Delaware R&D Tax Credit: Powerful Innovation Incentive

Key Takeaways

• The Delaware Research and Development Tax Credit offers unique benefits, including full refundability with no expenditure cap – making it the only state with this powerful combination.
• Small businesses with less than $20 million in annual gross receipts qualify for double the credit percentages: 20% using the traditional method or 100% using the Alternative Simplified Credit method.
• The One Big Beautiful Bill Act of 2025 has restored immediate expensing for domestic R&D costs, providing additional federal tax advantages to Delaware innovators.
• Delaware ranks 6th nationally for industrial R&D intensity, with over $2 billion invested annually, representing more than 3% of the state’s GDP.
• Applications must be submitted by September 15th after the tax year when qualified research expenses were incurred.

Let me tell you something most business owners don’t know: Delaware might be small in size, but when it comes to supporting research and innovation, the First State offers one of the most generous research and development tax credit programs in the country. I’ve helped countless businesses recover substantial tax dollars through this program, and the truth is, too many companies leave this money on the table.

How the Delaware Research and Development Tax Credit Works

Delaware’s research and development tax credit follows a similar structure to the federal R&D credit program under IRC Section 41, but with some key differences that make it exceptionally valuable for businesses operating in the state.

The Delaware Division of Revenue administers the program through Title 30, Chapter 20, Subchapter VIII of the Delaware Code. This credit is designed to incentivize companies to increase their research activities within state borders.

Calculation Methods

Delaware offers two ways to calculate your credit:

Method A (Traditional):

• 10% of the excess of your total Delaware qualified research expenses (QREs) over your Delaware base amount
• For small businesses (less than $20 million in annual gross receipts), this percentage increases to 20%

Method B (Alternative Simplified Credit):

• 50% of Delaware’s apportioned share of your federal research and development tax credit calculated using the alternative simplified credit method
• For small businesses, this percentage jumps to 100% of the apportioned share

Delaware’s apportioned share is calculated by taking the ratio of your Delaware QREs to your total QREs for the tax year.

The Small Business Advantage

One of the most compelling aspects of Delaware’s program is the enhanced rates for small businesses. If your business has average annual gross receipts under $20 million (as determined by IRC Section 41(c)(1)(B)), you qualify for the higher credit percentages.

This is a game-changer for startups and growing companies. I recently worked with a technology firm in Dover with fewer than 50 employees that recovered over $114,000 in state research and development tax credits in addition to their federal credits. This cash infusion allowed them to hire two additional developers.

The Unique Delaware Advantage: Refundability

Delaware stands alone as the only state that combines two powerful features: zero expenditure cap and full refundability of the research and development tax credit.

Prior to 2017, Delaware had a $5 million cap on total credits awarded each year. When applications exceeded this amount, credits were prorated among qualifying applicants. The cap was removed in 2017, meaning companies now receive 100% of their calculated credit amount.

Even more importantly, the credit is fully refundable. This means if your credit amount exceeds your tax liability, the state will pay you the difference as a refund. As Delaware tax specialist Michael Torbert explained to me, “This is huge for early-stage companies that might not yet have significant tax liability but are investing heavily in innovation.”

The refundability feature makes Delaware’s program especially attractive for:

• Pre-revenue startups
• Companies with net operating losses
• Businesses with minimal Delaware tax liability

Quick Decision Table: Maximizing Your Delaware Research and Development Tax Credit

Business Size	Best Calculation Method	Refundability	Strategy Tips
Small Business (<$20M gross receipts)	Compare both methods to determine highest benefit	Fully refundable	Focus on documenting all Delaware-based research activities
Large Business (>$20M gross receipts)	Compare both methods to determine highest benefit	Fully refundable	Consider restructuring to perform more R&D in Delaware
Startups with minimal tax liability	Method B (ASC) often provides greater benefit	Fully refundable	Apply even with minimal or no tax liability
Multi-state operations	Method B with careful apportionment calculations	Fully refundable	Track Delaware vs. non-Delaware research expenses separately

Qualifying Activities and Expenses

To qualify for the Delaware research and development tax credit, your activities must meet the same four-part test used for the federal credit:

1. Permitted Purpose: Activities must relate to developing or improving a business component’s functionality, performance, reliability, or quality.
2. Technological in Nature: Research must rely on principles of physical science, biological science, engineering, or computer science.
3. Elimination of Uncertainty: Activities must be intended to discover information to eliminate uncertainty about the development or improvement of a business component.
4. Process of Experimentation: Research must involve evaluating alternatives through modeling, simulation, systematic trial and error, or other methods.

