State R&D Tax Credits: Recent Updates and Impacts

ARTICLE | August 18, 2025

Authored by Aprio, LLP

At a glance

• The main takeaway: Changes to research and development (R&D) tax credits in Connecticut, Iowa, Massachusetts, Minnesota, Oklahoma, and Texas mean taxpayers may need to adjust the way they claim these valuable credits.
• Impact on your business: Companies conducting R&D in any of these states may see significant changes in how they benefit from these tax incentives.
• Next steps: A tax expert can help companies conducting R&D in these states — or any state — to determine credit opportunities and craft a documentation plan.

The full story:

Claiming a research and development (R&D) tax credit can be an excellent way for companies to boost their cash flow and fund innovation. The federal R&D tax credit, along with R&D credits available in several states, help thousands of businesses offset the experimentation costs to develop new products, processes, software, or inventions.

Currently, 38 states offer an R&D credit that can be claimed in addition to the Federal R&D credit. While many of these state credits are closely aligned to the requirements for the Federal credit, some states choose to implement unique requirements and incentives. Additionally, these state credits are notorious for changing frequently.

Recently, Connecticut, Iowa, Massachusetts, Minnesota, Oklahoma, and Texas have all passed legislation impacting their R&D credits, including changes to the value of the benefit and which businesses may qualify.

Connecticut

With the passage of H.B. 7287, signed into law on June 30, 2025, Connecticut expanded its R&D and research and experimentation (R&E) credits and increased the refund value of the credits for certain companies. The new law allows single-member LLCs to earn R&D and R&E credits if they meet certain criteria, such as having over 3,000 employees in the state and engaging in manufacturing, with expertise in mechatronics, alignment and sensor technology, and optical fabrication.

However, the new law makes a distinction between LLCs that are a disregarded entity for federal income tax purposes and those that are not, so consulting with a tax advisor is recommended.

Additionally, the law increases the credit refund value for qualifying small biotechnology companies to 90% of the credit (the previous amount was 65%). Qualifying small businesses outside the biotech sector may receive a refund of 65%. The state caps the refund at $1.5 million per company for each income year.

Iowa

Iowa repealed its long-standing Research Activities Credit on June 6, 2025, and replaced it with a new R&D tax credit program that aligns with the federal definition of Qualified Research Expenses (QREs) and imposes stricter eligibility requirements, making the credit program notably smaller. The legacy credit program was run by the Iowa Department of Revenue, while the new program is now a more stringent application process run by the Iowa Economic Development Authority.

The new credit will go into effect for the 2026 tax year, and there is a cap on credits of $40 million.

Highlights of Iowa’s new credit program include:

• Eligibility is restricted to businesses conducting research and experimentation in certain industries such as advanced manufacturing, bioscience, and technology and innovation.
• The new credit program also identifies businesses that are specifically not eligible, such as businesses engaged in the following (not an exhaustive list):
  • Agriculture production
  • Heating or cooling installation and repair
  • Plumbing and pipe fitting
  • Electrical installation and repair
  • Ethanol biorefinery
  • Real estate
• The amount of the benefit is reduced to a maximum of 3.5% of QREs (previously 6.5%).
• Credits can be refundable but not transferable.
• Taxpayers must obtain a qualified business certification, which is good for five years.
• While the certification is good for five years, taxpayers must apply for the credit each year and include a CPA-verified report of QREs. The credit requires reapplication for each tax year.

Massachusetts

In MA, the state’s Department of Revenue (DOR) recently issued a release clarifying the types of corporations eligible to file an R&D credit. The clarification brought about by the May 2025 Technical Information Release (TIR) 25-3 may prompt some entities to file amended claims, and all business corporations may now use the alternative simplified method (ASM) to calculate the state R&D credit on their amended returns. The release also reflects a 2024 decision from the state’s Appellate Tax Board and is a reversal of the DOR’s previous position, which did not permit the use of ASM on amended returns.

For amended returns still within the statute of limitations, the DOR will now process previously declined credit claims using ASM. This method is especially beneficial for companies with fluctuating research expenses, such as startups. While the method generates a smaller credit in comparison to the Regular Research Credit Method, it permits more business to participate in the credit program.

Minnesota

For tax years starting January 1, 2025, the MN R&D credit is partially refundable, with refundability rates of 19.2% for 2025. For 2026-2027, the refundability jumps to 25%. Starting in 2028, the rate will be determined by a formula. The state’s Department of Revenue must determine the formula by December 2027. Total state refunds will be limited to around $25 million.

The state’s prior credit was equal to 10% of QREs up to $2 million, and 4% above that dollar amount.

