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Last Updated: 12/18/2017

R&D Credit Documentation

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Minnesota follows the record keeping procedures required by the Internal Revenue Service (IRS). Rules governing record retention are included in Treasury Regulation Section 1.6001-1. You must maintain detailed records in a usable form to validate your expenditure claims.

Reviewing Documentation

The department follows the IRS determination that interviewing employees to reconstruct the activities believed to qualify – or not qualify – is generally insufficient in determining what employees did and whether such expenses qualify for the research credit.  Without additional evidence, the credit claimed may be adjusted.  

During an audit (review), we may request records generated at the time the research activities were performed. Some examples include, but are not limited to:

Research Activities

  • List of your research activities – your new or improved business components and location where activity was conducted.
  • Description of the new or improved function, performance, reliability, or quality of each of these business components.
  • Description of the process of experimentation, in chronological order, of all the steps or activities undertaken when developing or improving a product or business component. For example, present a time-line description of the company’s development processes and procedures.
  • Documentation showing the scope of the research activities, including things like the problem to solve, potential solutions, concerns, and project authorization requests.
  • Procedure manual, project checklist, technical abstract, lab schedule, lab report, project status report, summary experiment data results, etc. for products or business components developed or improved, and claimed for the research credit.
  • Issue logs, meeting minutes, chronological timeline, internal memos, emails, patent applications, abstracts, work orders, budgets, capital addition requests, purchase orders, invoices, contractual agreements with customers, grants, etc. related to the research.
  • Workpapers generated while calculating the credit.

Wages

  • Organizational chart.
  • Names and work titles of the employees whose wages are included in the computation.  Also include:
  • Position description, what each employee did, and the amount of their time and wages included in the credit.
  • Timesheets covering the time.
  • Social Security numbers and W2s.
  • Any other documentation tying them to the R&D credit claim.
  • Breakdown of wages claimed by employee, year and qualified project.

Supplies

  • List of the supplies claimed showing they are tangible property (link to definition, or provide definition of) used in conducting qualified research and used or consumed by an employee of the company performing qualified activities, the corresponding amount, and invoices.
  • Supplies do not include: land and land improvements, capital equipment, or general and administrative supplies such as travel or telephone expenses.

Contracted Research

  • Names, addresses, and FEINs of any contractors and amount claimed for each contractor.
  • The location where the contractor conducted the claimed activities.
  • Description of the research activities performed.
  • Description of ownership relationships between the company claiming the credit and the contractor.
  • Contractual agreements and invoices. 

IRS Guidance for R&D Credit

On September 11, 2017, the IRS issued new guidance on the R&D credit, summarized below. (For the full text, view the guidance on the IRS website.) 

The directive lays out the examination process the IRS will use for the Research and Development Credit claimed by Large Business & International (LB&I) taxpayers who meet both of the following requirements: 

  • Have assets equal to or greater than $10,000,000.
  • Follow U.S. GAAP to prepare their Certified Audited Financial Statements who show a separate line item or separately state the amount of currently expensed ASC 730 Financial Statement R&D.

The directive also requires specific documentation be made available upon request during an audit if the taxpayer chooses to follow the IRS Directive along with a completed and signed Certification Statement.

For LB&I taxpayers that file a Minnesota business return and meet the above requirements, the Minnesota Department of Revenue will follow the IRS guidelines and allow the use of GAAP expenditures for calculation of the Minnesota Research and Development Credit. During an audit, taxpayers making this election must provide the following information when requested by the department, for each tax period the taxpayer chooses to follow the IRS Directive for Minnesota purposes:

  • A copy of the completed and signed Certificate Statement filed with the IRS
  • All U.S. ASC 730 Financial Statement R&D In-house Research performed outside of Minnesota.

We may also request other relevant documentation during an audit.

Taxpayers that choose to follow the IRS Directive must make the following changes to their federal calculations when computing the credit for Minnesota purpose (see Minnesota Statute 290.068, subdivision 2(b)):

  • From the Computation of Adjusted ASC 730 Financial Statement R&D under the IRS Directive Appendix C, Line 9, subtract “All U.S. ASC 730 Financial Statement R&D In-house Research performed outside Minnesota.”
  • For the Adjusted ASC 730 Financial Statement R&D Wage Detail under the IRS Directive Appendix D, include only wages attributed to qualified research conducted within Minnesota.