Iowa R&D Tax Credits

State and Federal Credits Available

6.5% Regular Rate

On excess QREs over base + basic research

4.55% ASC Option

If federal ASC elected/required

Refundable (Limits Apply)

80% RAC / 90% Supplemental excess; no carryforward

Up to 10% Supplemental

For approved HQJ/Zone small firms (≤$20M revenue)

The Iowa Research and Development Tax Credit, codified under Iowa Code §15.335 and administered by the Iowa Department of Revenue, rewards eligible businesses for qualified research activities (QRAs) conducted in the state, aligned with IRC §41. This credit offsets income tax liabilities, with excess amounts refundable subject to statutory refund-percentage limits (recent guidance: 80% of RAC / 90% of Supplemental RAC), no carryforward of excess. For tax years beginning before January 1, 2026, claim up to 6.5% on excess qualified research expenses (QREs)—but note Senate File 657 repeals the RAC effective 2026, replacing it with a new, capped program under the Iowa Economic Development Authority (IEDA).

Book a Consultation

6.5% Regular Rate

On excess QREs over base + basic research

4.55% ASC Option

If federal ASC elected/required

Refundable (Limits Apply)

80% RAC / 90% Supplemental excess; no carryforward

Up to 10% Supplemental

For approved HQJ/Zone small firms (≤$20M revenue)

Key Highlights

Who Qualifies for the Iowa R&D Tax Credit

For tax year 2025, eligibility under the RAC requires performing QRAs in Iowa that meet IRC §41 standards, with a corresponding federal R&D credit claim on Form 6765. Businesses must operate in specified industries; exclusions apply, including financial services (eligible under the new 2026 IEDA program, subject to application and certification). Starting 2026, the new program narrows eligibility to advanced manufacturing, bioscience, insurance/finance, and technology/innovation (requires IEDA approval), excluding agriculture production, construction, real estate, retail, and wholesale.

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

How to Calculate the Iowa R&D Tax Credit

For 2025, the RAC uses the regular incremental method or Alternative Simplified Credit (ASC) on Iowa QREs only. Federal ASC election mandates state ASC use. Supplemental credits apply via the High-Quality Jobs (HQJ) Program based on gross revenue.

Regular Method (Current RAC)

Determine total Iowa QREs for the tax year.
Compute base: Fixed-base percentage × average Iowa-apportioned gross receipts (prior 4 years); minimum 50% of current Iowa QREs.
Excess QREs = Current Iowa QREs - base.
Credit = 6.5% × excess + 6.5% × qualified basic research payments (to universities/nonprofits).
For businesses approved under the HQJ or Enterprise Zone program, add supplemental: Up to 10% of qualifying incremental research expenditures or specified RAC amounts if ≤$20M gross revenue; up to 3% if >$20M.

Example Calculation

Iowa QREs = $1,000,000; Base = $600,000 (e.g., 3% fixed-base × $20M avg receipts); Excess =$400,000.

Regular Credit = 6.5% × $400,000 =$26,000.

Basic Research: 6.5% × $10,000 =$650.

Subtotal =$26,650.

Supplemental (small firm, up to 10% × $400,000 excess) =$40,000.

Total =$66,650 (refundable subject to recent limits: 80% RAC / 90% Supplemental).

Alternative Simplified Credit (ASC) (Current RAC)

Required if federal ASC elected.

Average Iowa QREs from prior 3 years.
Base = 50% of average (0% if no prior QREs).
Excess = Current Iowa QREs - base.
Credit = 4.55% × excess + 6.5% basic research.
Supplemental credits for HQJ awards under ASC use specific percentages and line calculations that differ from the regular method; see IA 128S instructions and HQJ contract terms for exact computations.

Important: Iowa gross receipts exclude non-Iowa sales. Startups: 3% fixed-base, phasing to 16% over 10 years.

Estimate Your Credits

Iowa-Specific Rules

In recent years prior to SF 657, the RAC program supported over $70 million in annual claims, focusing on refundability for eligible sectors. Post-2025, expect a shift to a competitive, lower-rate program.