Qualified research expenses (QREs) include:

• Wages for employees directly engaged in qualified research
• Supplies used in the research process
• Contract research expenses (limited to 65% of payments)

Critical Point: Only research activities physically performed within Delaware qualify for the state credit.

The Application Process

Unlike many state credits that are claimed directly on tax returns, Delaware requires pre-approval. Here’s the process:

1. Complete Form 2070AC: This is the “Application and Computation Schedule for Claiming Delaware Research and Development Tax Credits.”
2. Submit by the Deadline: Applications must be filed by September 15th after the end of the tax year in which the R&D expenses were incurred.
3. Attach Federal Documentation: Include a copy of your federal Form 6765 (Credit for Increasing Research Activities).
4. Wait for Approval: The Delaware Division of Revenue will review your application.
5. Transfer to Form 700: Once approved, transfer the credit amount to Delaware Form 700 (Income Tax Credit Schedule).
6. Attach Both Forms: Include both Forms 2070AC and 700 with your Delaware income tax return.

I’ve seen businesses miss out on thousands of dollars simply because they missed the September 15th deadline. Mark your calendar now if you’re conducting qualified research in Delaware.

The 2025 Game-Changer: One Big Beautiful Bill Act

The research and development landscape got a significant boost in 2025 with the passage of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. This federal legislation has important implications for Delaware businesses claiming research and development tax credits.

Key OBBBA Provisions for R&D Activities:

1. Immediate Expensing Restored: The OBBBA created a new IRC Section 174A that permanently restores the ability to immediately deduct domestic R&D expenses rather than amortizing them over 5 years.
2. Retroactive Options for Small Businesses: Businesses with less than $31 million in average annual gross receipts can elect to apply the changes retroactively to tax years beginning after December 31, 2021.
3. Acceleration Options for All Businesses: All taxpayers can elect to deduct remaining unamortized domestic R&D costs from previous years either entirely in 2025 or spread over 2025-2026.
4. Foreign R&D Still Amortized: The requirement to capitalize and amortize foreign R&D expenses over 15 years remains in place, further incentivizing domestic research.

Delaware business owners need to understand how these federal changes interact with the state’s research and development tax credit. The restored ability to fully expense R&D costs federally creates an even more powerful incentive when combined with Delaware’s refundable credit.

Delaware’s Innovation Ecosystem

The Delaware research and development tax credit is just one component of Delaware’s broader innovation ecosystem. The state ranks 6th nationally for industrial R&D intensity, with over $2 billion invested annually in research activities – more than 3% of Delaware’s GDP.

This impressive R&D activity is concentrated in several key sectors:

• Biopharmaceuticals and Life Sciences: Building on Delaware’s chemical industry legacy with companies like Incyte leading the way
• Advanced Materials: Continuing the innovation tradition established by DuPont
• Financial Technology: Leveraging Delaware’s strong financial services sector
• Clean Energy Systems: Emerging focus on green hydrogen, fuel cells, solar and wind technologies
• Rehabilitative and Performance Enhancement Technologies: Growing sector focused on health outcomes and mobility innovation

Delaware’s supportive business environment includes:

• The Delaware Technical Innovation Program
• EDGE Grants providing up to $100,000 for STEM-based companies
• Graduated Lab Space Grants
• Workforce Training Grants
• University research partnerships

As Noah Olson, Director of Innovation at Delaware Prosperity Partnership, recently noted, “Delaware offers more than a good business climate—it provides a strategic ecosystem where early-stage companies can access research partners, startup resources, and talent pipelines tailored to their needs.”

Real-World Example: Delaware Research and Development Tax Credit in Action

Let me share a recent case study that demonstrates the power of Delaware’s research and development tax credit:

A medical device manufacturer based in Wilmington had invested significantly in developing a new minimally invasive surgical tool. Their research involved extensive prototyping, materials testing, and clinical evaluations – all conducted in their Delaware facility.

