Minnesota R&D Tax Credit Summary
Companies that engage in certain research and development (R&D) activities in Minnesota may qualify for the Credit for Increasing Research Activities. The Minnesota R&D Tax Credit is very similar to the federal version including the definition of qualifying research.
Below are some of the differences between the federal and Minnesota research credits.
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Pursuant to § 290.068 Credit For Increasing Research Activities, the Minnesota R&D tax credit for the taxable year is equal to: 10% of the first $2,000,000 of the excess (if any) of Minnesota qualified research expenses for the taxable year, over the base amount; and 4% on all of such excess expenses over $2,000,000.
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"Base amount" means base amount as defined in section 41(c) of the Internal Revenue Code, except that the average annual gross receipts and aggregate gross receipts must be calculated using Minnesota sales or receipts under section 290.191 and the definitions contained in paragraphs (a) and (b) shall apply.
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Qualifying research expenses include
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qualified research expenses and basic research payments as defined in section 41(b) and (e) of the Internal Revenue Code, except it does NOT include expenses incurred for qualified research or basic research conducted outside the state of Minnesota pursuant to section 41(d) and (e) of the Internal Revenue Code. To qualify for the R&D credit, “Qualified Research” activities must be conducted (actually performed) in Minnesota;
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contributions to a nonprofit corporation established and operated pursuant to the provisions of chapter 317A for the purpose of promoting the establishment and expansion of business in this state, provided the contributions are invested by the nonprofit corporation for the purpose of providing funds for small, technologically innovative enterprises in Minnesota during the early stages of their development.
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Minnesota does not conform to the federal “Alternative Simplified Method.
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The credit may be carried over for a period up to 15 years, but it cannot be carried backwards.
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The definition of “gross receipts” differs. Minnesota sales or gross receipts must be used when calculating the Minnesota “base amount.”
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A taxpayer with Minnesota QREs and zero Minnesota gross receipts may still claim the Minnesota credit.
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The credit was refundable in Minnesota for tax years 2010-2012.
Eligible Entities: C-Corporation, S-Corporations,, LLCs, Partnerships
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Partnerships and S corporations:
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In the case of partnerships the credit shall be allocated in the same manner provided by section 41(f)(2) of the Internal Revenue Code.
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For shareholders in S corporations the credit must be allocated in the same manner as provided by section 1366(a) of the Internal Revenue Code.
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Deadline for Tax Filing: Due with Minnesota Tax Return
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The partnership or S corporation who paid qualified R&D expenses in Minnesota completes Schedule RD, Credit for Increasing Research Activities. You’ll receive your share of the credit on Schedule KPI, Partner’s Share of Income, Credits and Modifications (for partnerships), or Schedule KS, Shareholder’s Share of Income, Credits and Modifications (for S corporations).
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To claim the credit on your Minnesota tax return:
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Complete Schedule M1C, Other Nonrefundable Credits.
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Report the amount of your credit on Form M1, Individual Income Tax.
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When filing Form M1, include the schedule you completed in step 1 and a copy of Schedule KPI or Schedule KS.
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Data Required to Compute Credit:
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Claim Period Qualified R&D Expenses (QREs)
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Minnesota Gross Receipts for Prior 4 Years
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Adjustments (acquisitions and dispositions): If a taxpayer acquires or disposes of the major portion of a trade or business or the major portion of a separate unit of a trade or business in a transaction with another taxpayer, the taxpayer's qualified research expenses and base amount are adjusted in the same manner provided by section 41(f)(3) of the Internal Revenue Code.
Credit Carryforward: May carry forward up to 15 years any credit amount you are not able to claim against Minnesota liability for tax in the current year but it cannot be carried backwards.
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The entire amount of the excess unused credit for the taxable year shall be carried first to the earliest of the taxable years to which the credit may be carried and then to each successive year to which the credit may be carried.
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"Liability for tax" means the sum of the tax imposed under section 290.06, subdivisions 1 and 2c, for the taxable year reduced by the sum of the nonrefundable credits allowed under this chapter, on all of the entities required to be included on the combined report of the unitary business.
Refundable/Transferable Tax Credit: No. Effective beginning the tax year 2013, the R&D Tax Credit is nonrefundable.
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Although Minnesota’s research tax credit no longer offers refundability, the credit was refundable from 2010 to 2012. Legislative leadership intended refundability as a temporary provision to stimulate the economy.
Control Group Calculation:
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On June 18, 2020, the Minnesota Department of Revenue (MDOR) provided online guidance updating that the R&D carryover credit must be applied to other members of a combined group, similar to the way the credit is applied to the earning member in the year of generation. This update is effective for tax years beginning after December 31, 2012. It may be applied within the statute of limitations to claim a refund. In addition, the Department is currently updating its 2018 and 2019 forms (see Minnesota Statutes, section 289A.40) and instructions to be consistent with this guidance.
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This update is a modification from what is provided in Schedule RD (2019), which provides the credit carryover may only be used by the earning member. As such, the R&D credit carryover is allowed to be shared among other combined members. The new guidance is speculated based on increases in audit activity related to the MDOR challenging utilization of R&D credit carryovers. Accordingly, C-Corps filing a combined return should revisit returns or review prior audit assessments to investigate whether it would be advisable to file a refund claim.
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The MDOR reiterates that credit sharing became effective for tax years beginning after December 31, 2012. Therefore, it remains unclear whether R&D carryovers generated in pre-sharing credit years (i.e. prior 1/1/2013) can be shared.
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Minnesota statute section 290.068 provides that the R&D credit can be shared with members of a
combined group. The statute was amended to provide for a sharing of credits for tax years beginning
after 2012. The MDOR interpreted the statute, and subsequently updated the applicable form, to
allow sharing of the R&D credit only in the year the credit was generated. Consequently, to the extent
there was R&D carryover to the next tax year, the carryover could only be used by the entity that
generated the credit. -
Minnesota Outlined Interpretation of the New Guidance as follows:
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Credit Generation Year: R&D credit must be applied as follows in the year the credit is generated:
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1. The current-year credit amount is used by the earning member up to the amount of its tax liability.
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2. If any current-year credit amount remains, the unused credit amount must be used by other
members of the combined group up to the amount of their tax liabilities. -
3. Any unused credit amount is carried over to subsequent tax years by the earning member for up
to 15 years
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Credit Carryover in Subsequent Years: R&D credit carryover amount must be applied as follows in subsequent years:
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1. Credit carryover amounts must be used by the earning member up to the amount of its tax liability.
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2. If any credit carryover amount remains, the unused credit carryover amount must be used by other members of
the combined group up to the amount of their tax liabilities. -
3. Any unused and unexpired credit carryover amount is carried over to sub
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See Minnesota Department of Revenue, Credit for Increasing Research Activities (June 18, 2020.
Important Links and Forms: