Credit for Increasing Research Activities

The Minnesota R&D credit reduces income or franchise tax. You may qualify for the credit if you paid or incurred QREs while conducting qualified research in Minnesota.  

For taxable years beginning after December 31, 2016, the Minnesota R&D credit is equal to 10% of QREs up to a computed base amount of $2 million, and 4% for expenses above that level.  

The Minnesota R&D Credit is based on the federal credit, except for the following key differences:

• All QREs claimed for the Minnesota R&D credit must be conducted in Minnesota. 

• For tax years after May 30, 2017, Minnesota sales or gross receipts are used to calculate the base amount.

• Innovation Grant expenditures are not eligible QREs for the Minnesota R&D credit.

• Minnesota does not allow the federal alternative simplified method.

• The Minnesota R&D credit can be carried forward for up to 15 years but not carried back.

• Taxpayers with QREs but zero gross receipts can still claim the Minnesota R&D credit.

• The Minnesota R&D credit can be allocated among combined group members after the earning member uses their current year credit first.  

R&D Refundability

For tax years beginning after December 31, 2024, a portion of the current year R&D credit is refundable. You must make an election on a timely filed return (including extensions) to claim the refundable portion. 

The refundable portion of the credit can be calculated and claimed by a:

• C corporation
• Estate
• Individual
• Trust

For S corporations and partnerships that generate an R&D credit, the election is made by the partners, members, or shareholders.

The refundable portion is calculated after tax liability has been reduced to $0 by all other credits and the current year R&D credit. The remaining portion of the current year credit is multiplied by the refundability rate for the tax year. 

Refundability Rates

Starting in 2028, the refundability rate is subject to change annually but shall not exceed 25%. 

The following activities may qualify for the Minnesota R&D credit if they meet the Four-Part Test, have qualified research expenses, and are conducted in Minnesota:

• Develop new, improved, or more reliable products, processes, or formulas.
• Develop new technology.
• Develop new materials.
• Develop new processes.
• Develop new software or hardware.
• Conduct testing of new concepts and technology.

For examples, see Code of Federal Regulations, title 26, section 1.41-4.

Research activities performed outside of Minnesota do not qualify for the Minnesota R&D credit.

Additionally, these activities do not qualify for the credit:

• Acquisition and improvement of land
• Advertising and promotional expenses
• Certain property used in research which can depreciate or deplete
• Funded research
• Internal-use software
• Management studies and efficiency studies
• Market and consumer research
• Ordinary testing or inspection of materials or products for quality control
• Research conducted in the social sciences, arts, and humanities
• Research conducted after the beginning of commercial production
• Research related to any of these:
  • Style, taste, cosmetic, or seasonal design
  • The adaptation of an existing business component
  • The duplication of an existing business component from physical inspection, plans, blueprints, etc.

To meet the Elimination of Uncertainty test, an activity producing the QREs must:

• Qualify as a business deduction under Section 174 of the Internal Revenue Code
• Undertake (perform) an activity to discover information
• Eliminate technical uncertainty concerning the capability or method for developing or improving a product or process

To meet the Discovering Technological Information test, the activity performed must rely on the principles of:

• Physical sciences
• Engineering, chemistry, biology, metallurgy, or computer science

Research is treated as performed for a permitted purpose if the new or improved business component relates to:

• Function
• Reliability
• Performance
• Quality

To meet the Process of Experimentation test, the activity producing the QREs must:

• Evaluate alternatives
• Develop and test hypothesis
• Refine or discard the hypothesis
• Constitute a technical risk (i.e. failure may occur)

• Names of those involved in projects that satisfy the Four-Part Test
• Their location
• The amount you pay them
• The portion of their time dedicated to qualified activities
• The activities they perform

• The cost of the tangible supplies
• The location the supplies were used
• The projects the supplies were used for
• How the supplies were used in the R&D process
• The invoices for the supplies

• Scope of work
• Location
• Expectations
• Payment agreement
• Contracts related to expenses

• The lease agreement for computers used to conduct research
• The purpose the computers served in conducting research

• Amount of payments
• Identity of the qualified research organization
• Written agreement with the qualified research organization

• Amount of payments
• Identity of the nonprofit organization
• Eligibility of the nonprofit organization

Examples of records of your research activities include:

• List of Research Activities: Describe the new or improved products or processes you worked on and where the research took place. 

