How does Nebraska's enhanced (35%) research tax credit for on-campus research work, and how is it split from the regular (15%) credit?

Plain-English summary

Nebraska's Advantage Research and Development Act gives businesses a state credit tied to the federal research credit (IRC § 41). LB 555 (2009) added an enhanced version: research done on a Nebraska college or university campus (or a facility a college/university owns) earns 35% of the federal credit, instead of the 15% "regular" credit for research done anywhere else in Nebraska (Neb. Rev. Stat. § 77-5803). This ruling answers six interpretive questions about how the enhanced credit works.

1. What's a "college or university"? An institution of higher learning that offers a course or courses of study resulting in a bachelor's, vocational, associate, technical, or professional degree, or higher. (There's no statutory definition, so the Department drew from Nebraska higher-ed statutes and dictionary meaning.)

2. What does "in this state" modify? The campus or facility -- not the college or university. What matters is that the research happens in Nebraska, not where the school is headquartered. So research at an in-state campus of an out-of-state university can qualify.

3. Does a little on-campus research make all the firm's research "enhanced"? No. Subdivisions (a) and (b) are two separate credits. The enhanced credit applies only to the on-campus activity. A single firm can earn both credits in the same year if the activities are in separate locations, but the same expenditures can't count for both. (The Department noted the alternative would let a firm qualify all its in-house research as "enhanced" by contracting a small amount on campus -- an absurd result the Legislature couldn't have intended, citing Concrete Industries v. Department of Revenue, 277 Neb. 897 (2009).)

4. How do you split research across locations? For a firm operating both inside and outside Nebraska, and both on- and off-campus, divide the federal credit by either: (a) the ratio of actual research expenses at each location to total, or (b) apportionment using the average of the property and payroll factors (Neb. Rev. Stat. §§ 77-2734.12 and 77-2734.13). You must use the same method for both the regular and enhanced credits -- you can't mix methods to double-count on-campus spend.

5. One five-year period, or two? Two. Because these are separate credits, each has its own five-year earning period (the first year it's claimed plus the four following years).

6. Does pre-2009 on-campus activity start the enhanced clock early? No -- and it doesn't have to be new activity, either. LB 555 doesn't require the on-campus research to be new, so a firm that already did on-campus research (even claimed as regular credit in 2008) can begin a fresh five-year enhanced-credit period in tax year 2009, the first year the enhanced credit is available.

The ruling includes a worked example: a firm's regular period running 2008–2012 and a separate enhanced period running 2009–2013.

What this means for you

Businesses doing R&D in Nebraska (and their tax advisors)

If any of your qualifying research happens on a Nebraska college/university campus or a school-owned facility, that portion can earn 35% of the federal § 41 credit -- more than double the 15% regular credit. But you must carve out the on-campus expenditures and credit them separately; the rest of your Nebraska research gets the regular 15%. Pick one splitting method -- actual expenses or property/payroll apportionment -- and use it consistently for both credits. Track each credit's own five-year window, and remember the same dollars can't be claimed under both.

Firms partnering with universities

Locating research at an in-state campus can qualify even if the university itself is based out of state -- what counts is that the research occurs in Nebraska. If you've historically run on-campus research, you may still open a new five-year enhanced-credit period; the activity doesn't have to be newly created.

Common questions

Q: How much bigger is the enhanced credit?
A: The enhanced credit is 35% of the federal IRC § 41 research credit (for on-campus research), versus 15% for the regular credit (research anywhere in Nebraska).

Q: If some of my research is on campus, does all of it get 35%?
A: No. The enhanced credit applies only to the on-campus activity. Regular and enhanced are separate credits; a firm can earn both in a year if the activities are in separate locations, but the same expenditures can't be used for both.

Q: Does the university have to be a Nebraska school?
A: "In this state" refers to the campus or facility where the research occurs, not the college or university -- so research at an in-state campus can qualify even if the institution is based elsewhere.

Q: How do I divide research between locations?
A: By the ratio of actual research expenses at each location, or by apportionment using the average of the property and payroll factors (Neb. Rev. Stat. §§ 77-2734.12 and 77-2734.13). Use the same method for both credits.

