Kentucky does not have a wage-and-supply research credit like the federal §41 credit. Its research incentive is the Qualified Research Facility Tax Credit, a credit for the capital cost of building, remodeling, expanding or equipping facilities in Kentucky that are used for qualified research.
At a glance
- Jurisdiction: Kentucky (KY)
- Credit name: Qualified Research Facility Tax Credit (KRS 141.395)
- Administering agency: Kentucky Department of Revenue (Tax Credits Section)
- Rate(s) and base: 5% of the qualified costs of constructing, remodeling, expanding or equipping research facilities in Kentucky. Only tangible, depreciable property counts, and replacement property is excluded. Research wages and supplies are not part of the base.
- Refundable? No. It offsets individual income tax (KRS 141.020), corporation income tax (KRS 141.040) and the limited liability entity tax (LLET, KRS 141.0401), in the order set by KRS 141.0205.
- Transferable? No. Pass-through entities pass the credit to owners in proportion to their distributive share.
- Carryforward: 10 years
- Annual cap / proration: None. There is no per-taxpayer or statewide cap. The credit is limited by tax liability, and it cannot reduce the LLET below the minimum.
- Pre-approval / application and deadline: No pre-approval or separate application. The credit is claimed on the return for the year the property is placed in service, and Schedule QR is re-attached each year a carryforward is used.
- Forms:
- Schedule QR (Form 41A720QR, Qualified Research Facility Tax Credit), one for each qualifying project
- Schedule TCS (corporations and pass-through entities) or Schedule ITC (individuals)
- Kentucky Schedule K-1 for owners
- All filed with Form 720, 725, 740 or 765
- Sunset / recent changes: No sunset. No amendments to KRS 141.395 were enacted in 2024–2026. The 2026 revenue bill (HB 757, enacted April 14, 2026) decoupled Kentucky from federal §174A expensing, so domestic research expenditures must still be amortized over five years for Kentucky purposes.
What it is
Kentucky supports research by crediting 5% of qualified spending on the physical facilities where research takes place. This covers new construction, remodeling, expansions and the equipment in them. Research is "qualified" if it meets the IRC §41 definition, but the credit is based on facility and equipment costs, not on QREs. Kentucky also offers a separate sales and use tax incentive for certain research equipment. That incentive is not covered here.
Who can claim it
- Corporations, pass-through entities and individuals that construct, remodel, expand or equip a research facility located in Kentucky and use it for qualified research as defined in IRC §41.
- Pass-through entities (partnerships, S corporations, LLCs, trusts) may apply the credit against their LLET and pass it through to owners in proportion to their distributive share.
- Individuals include sole proprietors and K-1 recipients.
- Married couples: if both spouses are named, they may claim the full credit on a joint return, but must split it on separate returns.
How it is calculated
- Identify the tangible, depreciable property acquired for the project. This means construction, remodeling or expansion costs and the equipment installed in a Kentucky facility used for qualified research.
- Exclude:
- replacement property;
- land;
- intangibles; and
- property not used for qualified research.
- Credit = 5% × qualified costs.
- Apply the credit against income tax and LLET following the KRS 141.0205 ordering rules. Unused credit carries forward up to 10 years.
How to claim it
- File Schedule QR (41A720QR) with the return for each qualifying project. Attach a schedule of the property listing:
- description;
- date purchased;
- date placed in service; and
- cost.
- Report the credit used on Schedule TCS (corporations and pass-through entities) or Schedule ITC (individuals).
- Attach a copy of Schedule QR every year the credit or its carryforward is used, until it is used up or the 10-year period ends.
- Pass-through owners report their share from the Kentucky Schedule K-1. They attach Schedule TCS or ITC and a copy of the entity's Schedule QR.
- Contact: Kentucky Department of Revenue, Tax Credits Section, 501 High Street, Frankfort, KY 40602-0491, (502) 564-8139.
Recent changes
- 2024–2026: no changes to KRS 141.395 or the Schedule QR credit. The 5% rate, the 10-year carryforward and the absence of a cap are unchanged.
- HB 757 (2026 Regular Session, 2026 Ky. Acts ch. 161, enacted April 14, 2026 when the General Assembly overrode the Governor's line-item vetoes) and HB 869 (2026 Ky. Acts ch. 198, signed April 27, 2026): for tax years beginning on or after January 1, 2026, Kentucky conforms to the IRC as of December 31, 2025, but decouples from §174A. Taxpayers add back the federal §174A deduction for domestic research expenditures and instead deduct amortization computed under §174 as in effect on December 31, 2024 (five years for domestic research). Neither bill changed KRS 141.395.
- Context: Kentucky's individual income tax rate fell to 3.5% for 2026 (HB 1, 2025). The credit is worth the same dollar amount, but a lower rate means less individual income tax for it to offset. The corporate income tax and LLET continue to apply.
Likely examiner questions
These questions illustrate what an examiner may ask about this credit. They are drafts for illustration and should be reviewed by a specialist before use. Kentucky facility claims also face standard questions: where each asset is located, the Kentucky credit and carryforward schedule for each year claimed, and whether the claiming entity is the one subject to Kentucky tax.
- Provide the Schedule QR property listing for each project (description, purchase date, placed-in-service date, cost) and tie each item to invoices and the fixed-asset register.
- Show that each asset is located in Kentucky and is tangible, depreciable property, and that none is replacement property, land or intangible property.
- Describe the qualified research (IRC §41) performed in the facility and show that the facility or equipment is used for it. Explain the method used to allocate mixed-use space or equipment.
- Reconcile Schedule QR costs to depreciation schedules and capitalization records.
- Show how the credit was applied against income tax and LLET under KRS 141.0205, and that the LLET was not reduced below the minimum.
- Provide the carryforward schedule by project and year, and show that Schedule QR was attached for every year of use and that no amount was used after 10 years.
- For pass-through owners, provide the Kentucky Schedule K-1 and the entity's Schedule QR.
Common weak spots
- Replacement property, maintenance or repairs, or general office and administrative space included in qualified costs.
- Facilities or equipment outside Kentucky, or used mainly for production rather than qualified research.
- No contemporaneous evidence that the facility is used for §41-qualified research.
- Schedule QR not filed for each project, or not re-attached in carryforward years.
- Income tax and LLET credit balances not tracked separately, or the LLET minimum ignored.
- Treating research wages or supplies as eligible. They are not.
Next steps
- Run a mock audit for Kentucky
- Official source: Kentucky Department of Revenue, Qualified Research Facility Tax Credit (opens in a new tab)
- Run the eligibility checker
- Book a scoping call with Swanson Reed (opens Swanson Reed's booking calendar in a new tab)
- Contact us: +1 (469) 206-4335 or hello@creditarmor.ai
Important
This page is general information, not tax advice. Rules change; confirm current requirements with the state revenue agency or a qualified tax professional. creditARMOR is a free service. Passing this mock audit does not guarantee that your claim will pass an IRS or state examination. If needed, Swanson Reed can assist you with representation before the IRS. creditARMOR and TaxTrex are products of Swanson Reed.