Wisconsin R&D Tax Credit: Key Info for Business Savings

May 17, 2024
Gideon Ward
Fact Checked

Can businesses in Wisconsin apply for the Research and Development Tax Credit (R&D Tax Credit), and how can they maximize this tax benefit? We’ll look into how companies can determine if they’re eligible for this tax credit, how to calculate it, and what makes it unique in Wisconsin.

What are Wisconsin R&D Tax Credits?

Modeled after IRC § 41, Wisconsin equals 5.75% of the excess qualified R&D expenditures (QREs) over the base amount (50% of the prior three years’ QREs). Since the R&D credit is a comparative credit that uses the preceding three years’ QREs to calculate the base, if a company does not have at least three previous years of expenditures, the credit equals 2.875% of the excess QREs over the base amount.

Does Wisconsin have an R&D credit?

 

Two business professionals, holding a digital tablet, are discussing R&D tax credits in a conference room.

Yes, the state of Wisconsin offers an R&D tax credit for qualified research expenses conducted within its vicinity.

Eligibility Criteria for Wisconsin Businesses

Companies can file for the R&D Tax Credit if they have QREs as defined by IRC §41 in Wisconsin during the tax period. Taxpayers can claim the R&D Tax Credit to use as a tax offset. The credit is non-refundable. Wisconsin tax returns can be amended as far back as four years to claim the credit.

Wisconsin also offers the following Research Tax Credits:

  • Research Credit for Activities Related to Internal Combustion Engines
  • Research Credit for Activities Related to Certain Energy Efficient Products

Four-Part Test for Qualifying Activities

For a company’s activities to be considered qualified research expenses, it must pass the four-part test. These four criteria help businesses determine if they can include certain activities in their tax claim.

Technological in Nature

To qualify for research tax credits, the activity should fundamentally rely on principles of physical sciences, biological sciences, computer science, engineering, or scientific methods. This entails using technology or engineering in a field of science.

This activity should also aim to develop or improve a product, process, or software’s functionality, performance, reliability, or quality. Some examples include developing new materials, enhancing manufacturing processes, or enhancing software functionality.

Permitted Purposes

The activity must relate to a new or improved business component’s function, performance, reliability, quality, or composition. It should aim to develop a new or improved product, process, or software. It should also ensure that the research is not conducted for non-commercial purposes, like social science or arts-related endeavors.

Elimination of Uncertainty

The activity should unearth information to eliminate uncertainty concerning a particular method or capability for developing or improving a product or process. Uncertainty exists if the capability, method, or design of the product, process, or software is uncertain or not readily known.

Process of Experimentation

The activity should involve experimentation involving simulation, evaluating alternatives, confirming hypotheses through trial and error, testing and modeling, or refining or discarding hypotheses. It must also involve a systematic process to assess one or more alternatives, including testing hypotheses, modeling, prototyping, and iterative analysis. The activity should also identify uncertainties and test potential solutions to resolve them.

Carrying Forward & Refunding the Wisconsin R&D Tax Credit

The credit changed from 100% non-refundable to 10% refundable for tax years beginning after December 31, 2017, and increased to 15% for tax years beginning on or after January 1, 2021. For tax years beginning after December 31, 2023, the refundable portion is 25%.

The maximum refundable portion of the credit is computed by multiplying the current year’s research credit by 15%. The refundable portion is the lesser of 1) the current year research credit remaining after subtracting the current year credit used to offset tax or 2) 15% of the current year research credit.

Wisconsin Qualifying Research Expenditures 

 

A person is working on financial documents with various graphs and charts, using a calculator to analyze qualifying research expenditures.

Not all expenses incurred can be declared for one’s income tax liability. Companies should note that the research expenses that qualify for the Wisconsin Research and Development tax credit program are as follows: Generally, the Research and Development tax credit covers two categories of qualified research expenses: in-house and contract research expenses. In-house research expenses include wages paid to employees for any qualifying activities performed, supplies purchased to conduct qualified research, and contract research expenses paid to conduct qualified research.

To clarify, only wages, including all taxable wages reported on an employee’s W-2 Form, can be declared qualifying research expenditures. In addition, it should be highlighted that only employees involved in qualified research activities or directly supporting these initiatives are qualified.

Any tangible property bought to conduct qualified research can be considered a supply for this tax credit. Contract research expenses are when a business performs qualified research on behalf of the taxpayer.

How to Claim Wisconsin R&D Tax Credits?

Companies that intend to claim Wisconsin R&D Tax Credits must complete Form WI Schedule R, submitted with the annual Wisconsin state return.

Companies must present documentation to justify the figures declared. For example, the company should show sales invoices, payroll files, and official receipts so that the Department of Revenue can cross-check the amount stated.

Calculating the Wisconsin R&D Tax Credits

 

A professional working on a laptop and using a calculator and reading the tax credit documents, surrounded by financial documents.

The credit is calculated as 5.75% of QREs that exceed the base amount, which is 50% of the average QREs for the preceding three tax years. If the taxpayer had no QREs in the three preceding tax years, the credit is calculated as 2.875% of the current year’s QREs.

Recent Changes to the Wisconsin R&D Tax Credit

For tax years 2021 and 2022, up to 15% of a taxpayer’s state R&D credit is refundable, and this increases to 25% beginning in the 2024 tax year. The refundable portion of the credit is the lesser of the unutilized credit or 15% of the credit, 25% of the credit beginning in 2024.

Wisconsin chose not to adopt the changes the Tax Cuts and Jobs Act of 2017 ushered in. Specifically, Wisconsin decoupled from federal law and continues to allow full expensing of IRC Section 174 research and experimentation expenses instead of requiring taxpayers to capitalize and amortize these expenses over five years for research conducted within the state.

Next Steps

Companies that intend to maximize the R&D Tax Credit in Wisconsin should work with tax experts who are familiar with the state’s rules and regulations. They can help businesses maximize this tax claim and plan for the long term.

FAQs

What is the Wisconsin Research Credit Schedule R?

Research Credit Schedule R is the tax form used in Wisconsin to claim R&D tax credit.

What is the dependent tax credit in Wisconsin?

Wisconsin dependent tax credit provides substantial relief to families grappling with childcare expenses.

Are Wisconsin tax refunds delayed?

Paper returns may incur some delays with Wisconsin tax refunds.

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