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Research and Development
Colorado Department of Revenue, Taxpayer Service Division
Research and Development
Research and Development
Income Tax Credit for Enterprise Zones
(Revised 09/98)
For tax years beginning on or after Jan. 1, 1989, taxpayers who make expenditures on research and experimental activities in an enterprise zone qualify for an income tax credit. The 3 percent credit is based on the increase of a company's research and experimental expenditures within an enterprise zone over the average of such expenditures conducted in the same enterprise zone during the previous two income tax years. The expenditures must meet the research and experimental activities as defined in section 174 of the federal Internal Revenue Code of 1986, as amended. [39-30-105.5 C.R.S.]
Criteria
Qualified research must satisfy three criteria:
- It must be technological in nature.
- It must be useful in the development of a new or improved product or component of the business.
- It must utilize the process of experimentation.
In-house research expenses may include:
- Wages, excluding fringe benefits.
- Supplies.
- Payments for the right to use computers.
Contract research expenses may include the amount paid for research done by a third party for the benefit of the contracting firm.
The following types of expenses do not qualify:
- Land or improvements to land.
- Depreciable equipment.
- Management surveys.
- Costs incurred to adapt a product to a particular customer's needs.
- Research funded by any government entity.
How to Calculate the Credit
The total amount of the calculated credit must be divided equally over four years. The taxpayer may claim 25 percent of the tax credit in the year the expenditure is made and 25 percent in each of the following three years.
The credit is claimed on the "Colorado Corporation Credit Form" (DR 112 CR). The taxpayer must submit a certification from the enterprise zone administrator showing that the business is located in an enterprise zone.
EXAMPLE: During 1991, the Smith Company spent $325,000 for research in an enterprise zone. During 1989, the company spent $100,000 in research in the same enterprise zone. During 1990, the company spent $200,000 on research in the same enterprise zone. The company's 1991 research and experimental income tax credit is computed as follows:
1991 enterprise zone research expenditures -- $325,000.00
1990 enterprise zone research expenditures -- $200,000.00
1989 enterprise zone research expenditures -- $100,000.00
Total 1989 and 1990 -- $300,000.00
Average of 1989 and 1990 -- $150,000.00
Qualifying expenditures ($325,000 - $150,000) -- $175,000.00
Allowable credit at 3 percent -- $5,250.00
Credit allowed in 1991 (25 percent of credit) -- $1,312.50
Credit allowed in 1992 (25 percent of credit) -- $1,312.50
Credit allowed in 1993 (25 percent of credit) -- $1,312.50
Credit allowed in 1994 (25 percent of credit) -- $1,312.50
If the Smith Company's 1992 research expenditures in the enterprise zone were the same or less than the average of the 1990 and 1991 expenditures, there would be no additional tax credit for 1992. However, if the company's 1992 research expenditures increased, the credit would be computed in this way:
1992 enterprise zone research expenditures -- $600,000.00
1991 enterprise zone research expenditures -- $325,000.00
1990 enterprise zone research expenditures -- $200,000.00
Total 1990 and 1991 -- $525,000.00
Average of 1990 and 1991 -- $262,500.00
Qualifying expenditures ($600,000 - $262,000) -- $337,500.00
Allowable credit at 3 percent -- $10,125.00
Credit allowed in 1992 (25 percent of credit) -- $2,531.25
Credit allowed in 1993 (25 percent of credit) -- $2,531.25
Credit allowed in 1994 (25 percent of credit) -- $2,531.25
Credit allowed in 1995 (25 percent of credit) -- $2,531.25
Since the Smith Company is still carrying the
1991 credit forward, the total 1992 credit would be calculated as follows:
| 1991 research expenditure credit | $ 1,312.50 |
| 1992 expenditure credit | + $ 2,531.25 |
| 1992 total income tax credit | $ 3,843.75 |
If the taxpayer's tax liability is less than the research and experimental credit, the remaining amount may be carried forward to the subsequent tax years. There is no limit on the number of years this credit can be carried forward.
EXAMPLE: The Smith Company's 1992 tax liability is $3,000. This is less than the company's total 1992 research credit of $3,843.75. Therefore, the Smith Company may carry forward the $843.75 to the 1993 tax return.
Other Colorado "FYI" Tax Publications
Colorado Tax Forms (commonly requested forms)