• Description of Improvements: Explain how each product or process became better in terms of function performance, reliability, or quality.

• Experimentation Process: Outline the steps you took to develop or improve the product or process; in the order they happened. For example, present a timeline of your development processes.

• Research Documentation: Provide documents that show the scope of the research, testing of alternatives, project authorization records, procedure manuals, project checklists, lab schedules, reports, experiment results, and any other documents related to the research

• Issue logs, meeting minutes, chronological timeline, internal memos, emails, patent applications, work orders, budgets, capital addition requests, purchase orders, invoices, contracts, and any other relevant paperwork. 

• Any documents created while calculating your research credit.

Examples of your wage records include:

• Organizational chart, timesheets covering the time spent on qualifying activities, and any other supporting documentation. 

• Information on employees whose wages are included in the computation: Names, work titles, Social Security Numbers, Forms W2, position description, job duties, time and wages included, and a breakdown of wages claimed by the employee, year, and qualified project. 

Examples of your supply records include:

• List of physical supplies used for qualified research activities, amounts used, and invoices. 

• Supplies do not include land and land improvements, capital equipment, or general and administrative supplies such as travel or telephone expenses.

Examples of contracted research records include:

• Contractor names, addresses, Federal Employer Identification Number (FEIN), and the amount claimed for each contractor.

• Location of where the contractor conducted the claimed activities.

• Description of research activities performed and ownership relationships between the company and the contractor. 

• Contractual agreements, invoices, and Forms 1099. 

The IRS issued two directives for eligible large business and international taxpayers (LB&I) claiming the federal R&D tax credit.

The first directive from 2017 sets an efficient process for reviewing claims from these taxpayers.

The second directive from 2020 updated this process and should be followed for tax periods ending on or after July 31, 2020. 

Eligibility

To use this process, you need to:

• Be an LB&I taxpayer
• Have assets equal to or greater than $10 million
• Follow U.S. generally accepted accounting principles (GAAP) to prepare your certified audited financial statements, showing the amount of currently expensed financial statement R&D either as:
  • A separate line item on your certified audit financial statement
  • Separately stated in a note to your certified audited financial statements
• Use these statements to reconcile your book income to federal tax income on Schedule M
• Complete and sign a certification statement and provide specific documents if requested during an audit

Minnesota Impact

Minnesota will generally follow the 2020 IRS directive and allow the use of U.S. GAAP expenditures for calculating the state’s R&D credit

If you follow the 2020 directive and related guidance, you must make these changes to your federal calculations when computing the credit for Minnesota purposes:

• Subtract all U.S. ASC 730 Financial Statement R&D In-house Research performed outside Minnesota from the Computation of Adjusted ASC 730 Financial Statement R&D under the IRS Directive Appendix C, Line 9

• Include only wages attributed to qualified research conducted within Minnesota for the Adjusted ASC 730 Financial Statement R&D Wage Detail under the IRS Directive Appendix D

Minnesota Audits

We do not follow Part II C in the 2020 directive, which requires federal auditors to receive approval before requesting additional information not listed in the 2020 directive.

Minnesota auditors do not need to receive approval before requesting other relevant documentation during an audit.

We may request documentation for each tax period you used the directives for Minnesota purposes, such as:

• A copy of the completed and signed certification statement filed with the IRS

• All U.S. ASC 730 Financial Statement R&D In-house Research performed outside of Minnesota

Your Minnesota credit will be calculated using only the portion of QREs included in the federal credit calculation that resulted from activities within the state.

For more information, see R&D Credit Instructions or the resources listed:  

• Minnesota Statutes 290.068 

• Internal Revenue Code 

  • Section 41 

  • Section 174 

• Treasury Regulations 

  • 1.41-2 Qualified Expense 

  • 1.41-3 Base Period 

  • 1.41-4 Qualified Activities 

    • 1.6001-1 Record Retention 

• Forms 

  • Minnesota Schedule RD, Credit for Increasing Research Activities 

  • IRS Form 6765, Credit for Increasing Research Activities  

• IRS Guidance for R&D Credit