Q: Is there one five-year period or two?
A: Two -- each credit (regular and enhanced) has its own five-year earning period, being the first year claimed plus the four following years. Pre-2009 on-campus activity can start a new enhanced-credit period in tax year 2009.

Citations and references

• Neb. Rev. Stat. § 77-5803(1)(a) -- the regular research tax credit: 15% of the federal IRC § 41 credit for research in Nebraska.
• Neb. Rev. Stat. § 77-5803(1)(b) -- the enhanced research tax credit: 35% of the federal IRC § 41 credit for on-campus (or college/university-owned facility) research.
• Neb. Rev. Stat. § 77-5803(2) -- apportionment of the federal credit by in-state expense ratio or by the property/payroll factors.
• Neb. Rev. Stat. §§ 77-2734.12 and 77-2734.13 -- the property factor and payroll factor used in the apportionment method.
• IRC § 41 (federal research credit) and IRC § 174 (research and experimental expenditures) -- the federal provisions the Nebraska credit is built on.
• LB 555 (2009) -- amended the Nebraska Advantage Research and Development Act to add the enhanced on-campus credit.
• Concrete Industries v. Department of Revenue, 277 Neb. 897 (2009) -- cited for the principle that statutes are read to reach a sensible rather than absurd result.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr291002.pdf

Original ruling text

Revenue Ruling 29-10-2
Nebraska Advantage Tax Incentives
May 10, 2010
ENHANCED RESEARCH TAX CREDITS
Issues:
LB 555 (2009) amended the Nebraska Advantage Research and Development Act (Act) to provide
enhanced research tax credits if the research or experimental activity takes place “on the campus of a
college or university in this state or at a facility owned by a college or university in this state.” If the
research activity meets this standard, the business firm is eligible to receive a research tax credit equal
to 35 percent of the federal credit allowed by Internal Revenue Code (IRC) § 41, instead of 15 percent
of the federal credit which is applicable if the research activity is not for on‑campus activity.
Advice has been requested on the enhanced research tax credit. This ruling provides guidance to
taxpayers that may qualify for enhanced research tax credits under Neb. Rev. Stat. § 77-5803(2). The
issues addressed by this ruling are:

1. What is a “college or university” for purposes of enhanced research tax credits?
2. Does the phrase “in this state” refer to the campus, the college or university, or the facility?
3. Do the enhanced research tax credits only apply to research taking place on the campus or
   facility, or does the fact that some research occurs on the campus mean that all research
   carried on by that business firm in Nebraska qualifies for enhanced research tax credits?
4. If research is taking place both on- and off-campus, and both inside and outside this state,
   how are the regular and enhanced research tax credits calculated?
5. If the regular and enhanced research tax credits are separate credits, is there one five-year
   period for claiming the credits, or separate five-year periods?
6. If the tax year 2008 regular research tax credit included on-campus activities, does the firm
   have a five-year period for the enhanced research tax credits beginning in tax year 2009?
   Conclusions:
7. “College or university,” for purposes of enhanced research tax credits, means an institution of
   higher learning that offers a course or courses of study; resulting in a bachelor’s, vocational,
   associate, technical, or professional degree, or higher.
8. The phrase “in this state” refers to the campus or facility, not the college or university. It is
   the location of the research or experimental activities “in this state” that qualifies the business
   firm for enhanced research tax credits under the Act, not the home or primary location of the
   college or university.
9. Business firms qualify for enhanced research tax credits related to only on-campus activities.
   Business firms may qualify for both enhanced and regular research tax credits in the same
   year, provided the research and experimental activities are conducted in separate locations.
10. Dividing research and experimental activities between on- and off-campus and inside and
    outside this state may be done either by calculating the ratio of the actual amount of expenses

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 29-10-2

May 10, 2010

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incurred at each location to the total expenses, or by apportionment based on the average of
the business firm’s property and payroll factors for each location. The same method must be
used to calculate both the regular and enhanced research tax credits.