Refundable Subject to Limits

Recent: 80% of excess RAC / 90% Supplemental refunded, no carryforward for remainder—key for liquidity in software or aerospace.

Tiered Supplemental Credits

Available only for approved HQJ/Enterprise Zone; up to 10% of incremental QREs for small firms (≤$20M revenue); up to 3% for larger.

2026 Transition Under SF 657

RAC repealed; new IEDA program offers up to 3.5% on QREs, $40M annual cap, application-based with CPA verification, narrower industries.

Other Important Rules (Current RAC)

Federal Alignment: Follows IRC §41 for QRE definitions. Federal §174 capitalization rules may affect overall tax position and interact with the RAC; coordinate with your tax advisor on Iowa conformity.
Pass-Through: Pro-rata via K-1; combined returns for unitary groups.
Audit: Retain contemporaneous documentation consistent with Iowa and federal record retention rules, typically at least through the statute of limitations period (3 years for most assessments).
2018 Reforms: Limited to listed industries; prior ineligible claims required amendments (waivers expired).

Refundable Subject to Limits

Recent: 80% of excess RAC / 90% Supplemental refunded, no carryforward for remainder—key for liquidity in software or aerospace.

Tiered Supplemental Credits

Available only for approved HQJ/Enterprise Zone; up to 10% of incremental QREs for small firms (≤$20M revenue); up to 3% for larger.

2026 Transition Under SF 657

RAC repealed; new IEDA program offers up to 3.5% on QREs, $40M annual cap, application-based with CPA verification, narrower industries.

Other Important Rules (Current RAC)

Federal Alignment: Follows IRC §41 for QRE definitions. Federal §174 capitalization rules may affect overall tax position and interact with the RAC; coordinate with your tax advisor on Iowa conformity.
Pass-Through: Pro-rata via K-1; combined returns for unitary groups.
Audit: Retain contemporaneous documentation consistent with Iowa and federal record retention rules, typically at least through the statute of limitations period (3 years for most assessments).
2018 Reforms: Limited to listed industries; prior ineligible claims required amendments (waivers expired).

Speak to an Expert

Iowa R&D Tax Credits Case Study

A Cedar Rapids aviation firm qualified 45% of engineering wages and contract R&D as QREs, claiming

$89,230

in RAC credits for 2024

80%

RAC refunded to fund prototypes. Combined with federal, total savings hit

$512,000

per Strike Tax analysis.

Frequent Asked Questions

The Research Activities Credit (RAC) offers a 6.5% credit on excess Iowa QREs for 2025, plus 6.5% on basic research, requiring a federal IRC §41 claim. It sunsets after 2025 under SF 657.

QRAs under IRC §41 in eligible industries like manufacturing or life sciences, performed in Iowa—e.g., developing aerospace components or software prototypes. Strike Tax audits for compliance.

Up to $65,000 on $1M excess QREs at 6.5%, plus up to $40,000 supplemental for small firms—refundable subject to recent limits (80% RAC / 90% Supplemental). Use Strike Tax’s calculator; stack with federal for more.

Refundable subject to statutory percentage limits (recent: 80% RAC / 90% Supplemental), with no carryforward for excess amounts.

File Form IA 128 (or IA 128S) with your Iowa return, post-federal Form 6765. Include QRE/supporting data. Strike Tax streamlines.

Yes, same QREs qualify; state requires federal claim first. Strike Tax maximizes stacking.

For 2025: Manufacturing, life sciences (incl. agriscience), software engineering, aviation/aerospace (financial services ineligible). 2026 narrows to advanced manufacturing, bioscience, finance/insurance, tech/innovation (IEDA certification required).

Refundability subject to recent limits (80% RAC / 90% Supplemental); supplies qualify at 40%. SF 657 repeals RAC post-2025.

Replaces RAC with IEDA-administered credit: up to 3.5% QREs, $40M FY cap, annual applications/CPA reports, refundable and carryforward, limited industries.

Fixed-base % × avg Iowa gross receipts (prior 4 years), min 50% current QREs. Startups phase from 3%.

See More FAQs