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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.
Following the IRS, solely interviewing employees to reconstruct activities believed to qualify for the credit is generally insufficient without additional evidence.
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 the following:
On September 11, 2017, the IRS issued a Directive providing guidance on an efficient examination process it uses for eligible Large Business and International taxpayers (LB&I) claiming the federal Credit for Increasing Research Activities (R&D credit).
On September 10, 2020, the IRS issued a Directive modifying this guidance. The 2020 Directive does not replace the 2017 Directive.
Follow the 2020 Directive if you are eligible to use it for filing returns for tax periods ending on or after July 31, 2020. View the 2020 Directive on the IRS website
Follow the 2017 Directive if you are eligible to use it for filing returns due on or after September 11, 2017, for tax periods ending before July 31, 2020. View the 2017 Directive on the IRS website
Eligibility
Both directives provide an efficient examination process used by the IRS for determining qualified research expenses (QREs). You are eligible for the process if you are an LB&I taxpayer and meet all these requirements:
You must also complete and sign a Certification Statement and provide specific documentation when requested during an audit.
Impact on Minnesota
The Minnesota Department of Revenue will generally follow the 2020 Directive and allow the use of U.S. GAAP expenditures for calculating the Minnesota 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:
Minnesota Audits
We will 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: