Kentucky R&D Tax Credits

State and Federal Credits Available

5% Credit Rate

5% on qualified facility costs; no base required

10-Year Carryforward

Unused credits carry forward up to 10 years

Nonrefundable

Offsets tax liability; no cash refunds

The Kentucky R&D Tax Credit incentivizes businesses to invest in research infrastructure within the state, providing a nonrefundable credit against income taxes or the Limited Liability Entity Tax (LLET) via the Kentucky Department of Revenue.

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5% Credit Rate

5% on qualified facility costs; no base required

10-Year Carryforward

Unused credits carry forward up to 10 years

Nonrefundable

Offsets tax liability; no cash refunds

Key Highlights

5% credit on qualified costs for constructing, remodeling, expanding, or equipping research facilities in Kentucky
10-year carryforward for unused credits
Nonrefundable but applicable to individual, corporate, and LLET taxes
Pass-through eligible for partnerships, S corporations, and LLCs
In-state only - focuses on tangible, depreciable property used for IRC § 41 qualified research
Excludes replacement property and routine expenses like wages

Who Qualifies for the Kentucky R&D Tax Credit

Eligibility centers on investments in physical research facilities conducted in Kentucky, aligned with federal IRC § 41 definitions of qualified research. Businesses must incur qualified costs for tangible, depreciable property that supports technological uncertainty resolution in developing or improving products, processes, or software.

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)

Kentucky's credit is limited to facility-related investments, excluding operational costs like wages or supplies.

How to Calculate the Kentucky R&D Tax Credit

Kentucky uses a straightforward regular method based on qualified facility costs, without an incremental base or alternative simplified credit (ASC). Calculations apply only to in-state expenditures on tangible, depreciable property for qualified research.

Regular Method

Determine qualified costs: Sum eligible expenditures for construction, remodeling, expansion, or equipping research facilities in Kentucky during the tax year.
Verify eligibility: Ensure costs relate to tangible, depreciable property supporting IRC § 41 qualified research (e.g., resolving technical uncertainties).
Calculate credit: Apply 5% to total qualified costs. The credit is generated when qualified property is placed in service in Kentucky.
Apply ordering: Per KRS 141.0205, the research facilities credit is applied in the statutory order among other business incentive credits and, for LLET, it cannot reduce the LLET below the $175 minimum; carry forward unused portions for up to 10 years.

Example Calculation

Qualified Costs =$1,000,000 → Base not applicable

ull amount qualifies → Credit = 5% × $1,000,000 =$50,000

Base Calculation for Kentucky R&D Tax Credit

Identify all qualified costs for the tax year: construction, remodeling, expansion, equipping with depreciable property.
No prior year averaging or fixed-base percentage; all eligible current-year costs qualify fully for the 5% credit.
Ensure all costs are for Kentucky-based facilities supporting IRC § 41 qualified research; exclude non-Kentucky or ineligible expenses.
If no qualified costs in the year, base = $0 (no credit generated).

Example Calculation

A Kentucky manufacturing firm invests $2,000,000 in constructing and equipping a new R&D lab (all qualified under IRC § 41).

Qualified Costs =$2,000,000

Credit = 5% × $2,000,000 =$100,000

If the firm's tax liability is $80,000, apply $80,000 this year and carry forward $20,000 for up to 10 years. Add federal R&D credits (often around 10 to 20 percent of incremental qualified research expenses, depending on method) for stacking benefits on the same activities./div>

Scope and Location Rules

Kentucky-sourced only: All costs must be for facilities physically located in the state.
No base amount: Unlike federal rules, no fixed-base percentage or prior-year averaging.
Depreciable focus: Costs must qualify as capital investments under federal depreciation rules.

Estimate Your Credits

Kentucky-Specific Rules

Kentucky's R&D credit emphasizes infrastructure investment, with provisions tailored to capital-intensive projects and pass-through structures.

Facility Costs Only

5% on construction and equipment drives meaningful benefits for capital projects in manufacturing and tech.

10-Year Carryforward

Provides sustained value for long-term infrastructure investments, allowing offsets against future LLET or income taxes.

Pass-Through Treatment

Pro-rata allocation via K-1 maximizes benefits for partnerships and S corps, including LLET offsets at the entity level.