5. Separate qualification for enhanced and regular research tax credits start separate five-year
   earning periods. The five-year period for enhanced research tax credits applies even if some
   of the on-campus activity occurred before 2009.
6. The five-year period for claiming enhanced research tax credits applies beginning with the
   first year the enhanced credit is claimed, but no sooner than tax year 2009, even if some of
   the on-campus activity occurred before tax year 2009.
   Definitions:
   Enhanced research tax credits. Enhanced research tax credits are the credits business firms may
   earn under Neb. Rev. Stat. §77-5803(1)(b), for on-campus research and experimental activities.
   Off-campus activities. Off-campus activities are research and experimental expenditures that take
   place in this state, that are not on-campus activities.
   On-campus activities. On-campus activities are research and experimental expenditures that take
   place on the campus of a college or university in this state or at a college- or university-owned
   facility in this state.
   Regular research tax credits. Regular research tax credits are the credits business firms may earn
   under Neb. Rev. Stat. §77-5803(1)(a), for research and experimental activities taking place anywhere
   in this state.
   Analysis:
   (1) What is a “college or university” for purposes of enhanced research tax credits?
   There is no general definition of “college” or “university” found in the Nebraska Revised
   Statutes, even though those terms are used extensively throughout the statutes dealing with higher
   education. Chapter 85, Article 11 of the Nebraska Statutes, which deals with establishment of
   new private colleges and registration of out-of-state colleges, defines “out‑of‑state institutions of
   higher education” to include “any college, university, community college, technical institute,
   junior college or the equivalent that offers college courses or awards an associate or higher degree”
   (Neb. Rev. Stat. §85-1101). The approval process for new private colleges governs applications
   to “establish new two-year, four-year, graduate, or professional private colleges” (Neb. Rev. Stat.
   §85-1105). The property tax exemption for private colleges extends to “an institution operated
   exclusively for the purpose of offering regular courses with systematic instruction in academic,
   vocational, or technical subjects” (Neb. Rev. Stat. §77-202(1)(d)(iii)(A)).
   The Merriam-Webster online dictionary defines “university” as “an institution of higher
   learning providing facilities for teaching and research and authorized to grant academic degrees;
   specifically bachelor’s degrees, graduate degrees, and professional schools which may confer
   master’s degrees and doctorates.” “College” is defined as “an independent institution of higher
   learning offering a course of general studies leading to a bachelor’s degree; also a university
   division offering this.” A secondary definition is “an institution offering instruction usually in a
   professional, vocational, or technical field.” Common to all of these sources are institutions of
   higher learning, offering postsecondary courses that grant or lead to a degree.

Revenue Ruling 29-10-2

May 10, 2010

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Consistent with Nebraska law and the common and ordinary meaning of these terms, “college
or university” for purposes of enhanced research tax credits, means “an institution of higher
learning that offers a course or courses of study; resulting in a bachelor’s, vocational, associate,
technical, or professional degree or higher.”
(2) Does the phrase “in this state” refer to the campus, the college or university, or
the facility?
Neb. Rev. Stat. §77-5803(1)(b) states as follows:
Any business firm which makes expenditures in research and experimental activities as
defined in section 174 of the Internal Revenue Code of 1986, as amended, on the campus of
a college or university in this state or at a facility owned by a college or university in this
state shall be allowed a research tax credit. . . . [emphasis added]
This language allows two possible interpretations: first, “in this state” refers to the campus or
facility; or second, it refers to a college or university.
Because the location of the research and experimental expenditures is critical to determining the
amount of the credit, the reference to “in this state” must also refer to the location of the research,
not the location of the college or university. Also, this legislation amended the Nebraska Advantage
Research and Development Act, part of a series of acts designed to stimulate investment and
employment in Nebraska. It seems only natural that this Act, like the Nebraska Advantage Act
itself, should be construed to encourage research activities that take place in Nebraska.
Therefore, the Department of Revenue (Department) has determined that “in this state” refers to
the campus or facility; not the college or university.
(3) Do the enhanced research tax credits apply to only the research taking place on the campus
or facility, or does the fact that some research occurs on the campus mean that all research
carried on by that business firm in Nebraska qualifies for enhanced research tax credits?
The entire text of subsection 77-5803(1) reads as follows:
(1)(a) Except as provided in subdivision (1)(b) of this section, any business firm which makes
expenditures in research and experimental activities as defined in section 174 of the Internal
Revenue Code of 1986, as amended, in this state shall be allowed a research tax credit as
provided in the Nebraska Advantage Research and Development Act. The credit amount
under this subdivision shall equal fifteen percent of the federal credit allowed under section
41 of the Internal Revenue Code of 1986, as amended, or as apportioned to this state under
subsection (2) of this section. The credit shall be allowed for the first tax year it is claimed and
for the four tax years immediately following.
(b) Any business firm which makes expenditures in research and experimental activities as
defined in section 174 of the Internal Revenue Code of 1986, as amended, on the campus of a
college or university in this state or at a facility owned by a college or university in this state
shall be allowed a research tax credit as provided in the Nebraska Advantage Research and
Development Act. The credit amount under this subdivision shall equal thirty-five percent of
the federal credit allowed under section 41 of the Internal Revenue Code of 1986, as amended,
or as apportioned to this state under subsection (2) of this section. The credit shall be allowed
for the first tax year it is claimed and for the four tax years immediately following.

