA for certification as a Qualified Business. Once approved, the certification is generally valid for up to five years, subject to continued compliance with program requirements.
Step 2: Annual Credit Application.
Certified businesses must submit a separate application each year to claim the credit. The application is due no later than January 31 following the filing of the most recent federal income tax return.
Annual R&D Credit Application Information
The annual credit application will require significantly more detailed supporting schedules for eligible Iowa expenditures. Applicants must provide qualified research expense detail by business entity and expense type, business component, qualified wages by employee, qualified supply expenses, qualified contract research expenses, and qualified rental or lease costs of computers by account and vendor. Historically, Iowa Form IA 128 Research Activities Credit required only the reporting of total qualified research expenses by expense category. As a result of this change, businesses will need to have comprehensive qualified research documentation—including detailed allocations to employees, vendors, and business components—prepared at the time of application.
CPA Verification Requirement
A key change under the redesigned program is the requirement that each annual credit application include a verification report from an independent CPA. The CPA must perform specified procedures to confirm that the claimed Iowa R&D expenditures are more likely than not eligible and supported by the company’s records.
While the independent CPA verification is not intended to be an audit or attestation engagement, it represents a new compliance step that may increase both cost and preparation time for businesses seeking the credit.
Credit Amount and Timing
The credit is calculated as up to 3.5% of a company’s Iowa-based qualified research expenses (QREs), subject to the $40 million statewide cap. If total approved claims exceed the cap, all awards will be reduced on a pro-rata basis based on expenditures, potentially lowering the effective credit rate. For context, in recent years, aggregate R&D credit claims have exceeded $70 million annually.
Credits are awarded by the IEDA and claimed on the tax return for the year following the year in which the qualifying expenditures were incurred. This represents a timing delay compared to the prior RAC program, resulting in an unavoidable gap year in which taxpayers will not claim a credit on the 2026 return, as credits related to 2026 expenditures are first claimable in 2027.
Ongoing Compliance Considerations
The new program includes enhanced compliance and recapture provisions. Businesses must notify the IEDA of certain post-award changes, such as reductions to the federal R&D credit, facility closures, or workforce reductions that impact Iowa R&D activities.
What This Means for Businesses
- Evaluate whether your business meets the new industry eligibility requirements.
- Plan ahead for the expanded application and documentation requirements.
- Budget for the additional compliance associated with CPA verification.
- Model the expected benefit, recognizing that the 3.5% rate is a maximum and may be reduced by the statewide cap.
- Consider engaging advisors early to navigate the certification and application process.