Other Important Rules

No Wages or Supplies QualifyCredit is strictly for depreciable facility investments; operational R&D expenses fall under federal credits only.
Audit ReadinessMaintain detailed property records (including date purchased, date placed in service, description, and cost) and copies of filed Schedules QR, ITC, TCS and Kentucky K-1s for at least the normal Kentucky statute of limitations period, typically four to five years or longer as advised by your tax advisor.
In-State OnlyFacilities must be located in Kentucky; no credit for out-of-state or remote research.
Exclusions for ReplacementsRoutine asset swaps do not qualify - focus on net new or expansive investments.
Ordering RulesPer KRS 141.0205, the research facilities credit is applied in the statutory order among other business incentive credits and, for LLET, it cannot reduce the LLET below the $175 minimum.

Facility Costs Only

5% on construction and equipment drives meaningful benefits for capital projects in manufacturing and tech.

10-Year Carryforward

Provides sustained value for long-term infrastructure investments, allowing offsets against future LLET or income taxes.

Pass-Through Treatment

Pro-rata allocation via K-1 maximizes benefits for partnerships and S corps, including LLET offsets at the entity level.

Other Important Rules

No Wages or Supplies QualifyCredit is strictly for depreciable facility investments; operational R&D expenses fall under federal credits only.
Audit ReadinessMaintain detailed property records (including date purchased, date placed in service, description, and cost) and copies of filed Schedules QR, ITC, TCS and Kentucky K-1s for at least the normal Kentucky statute of limitations period, typically four to five years or longer as advised by your tax advisor.
In-State OnlyFacilities must be located in Kentucky; no credit for out-of-state or remote research.
Exclusions for ReplacementsRoutine asset swaps do not qualify - focus on net new or expansive investments.
Ordering RulesPer KRS 141.0205, the research facilities credit is applied in the statutory order among other business incentive credits and, for LLET, it cannot reduce the LLET below the $175 minimum.

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Kentucky R&D Tax Credits Case Study

Real results from a Kentucky manufacturing company

A mid-sized Kentucky firm expanded its R&D facility with $1.5 million in qualified construction and equipment costs.

$75,000

total state R&D tax credits earned

100%

of facility costs qualified

$250,000

total R&D tax credits earned (federal + state combined)

‍

This credit offset LLET liability and carried forward for future years, freeing capital for further innovation.

Frequent Asked Questions

What is the Kentucky R&D tax credit?

The Kentucky Qualified Research Facility Tax Credit provides a 5% nonrefundable credit on qualified costs for constructing, remodeling, expanding, or equipping research facilities in the state, per KRS 141.395. It aligns with IRC § 41 for qualified research but focuses on infrastructure.

What activities qualify for Kentucky’s R&D tax credit?

Eligible activities involve investments in tangible, depreciable property supporting qualified research, such as building labs to develop new manufacturing processes or tech prototypes. Strike Tax reviews documentation to confirm IRC § 41 alignment.

How much can my business save with Kentucky’s R&D tax credit?

For $2 million in qualified facility costs, you could save $100,000 in tax offsets, plus federal credits. Use Strike Tax’s R&D Credit Calculator for personalized estimates based on your investments.

Are Kentucky R&D tax credits refundable for small businesses?

No, the credit is nonrefundable but carries forward for 10 years. Small businesses can leverage federal payroll tax offsets for operational R&D. Strike Tax helps maximize combined benefits.

How do I apply for Kentucky’s R&D tax credit?

File Schedule QR with your Kentucky income tax return (Form 740, 720, or 765), including a supporting schedule of qualified property. Pass-through entities use Schedule TCS or ITC. Strike Tax handles documentation and compliance.

Can Kentucky businesses claim both state and federal credits?

Yes, stack the 5% state facility credit with the federal R&D credit, which is often in the 10 to 20 percent range of incremental qualified research expenses depending on the method you use. Strike Tax optimizes claims across both programs.

Why is Kentucky’s R&D credit valuable for manufacturing companies?

Manufacturers benefit from the 5% rate on capital-intensive facility builds, with 10-year carryforward supporting phased expansions. Strike Tax tailors strategies for high-QRE industries like yours.

What costs qualify as Kentucky facility expenses?

Qualified costs include construction, remodeling, expansion, and equipping with depreciable property (e.g., lab equipment) for IRC § 41 research. Excludes wages, supplies, and replacements. Strike Tax verifies eligibility.

How does pass-through work for Kentucky R&D credits?

Credits pass pro-rata to owners via K-1, applicable against individual income tax or LLET. Entities can claim against LLET first. Strike Tax ensures accurate allocation.

What records do I need for a Kentucky R&D credit audit?

Maintain detailed property records (purchase date, in-service date, description, cost) and proof of IRC § 41 qualification, along with filed Schedules QR, ITC, TCS and Kentucky K-1s, for at least the normal Kentucky statute of limitations period, typically four to five years or longer as advised by your tax advisor. Strike Tax assists with audit-ready documentation.

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