The company had the following qualified research expenses in 2024:

• $850,000 in wages for engineers and scientists
• $320,000 in supplies and materials used in testing
• $230,000 in contract research with University of Delaware researchers

Their total Delaware QREs came to $1.4 million. Using Method A, their credit amounted to $112,000. Since they had a Delaware tax liability of only $40,000, they received a refund check for the remaining $72,000.

This unexpected cash infusion allowed them to accelerate development of their next-generation device and hire an additional engineer. The credit effectively funded over 8% of their annual research budget.

Best Practices for Maximizing Your Delaware Research and Development Tax Credit

Based on my experience helping businesses claim millions in research and development tax credits, here are some best practices to maximize your benefit:

1. Document Everything: Maintain detailed records of all qualified research activities, including time tracking for research personnel, lab notebooks, project plans, and testing results.
2. Consider Both Calculation Methods: Run the calculations using both Method A and Method B to determine which provides the greater benefit.
3. Structure Operations Strategically: Where possible, locate research activities in Delaware to maximize the state credit.
4. Coordinate Federal and State Claims: Ensure your Delaware application aligns with your federal R&D credit claim while accounting for the different calculation methods.
5. Mark the Application Deadline: Set reminders for the September 15th deadline to ensure timely filing.
6. Track Delaware vs. Non-Delaware Expenses: For multi-state operations, implement systems to clearly track which research expenses occur in Delaware.
7. Consult with a Specialist: Partner with a tax credit specialist familiar with Delaware’s program to ensure you’re capturing all eligible activities and expenses.

The 2025 Impact: Section 174 Relief and Delaware Innovation

The Section 174 fix included in the One Big Beautiful Bill Act brings significant relief to Delaware businesses engaged in R&D. From 2022 through 2024, companies were required to capitalize and amortize research expenses rather than deducting them immediately, creating a cash flow burden that hit smaller, innovation-focused companies particularly hard.

As Kurt Foreman, President and CEO of Delaware Prosperity Partnership, stated following the OBBBA passage, “These are impactful changes for life sciences, advanced manufacturing and other R&D-heavy industries in Delaware. These updates help Delaware support important R&D work and make possible the discoveries that revolutionize how we live.”

The combination of immediate federal expensing and Delaware’s refundable credit creates one of the most powerful R&D incentives in the nation. Companies in Delaware’s key innovation sectors – from biopharmaceuticals to clean energy – now have even more reason to accelerate their research activities.

Conclusion

The Delaware research and development tax credit stands out as one of the most business-friendly innovation incentives in the nation. With its unique combination of refundability, no expenditure cap, and enhanced benefits for small businesses, it provides substantial financial support for companies investing in research activities within the state.

When combined with the recent federal changes restoring immediate expensing for domestic R&D costs, Delaware offers an exceptionally attractive environment for innovation. Companies from startups to established enterprises should carefully evaluate this powerful program as part of their tax and innovation strategies.

Don’t leave this money on the table. If your business conducts qualified research in Delaware, the research and development tax credit represents a significant opportunity to recoup some of your investment and fuel further innovation.

Delaware Research and Development Tax Credit FAQs

R&D Tax Credits by State

Citations

1. “Delaware Research and Development Tax Credit.” AndreTaxCo, PLLC. https://www.andretaxco.com/delaware-rdcredit
2. Delaware Code Online, Title 30, Chapter 20, Subchapter VIII — Credit for Research and Development Expenses. https://delcode.delaware.gov/title30/c020/sc08/index.html
3. “R&D Benefits for DE Innovators Restored.” Delaware Prosperity Partnership. https://www.choosedelaware.com/in-the-news/rd-benefits-for-de-innovators-restored/
4. “The 2025 Guide to State R&D Tax Credits.” TaxTaker. https://www.taxtaker.com/blog/the-2025-guide-to-state-r-d-tax-credits
5. “Delaware’s Innovation Ecosystem: A Strong Foundation for Early-Stage Growth.” Delaware Prosperity Partnership. https://www.choosedelaware.com/success-stories/de-is-strong-base-for-early-stage-firms/