Wisconsin recently issued Publication 131 defining “qualified research” and detailing who is eligible for research credits and sales and use tax exemptions. Calculations of state research and experimentation (R&E) credits generally follow the federal credit format, with minor differences.
Income Tax Credit
Prior to 2022, Internal Revenue Code (IRC) Section 174 allowed for a current federal deduction of R&E expenditures. Alternatively, an election was available to treat R&E expenditures as deferred expenses deductible over at least 60 months or as capital expenditures that are amortizable over a useful life, if determinable. This election allowed for recovery of the costs over a 10-year period.
The amendment to Section 174 by the Tax Cuts and Jobs Act in 2017 eliminated the deductibility of R&E expenses for amounts paid or incurred in tax years beginning after December 31, 2021 and required the capitalization of the R&E expenses, with a five-year amortization for domestic costs and 15-year amortization for foreign costs. The impact of this federal change on state research credits depended on whether the state had adopted rolling conformity or specific-date conformity to include the federal changes to Section 174. Although Wisconsin adopts Section 174, it specifically references the version of the IRC in existence prior to the 2017 tax reform. Accordingly, calculation of state R&E credits becomes more complicated when the federal rules are not applicable.
In defining qualifying R&E expenses, Wisconsin references IRC Section 41 and related regulations. Credits are allowed for increasing qualified R&E expenses in the state, for activities related to internal combustion engines and certain energy efficient projects. For tax years beginning before January 1, 2022, Wisconsin allowed a deduction for R&E expenses related to a trade or business and allowed an election to amortize the cost over five years. For tax years beginning after December 31, 2021, Wisconsin requires the amortization of R&E costs related to a trade or business over a five-year period for domestic costs and over a 15-year period for foreign costs.
Sales and Use Tax Exemption
A sales and use tax exemption is also available for purchases of qualifying R&E expenses. Specifically exempt from sales and use tax are the following costs:
- Machinery and specific processing equipment used exclusively and directly in qualified research.
- Tangible personal property, including fuel and electricity, and certain other property consumed or destroyed while being used exclusively and directly in qualified research.
Contact one of the Ryan professionals listed below for assistance with identifying your qualifying exempt R&E expenses.
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