The Kentucky R&D tax credit, explained
Kentucky's R&D credit covers only 5% of research facility construction costs, not day-to-day research spending like salaries.
Last verified July 2026 against Kentucky Department of Revenue guidance.
The short answer
Yes, Kentucky has a state R&D tax credit, but it is narrower than what most startups expect. The Qualified Research Facility Tax Credit covers 5% of the cost to construct, remodel, or equip a facility used for qualified research in Kentucky.
How the Kentucky credit works
It does not cover the day-to-day costs of research, like engineer salaries, contractor fees, or cloud computing, which make up most of a typical software startup's research spending.
The credit is nonrefundable and can offset Kentucky income tax or the limited liability entity tax. Unused amounts carry forward for up to 10 years.
How it stacks with the federal credit
For most Kentucky startups, the federal R&D credit does the real work, since the state credit only applies to facility construction costs, not the wages and cloud costs that make up most research budgets.
The federal credit is worth roughly 6% to 10% of qualified spend, and a startup under $5 million in revenue can apply up to $500,000 of it against payroll taxes each year, regardless of whether the company built or leased its office.
Example: a 4-person Kentucky team with $360,000 in qualified salaries could see a federal credit of roughly $25,000 to $36,000, usable against payroll taxes. If that same company spent $200,000 building out a dedicated lab or testing facility in Kentucky, it could add a state credit of about $10,000 at the 5% rate, on top of the federal amount.
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Eligibility and how to claim it
Kentucky's credit is open to any business that constructs, remodels, or equips a facility in Kentucky specifically for qualified research, where the costs involve tangible, depreciable property.
Companies claim it on Schedule QR, Qualified Research Facility Tax Credit, attached to the Kentucky corporate return, Form 720, 720S, or 765, depending on entity type.
Because this credit is tied to physical facility costs, not general research spending, the Kentucky Department of Revenue and a company's CPA need clear documentation of what was built, remodeled, or equipped and its cost, separate from the research expense records used for the federal credit.
Official source: Kentucky Department of Revenue.
Carryforward and deadlines
Unused Kentucky research facility credit carries forward for up to 10 years, applied against current-year Kentucky income tax and the limited liability entity tax first.
Schedule QR is filed with the annual Kentucky income tax return. There is no separate application process, but good cost records for the facility work are essential.