Iowa Research Activities Credit

Who qualifies

• Business must be engaged in manufacturing, life sciences, agriscience, software engineering, or aviation and aerospace — the credit is industry-restricted (most state R&D credits are not)
• Explicitly excluded industries: agricultural production (except qualifying agriscience research), contractors/subcontractors, finance/investment companies, retailers, wholesalers, transportation companies, publishers, agricultural cooperatives, real estate companies, collection agencies, accountants, architects
• Must claim and be allowed a federal §41 Research Credit for the same taxable year — Iowa RAC is piggyback to the federal credit
• Iowa QRE apportionment: credit is based on the ratio of Iowa-located QRE to total QRE — companies must track which research activities are performed in Iowa
• Employee wages qualify only if the employee performs a majority of their services directly related to research projects during the period they engage in those projects
• Contract research: third-party payments qualify only if the contractor performs a majority of their services for the business's research projects, and only for research conducted in Iowa
• Supplies phaseout: for TY2025, only 40% of supply costs count as Iowa QRE; from TY2026, supplies are fully excluded from Iowa QRE
• Computer rental/use costs are never Iowa QRE (unlike federal §41 which includes 40% of computer rental)
• All entity types eligible: C-corps, S-corps, LLCs, partnerships, individuals — pass-through credits flow pro-rata to members/partners
• Must file Iowa return; credit claimed on timely-filed return

What it covers

How to apply

1. 1

   Confirm federal §41 eligibility and claim approval

   Iowa RAC requires that the business claim and be allowed the federal §41 credit for the same taxable year. Complete federal Form 6765 first. If the federal credit is denied on audit, the Iowa RAC is also at risk. Document the four-part §41 test (technological in nature, new or improved business component, uncertainty, process of experimentation) for each qualifying project.

   ~8 hrs

2. 2

   Calculate Iowa-apportioned QRE

   Identify which research activities were conducted in Iowa. Calculate Iowa QRE: wages for employees who perform a majority of their services on Iowa research projects; contract research paid to third parties performing Iowa research; Iowa supply costs (capped at 40% of actual costs for TY2025; zero from TY2026). Do NOT include computer rental costs in Iowa QRE. Divide Iowa QRE by total QRE to get Iowa's apportionment percentage.

   ~10 hrs

3. 3

   Determine base amount and incremental Iowa QRE

   Base amount = fixed-base percentage × average annual Iowa gross receipts for the prior 4 taxable years, with a floor of 50% of current-year Iowa QRE (the same structure as federal §41). Incremental Iowa QRE = Iowa QRE minus Iowa base amount. Apply 6.5% to incremental Iowa QRE plus 6.5% of basic research payments apportioned to Iowa.

   ~6 hrs

4. 4

   Consider Alternative Simplified Credit (ASC) method

   If your company used the federal ASC method (Form 6765, Section B), Iowa requires using the ASC method as well. Iowa ASC rate: 4.55% of Iowa QRE above 50% of average Iowa QRE for prior 3 years (or 1.95% if no prior-year Iowa QRE). The ASC reduces documentation burden by eliminating the fixed-base percentage calculation. Choose the method that maximizes your credit.

   ~4 hrs

5. 5

   Calculate refundable portion

   If the credit exceeds Iowa income tax liability for the year, the refundable portion is 70% of the excess for TY2025 (60% for TY2026; 50% from TY2027+). The refundable amount is paid with interest per Iowa Code §421.60(2)(e). Alternatively, you may elect to carry the overpayment forward to the next year rather than taking the cash refund — model both options based on projected future Iowa tax liability.

   ~2 hrs

6. 6

   File Iowa Form IA 128 or IA 128S

   File Form IA 128 (standard method) or Form IA 128S (ASC method) with your Iowa income tax return. The form collects Iowa QRE, base amount, credit computation, and refund election. Attach supporting schedules showing Iowa vs. total QRE allocation by project and employee. Submit with Form IA 1120 (corporations), IA 1040 (individuals), or the applicable pass-through return.

   ~5 hrs

7. 7

   Maintain Iowa-specific documentation

   Keep records demonstrating Iowa location of research: employee project timesheets by work location, Iowa office address for supply deliveries, contract research agreements with Iowa-location confirmation. Iowa DOR audits the location apportionment separately from IRS federal audit. Retain for at least 3 years from return due date. Note: the 'substantially all rule' (§41(b)(2)(B)) does not apply for Iowa QRE determination — Iowa has its own majority-services test.

   ~6 hrs

Industry & certifications

NAICS codes: 311, 312, 313, 314, 315, 316, 321, 322, 323, 324, 325, 326, 327, 331, 332, 333, 334, 335, 336, 337, 339, 541511, 541512, 541714, 541715, 325412, 336411

Deadline & timing

File Form IA 128 (standard incremental method) or Form IA 128S (alternative simplified credit method) with your Iowa income tax return by the due date including extensions. The credit must be claimed on a timely-filed return — amended returns can only increase the claim within 6 months of the original due date or if the IRS audits the federal §41 claim. CRITICAL: Iowa Code §422.10 is repealed effective January 1, 2027 — TY2026 is the last year the credit is available. Companies should accelerate Iowa R&D activity into 2025–2026 to maximize remaining claims. Iowa Code §422.10(1) provides that rights to credits 'issued, awarded, or allowed before December 31, 2025' are preserved (2025 Acts, ch 136, §58).

Programs that stack well

• Research & Development Tax Credit (Section 41)

Related programs