Oklahoma

While OK does not offer a traditional R&D tax credit, the state passed S.B. 324 on May 29, 2025, establishing the Oklahoma Research and Development Rebate Fund and Program. The program, limited to a $20 million fiscal year cap, intends to support high-tech investments and innovation, and allows qualifying businesses to receive a 5% rebate for QREs. Qualifying businesses will be awarded on a first-come, first-served basis.

To potentially qualify, companies must complete the following:

1. Submit the application and supporting documentation to the Oklahoma Department of Commerce (DOC).
2. Confirm that R&D expenditures were carried out within OK (include additional documentation as required).
3. File all required tax returns.

Taxpayers whose claims are not approved by the DOC due to the fiscal year cap could be approved in subsequent years.

Texas

Companies performing R&D in Texas should be aware of the following changes brought about by S.B. 2206:

• Effective January 1, 2026, Texas’s former dual-incentive structure is consolidated into a single, performance-based franchise tax credit.
• The new law repeals the current sales and use tax exemption for R&D equipment.
• The law introduces a new credit framework with increased base credit to 8.722% from 5%, and an enhanced 10.903% rate for research conducted through Texas-based higher education institutions.
• QREs are now defined as those reported on line 48 of IRS Form 6765, allowing IRS-accepted amounts and adjustments. Additionally, the new law provides rolling conformity with the federal Internal Revenue Code (IRC).
• The credit is capped at 50% of the franchise tax due and is generally nontransferable. Unused credits may be carried forward for up to 20 years. If no tax is due, there is a possibility that some of the credit is refundable.
• The new law prohibits claiming the new credit if the repealed sales tax exemption was utilized during the same period.
• The Legislative Budget Board projects a net revenue reduction of $248 million for fiscal year 2026-27, rising to over $1 billion by FY 2028-29.

Impacts on Taxpayers: Preparing for Change

Taxpayers doing business in any of these states have the potential to qualify for these credits if they are performing eligible R&D activities. Any businesses with a state presence, and especially those who have historically benefited from these state credits, should take proactive steps to prepare for the impending changes, such as consulting with tax professionals specializing in R&D credits. For example:

• For single member LLCs with an R&D/R&E presence in Connecticut, a skilled tax professional can help determine the tax implications of being a disregarded entity.
• In Iowa, while some businesses that used to qualify for a state R&D award may no longer be eligible starting in 2026, others will need CPAs to verify reports of their QREs.
• In Massachusetts, some taxpayers may not have realized they could claim the credit and will be eager to do so with the new clarification. Companies will rely on R&D specialists to help them file amended returns using the ASM.
• Taxpayers in Minnesota may wish to lean on trusted R&D advisors to determine whether to pursue refundability for unused credits.
• Businesses conducting R&D in Oklahoma may want to rely on a proven R&D tax team to help them apply for the new Rebate Fund.
• For taxpayers in Texas, R&D specialists can help identify whether it is more beneficial to claim a sales and use exemption in TX or the R&D credit.

Regardless of which state you operate in, taxable entities should prioritize robust documentation and record-keeping practices. It is critical to thoroughly document all QREs and link them to specific research activities. Contemporaneous business records should be maintained meticulously, including detailed descriptions of research projects, expenses incurred, and the nature of the activities conducted.

Taxpayers may also want to conduct regular reviews and compliance checks to ensure that all documentation is up-to-date and meets the requirements of the amended rule. Establish internal audit processes to verify the accuracy and completeness of records.

The bottom line

With evolving requirements for claiming R&D tax credits in certain states like Connecticut, Iowa, Massachusetts, Minnesota, and Texas, businesses are encouraged to seek the counsel of seasoned tax professionals to appropriately document and support their credit claims. A dedicated business advisory service can help you determine if an R&D franchise tax credit or a sales and use tax exemption would be more beneficial to your enterprise.

Please connect with your advisor if you have any questions about this article.

This article was written by Aprio and originally appeared on 2025-08-18. Reprinted with permission from Aprio LLP.
© 2025 Aprio LLP. All rights reserved. https://www.aprio.com/state-rd-tax-credits-recent-updates-and-impacts-ins-article-tax/

“Aprio" is the brand name under which Aprio, LLP, and Aprio Advisory Group, LLC (and its subsidiaries), provide professional services. LLP and Advisory (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. LLP is a licensed independent CPA firm that provides attest services, and Advisory and its subsidiaries provide tax and business consulting services. Advisory and its subsidiaries are not licensed CPA firms.

This publication does not, and is not intended to, provide audit, tax, accounting, financial, investment, or legal advice. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Readers should consult a qualified tax advisor before taking any action based on the information herein.