Every state that offers state R&D Tax Credits typically rewards businesses for spending on research activities: wages, supplies, contract research. Kentucky takes a fundamentally different approach. Its credit doesn’t reward what you spend on research itself. It rewards what you spend building the place where that research happens.
What Makes Kentucky Different
Most states calculate their R&D credit the way the federal government does, as a percentage of qualified research expenses like employee wages, supplies consumed in testing, and payments to outside research contractors. Kentucky’s Qualified Research Facility Tax Credit works differently. It’s tied to the cost of constructing, remodeling, equipping, or expanding a physical research facility in the state, not to the ongoing wages and supplies used to conduct research inside it.
In practice, this means a company can claim Kentucky’s credit for building a new lab, installing specialized equipment like mass spectrometers or biosafety cabinets, or expanding an existing testing facility, but the credit doesn’t apply to the researchers’ salaries or the day to day cost of running experiments. That’s the opposite of how nearly every other state, and the federal government, structures its R&D incentive.
How the Credit Works
The credit applies to the construction, remodeling, and equipping of research facilities in Kentucky, or the expansion of existing facilities, provided the facility supports qualified research as defined under Section 41 of the Internal Revenue Code. Only tangible, depreciable property counts, and the law specifically excludes replacement property, meaning the investment has to represent a genuine expansion or creation of research capacity rather than simply swapping out existing equipment.
Credit Amount
The credit equals 5% of the qualified costs of constructing a research facility. It’s nonrefundable, meaning it can only offset Kentucky individual income tax, corporate income tax, or the limited liability entity tax, and any unused credit can be carried forward for up to 10 years.
Claiming the Credit
Businesses claim the credit by filing Schedule QR with their income tax return, along with a supporting schedule listing each piece of tangible, depreciable property, its purchase date, in service date, description, and cost. A new Schedule QR is required for each qualifying project, and a copy must be attached every year the credit is claimed until it’s fully used or the 10 year carryforward expires. Pass through entities can pass the credit to partners, members, or shareholders, who then report it using Schedule TCS or Schedule ITC.
Who’s Claiming It
Because the credit is tied to facility investment rather than research spending broadly, it tends to draw claimants who are actively building out physical lab or testing space in Kentucky. Common industries include:
- Advanced manufacturing
- Chemical products
- Engineering
- Software development
- Transportation and logistics
- Construction related to research facility buildouts
What This Means for Your Business
Because Kentucky’s credit hinges on facility construction rather than research wages, businesses need to think about it at the moment they’re planning a lab buildout, equipment purchase, or facility expansion, not just at tax time. Careful tracking of each piece of qualifying property, including purchase dates and in service dates, is essential given the credit’s asset by asset documentation requirements. It’s also worth remembering that this credit doesn’t replace the value of the federal R&D credit, which still rewards wages and supplies. The two work as complements, not substitutes.
CSSI is committed to helping businesses identify and defend tax savings through detailed, engineering based studies. If you’re planning a research facility investment in Kentucky, or want to understand how this credit fits alongside your federal R&D credit, request a free analysis to get started.
FAQ: Kentucky R&D Tax Credit
Why is Kentucky’s R&D credit considered unusual compared to other states?
Most states, and the federal government, base their R&D credit on research spending like wages, supplies, and contract research. Kentucky instead bases its credit on the cost of constructing, remodeling, or equipping a physical research facility, not on the ongoing expenses of conducting research inside it.
How much is the credit worth?
5% of the qualified costs of constructing a research facility in Kentucky.
What counts as a qualifying facility cost?
Tangible, depreciable property used to construct, remodel, equip, or expand a facility supporting qualified research, such as lab buildouts and specialized equipment. Replacement property does not qualify.
Is the credit refundable?
No. It’s nonrefundable and can only offset Kentucky income tax and the limited liability entity tax. Unused credit carries forward for up to 10 years.
Does this credit cover research wages like the federal credit does?
No. It’s specific to facility construction and equipping costs. Research wages and supplies are not part of this Kentucky credit’s calculation.
How do I claim the credit?
By filing Schedule QR with your income tax return, along with a supporting schedule of qualifying property, and attaching a copy each year the credit is claimed until it’s used up or the carryforward expires.
Which industries typically claim this credit in Kentucky?
Advanced manufacturing, chemical products, engineering, software development, and transportation and logistics are common claimants, particularly companies investing in new or expanded lab and testing facilities.
How do I know if my business qualifies?
The best way to find out is through a professional analysis of your facility investment and research activities, evaluated alongside your federal R&D credit position. CSSI offers a free analysis to help determine eligibility and estimate potential savings.