Revenue Ruling 29-10-2

May 10, 2010

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Answering this question requires determining if subdivisions (a) and (b) are alternative calculations
of a single credit, or two separate credits. If there is only one credit, then (a) and (b) merely
determine the amount of the credit. If, however, (a) and (b) are two separate credits, then business
firms may qualify for them separately. In that event, a credit could be calculated for on-campus
research, and a separate credit for off-campus research.
The two statutory subdivisions are not drafted so that each is connected to or dependent on the other.
Either subdivision could be repealed, and the remaining subdivision would describe completely
the remaining credit. While it is possible to interpret “Except as provided in subdivision (1)(b)
of this section” to refer to business firms (meaning firms qualify for one or the other), the more
logical interpretation is that the clause refers to “research and experimental activities.”
Therefore, the Department has determined that subdivisions (a) and (b) authorize separate credits,
with separate calculations, and business firms qualify for enhanced research tax credits related to
only on-campus activities. Furthermore, the statutory language allows a single business firm to
qualify for both the credit under subdivision (a) and the credit under subdivision (b). However, the
subdivision precludes the same increased research and experimental activities from qualifying
for both credits.
This determination is supported by the conclusions with respect to the second issue, holding
that the location of the research and experimental activities is crucial in determining the amount
of credit and the applicability of each subdivision. Holding otherwise would allow a business
firm with in-house research and experimental expenditures to qualify for the enhanced research
tax credit for all of its activities by contracting for a relatively small amount of research to be
conducted on a campus. “We must assume the Legislature intended a sensible rather than absurd
result in enacting the statute.” Concrete Industries v. Department of Revenue, 277 Neb. 897,
N.W.2d (2009), 277 Neb. at 904-905.
(4) If research is taking place both on- and off-campus, and both inside and outside this state,
how are the regular and enhanced research tax credits calculated?
For research that is conducted both in Nebraska and in another state, Neb. Rev. Stat. §77-5803(2)
provides the answer:
(2) For any business firm doing business both within and without this state, the amount of
the federal credit may be determined either by dividing the amount expended in research and
experimental activities in this state in any tax year by the total amount expended in research
and experimental activities or by apportioning the amount of the credit on the federal income
tax return to the state based on the average of the property factor as determined in section
77-2734.12 and the payroll factor as determined in section 77-2734.13.
There is nothing in the statute or legislative history suggesting that a different method should be
used for dividing in-state research credits between on-campus and off-campus activities.
The Department has determined that the provisions of Neb. Rev. Stat. §77-5803(2) also govern
the allocation of the federal research credit between on-campus and off-campus activities.

