Minnesota R&D Tax Credit Filing Instructions
To claim the Research and Development (R&D) tax credit in Minnesota, businesses must first identify their qualified research expenses (QREs) that align with federal R&D credit definitions, but are specifically for research conducted within Minnesota. The credit is nonrefundable and is equal to 10% of the first $2 million of Minnesota QREs exceeding a base amount, and 4% on any such excess expenses over $2 million. The primary form that needs to be filed to make the state R&D tax credit claim is Schedule RD, Credit for Increasing Research Activities. This schedule is completed by the corporation or pass-through entity (partnership or S corporation) that incurred the qualified expenses. If the credit is passed through from a partnership or S corporation, individual partners or shareholders will receive their share of the credit on Schedule KPI (Partner’s Share of Income, Credits and Modifications) or Schedule KS (Shareholder’s Share of Income, Credits and Modifications), respectively. They then report this credit on Schedule M1C, Other Nonrefundable Credits, when filing their Minnesota individual income tax return (Form M1). The credit can be carried forward for up to 15 years if it cannot be fully utilized in the current tax year.
Minnesota Patent of the Year – 2024/2025
Nanocopoeia LLC has been awarded the 2024/2025 Patent of the Year for advancing cancer treatment with a novel drug delivery system. Their invention, detailed in U.S. Patent No. 12016861, titled ‘Amorphous nilotinib microparticles and uses thereof’, introduces a breakthrough approach to administering nilotinib, a medication used in treating certain cancers.
This innovative system employs amorphous solid dispersions of nilotinib, enhancing its solubility and bioavailability. The formulation allows for a significantly lower dose compared to traditional immediate-release versions, potentially reducing side effects and improving patient compliance. Additionally, the new system can be administered without regard to food intake, offering greater flexibility for patients.
By optimizing the delivery of nilotinib, Nanocopoeia’s invention addresses common challenges in cancer treatment, such as dosing accuracy and patient adherence to medication schedules. The technology holds promise for improving therapeutic outcomes and quality of life for individuals undergoing cancer treatment.
This patent underscores Nanocopoeia’s commitment to innovation in pharmaceutical sciences, paving the way for more effective and patient-friendly cancer therapies.
Study Case
IVO Tech (IVO) is a leading software company specializing in employment screening software. The company was founded to provide new and innovative technologies to employment screening firms to help them improve productivity, reduce overhead, and have technological competitive advantages over otherwise similar firms.
IVO incurred qualified research expenses relating to the development of numerous innovative features in 2011-2013. IVO had never claimed the R&D tax credit before and was unaware it was performing qualified activities. After meeting with a specialist and learning more about R&D, IVO realized it was eligible for the credit.
The R&D tax credit specialist helped IVO determine its qualifying R&D activities, many of which were part of the company’s daily operations. IVO’s qualified research expenses (QRE) included:
- Development of new or improved software features to meet changing consumer preferences;
- Improvement to processing speeds
- Improvements for storage
- Testing across all supported releases to determine exposure
- Experimentation with possible fixes until an adequate solution was determined
- Creating and executing test cases to eliminate uncertainty prior to releasing software to customers
After adding up labor and supplies costs from 2011-2013, IVO spent $1.95 million on R&D for those three years. IVO claimed the Federal R&D Tax Credit and received a $45,000 tax credit.
After realizing the benefits, a sustainable methodology was also established to help IVO identify, document and substantiate eligible R&D projects and costs on an ongoing basis.
Qualified research consists of research for the intent of developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
The Four-Part Test
Activities that are eligible for the R&D Credit are described in the “Four-Part Test” which must be met for the activity to qualify as R&D.
- Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
- Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
- Process of Experimentation: The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
- Technological in Nature: The process of experimentation used to discover information must fundamentally rely on principles of hard science such as physical or biological sciences, chemistry, engineering or computer science.
What records and specific documentation did IVO Tech keep?
Similar to any tax credit or deduction, IVO had to save business records that outlined what it did in its R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. IVO saved the following documentation as evidence:
- Innovation Log
- Records of changes and bug fixes
- Photographs/ videos of testing
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Receipts
- Labor time sheets
By having these records on file, IVO confirmed that it was ‘compliance ready’ — meaning if it was audited by the IRS, it could present documentation that illustrated the progression of its R&D activity, therefore proving its R&D eligibility.
Click here to view the PDF version of this case study.
A Minnesota Company develops circuit boards used by their clients. It had never before claimed the R&D credit for the development activities of its software programmers. This project involved a four-year study with a three-year look back.
The Company qualified for the federal R&D Tax Credit of $280,446 and an additional $140,222 of state R&D Tax Credit in Minnesota.
| FEDERAL | MINNESOTA | |||||
| Year | Total QREs | Credit | Total QREs | Credit | ||
| Year 4 | $1.050.900,00 | $105.090,00 | $1.050.900,00 | $52.545,00 | ||
| Year 3 | $878.635,00 | $87.863,00 | $878.635,00 | $43.931,00 | ||
| Year 2 | $526.485,00 | $52.648,00 | $526.485,00 | $26.324,00 | ||
| Year 1 | $348.456,00 | $34.845,00 | $348.456,00 | $17.422,00 | ||
| Total | $2.803.576,00 | $280.446,00 | $2.803.576,00 | $140.222,00 | ||
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