Iowa provided more than 200 companies with tax credit refunds in 2016 in connection to a state program. In total, 207 companies received more than $40 million in state tax credit refunds last year from the state’s Research Activities Tax Credit (or “R&D”) program, per the Iowa Department of Revenue[1]. For companies operating and growing in Iowa, and for companies considering Iowa, the R&D program can be a critical tool for growth and an important factor in site selection decisions. Now, the program is under political fire. Our discussion highlights the use of R&D in Iowa and tells you what you need to know before you invest in the Hawkeye state.
For tax credit eligibility under the Iowa Research Activities Tax Credit, in accordance with Internal Revenue Code Section 41, businesses must conduct research in Iowa that is:
Experimental
- Undertaken to discover information that is technological in nature; and
- Aimed at the development of a new product.
- Qualified research expenditures include expenses incurred in Iowa on:
Wages
- The cost of supplies;
- The rental or lease cost of personal property; and
Contract expenses. - The Research Activities Tax Credit is an incremental credit, which means only research expenditures that exceed a base amount are eligible for the credit. In addition to the Research Activities Tax Credit, companies can also be awarded the Supplemental Research Activities
- Tax Credit by the Iowa Economic Development Authority.
Political fire aimed at Iowa R&D credits
While House member Pat Grassley, R-New Hartford (who proposed House Study Bill 187 that would eliminate the R&D program’s refunds) takes aim at the R&D credit, former House Ways and Means Committee Chairman Tom Sands, warned that “tinkering with tax credits could make it harder for Iowa to attract and retain business and industry.” Sands further stated, “Iowa has the highest marginal corporate tax rate in the country and one of the highest marginal rates for individual filers,”.
In addition, Dave Tierney, government affairs manager for the Midwest region at Monsanto Co., said the refundable research and development tax credit is one reason the company has several thousand employees at 15 sites around Iowa. However, many of those employees could do their jobs from anywhere, he said. “It comes down to numbers,” Tierney said, explaining the benefits of the tax credit when Iowa’s tax rates are double those in some other states.
McGuire Sponsel’s view
Having one of the better state R&D credits has been a big win for the Hawkeye state. Many companies want to keep their high wage research jobs in a state where an R&D credit rewards those expensive endeavors. If Iowa decides to claw back some of the benefits to their R&D program, then it is likely other states with a great R&D credit, such as Indiana, will see an influx of R&D growth.
Lt. Gov. Kim Reynolds has defended the tax credit as an intended boost to research and development in the state, stating “By focusing our priorities on building a skilled workforce, promoting innovation and research and development and really improving global competitiveness, we hope to elevate and bolster the state’s thriving manufacturing sector.”
With this in mind, Iowa has a stated goal to grow its manufacturing sector’s share of the state’s gross domestic product from $29 billion annually to $32 billion annually by 2022[2]. It includes a focus on research and development, meaning the goal could be compromised if the R&D credit is scaled back. In many cases, a site selection process can pivot based on a single factor. Therefore, scaling back one of the state’s strong selling points could cause businesses to look elsewhere for R&D jobs and investment.
Can local incentives help your company?
With the wide array of economic tools offered in Iowa, knowing which incentive and location best fit your development project can be challenging. From evaluating project locations to managing interactions with economic development liaisons, to meeting compliance requirements, recognizing the full scope of project challenges is vital to making the best location decision.
McGuire Sponsel’s planning services focus on identifying key value drivers, comprehensive site and cost comparison, multi-state incentive program education and ongoing opportunity assessment. If your company is investing, expanding or adding jobs – incentives in Iowa and other market impacts could significantly affect your decision process. To schedule your incentive planning session contact our Location Advisory team.