Revenue Ruling 29-10-2

May 10, 2010

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Example 1: Actual Expenditures Method
Assume that the business firm qualifies for a $20,000 federal research credit. The firm’s actual
total research expenditures for that year occur 50% in Nebraska and 50% in another state; and
the Nebraska research expenditures were also divided equally between on-campus research
contracts and off-campus expenditures.
In this example, the actual expense ratios are 25% for the Nebraska on-campus expenditures,
25% for Nebraska off-campus expenditures, and 50% for out-of-state expenditures.
   Off-campus activities regular research tax credit: . . . . .
$
% off-campus
x
% credit
x

Regular credit amount

20,000.00
0.25
0.15

$

750.00

   Enhanced research tax credit:  . . . . . . . . . . . . . . . . . . . .

$
% on-campus
x
% credit
x

20,000.00
0.25
0.35

     Enhanced credit amount     
     Total research tax credits for both

1,750.00
2,500.00

$
$

Example 2: Apportionment Method
This same business firm could also determine the Nebraska credit using the apportionment
method. Assume that the property and payroll factors would apportion 60% of the federal
credit to Nebraska activities, and 40% to out-of-state activities. Because the on-campus
research is under contract, there are no on-campus payroll or property factors, so all of the
apportionment to Nebraska would be off-campus.
Both the regular and the enhanced research tax credit would be calculated by multiplying the
federal research credit amount times the apportionment factor that reflects the share of the
federal research credit that is attributable to on-campus or off-campus activities, times the
appropriate credit percentage.
   Off-campus activities regular research tax credit: . . . . .
$
% off-campus
x
% credit
x
Regular credit amount
$

20,000.00
0.60
0.15
1,800.00

   Enhanced research tax credit:  . . . . . . . . . . . . . . . . . . . .

$
% on-campus
x
% credit
x
Enhanced credit amount
$
Total research tax credits for both
$

20,000.00
0.00
0.35
0.00
1,800.00

The maximum total credits for the business firm are $2,500 using the actual expenditures method.
The business firm cannot use the apportionment method to apportion 60% of the federal credit
to Nebraska for the regular research tax credit and then use actual expenses to calculate the
enhanced research tax credit, because doing so would allow part of the on-campus expenditures
to qualify for both credits.

Revenue Ruling 29-10-2

May 10, 2010

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(5) If the regular and enhanced research tax credits are separate credits, is there one fiveyear period for claiming the credits, or separate five-year periods?
Because the Department has determined in conclusion (3) that Neb. Rev. Stat. §77-5803(1)
(a) and (b) grant two separate credits, business firms may benefit from two separate
five‑year periods.
Example 3: Determining the Five-year Period
If a business firm first qualified for the regular research tax credit in tax year 2008, the
credit may be taken for five years (through tax year 2012), so long as the business firm
qualifies for the federal research credit in one or more of those years, and had research
and experimental expenditures in those years in Nebraska. If, in tax year 2009, that same
business firm had research or experimental expenditures on a campus site, the business firm
could qualify for the enhanced research tax credit under subdivision (b) in tax year 2009.
The enhanced research tax credit may also be taken for any of the succeeding four tax
years, through tax year 2013, in which the business firm qualifies for the federal research
credit and has research and experimental expenditures at an on-campus site in that year.
In tax year 2013, the business firm may only qualify for the enhanced research tax credits
for on-campus research and experimental activities. Beginning in tax year 2014, the firm
may no longer qualify for either regular or enhanced research tax credits, regardless of the
amount or location of research or experimental activity.
(6) If the tax year 2008 regular research credit included on-campus activities, does the
firm have a five-year period for the enhanced research tax credits beginning in tax year
2009?
Nothing in Neb. Rev. Stat. § 77-5803, as amended by LB 555, requires the on-campus activities
to be new activities. Therefore, a five-year period for enhanced research tax credits could begin
in tax year 2009, even if the on-campus activity has been taking place in prior years.
The Department has determined that even if there were on-campus activities in 2008 that
qualified for the regular research tax credit for tax year 2008, continuing on-campus activities
could be claimed for the enhanced research tax credits in tax year 2009, and a new five-year
period would start for the enhanced credits.
APPROVED:

Douglas A. Ewald
Tax Commissioner
May 10, 2010