R&D Tax Credits in Minnesota

Minnesota offers a research and development tax credit to offset a company’s income tax return to those who have incurred qualifying research activities in Minnesota.

To be eligible for the credit you must be a partner in a partnership or shareholder in an S-Corporation and the partnership or business had qualifying R&D expenses in Minnesota that exceeded its base amount, as calculated for the federal R&D credit, but based on Minnesota gross receipts.

Qualifying Research Expenses

Qualifying expenses consist of R&D expenses that qualify for the federal R&D credit under Internal Revenue Code Section 41 and are for research conducted in Minnesota; and contributions to qualified nonprofit organizations that make grants to small, technology innovative businesses in Minnesota during their early development stages.

The R&D project must follow the federal guidelines for bring technology-oriented and while not mandatory, Minnesota does expect to see a substantial amount of costs related to experimentation.

The Internal Revenue Code defines qualified research as those expenses for activities intended to discover information that eliminates uncertainty concerning the development or improvement of a product. A product is defined as a process, technique, formula or invention.

Minnesota Credit Rate and Limitations

The credit is 10% of the taxpayer’s QREs for the first $2 million, and 2.5% for expenses above $2 million.

As of 2013, the Minnesota Research credit is non-refundable. Any unused credit may be carried forward for 15 years. For tax years prior to 2013, the credit is still refundable and may be claimed even if a business is unprofitable within that year.

Case Study

A company in Minnesota designs and manufactures custom-made furniture. The company began claiming R&D credits in 2014.

Summary of credits:

  FEDERALMINNESOTA
Year Total QREsCreditTotal QREsCredit
2016 $422,000$25,320$422,000$21,100
2015 $275,000$16,500$275,000$13,750
2014 $75,000$4,500$75,000$3,750
Total $772,000$46,320$772,000
$38,600

 

Minnesota R&D Tax Credit Forms

If a partnership or S-Corporation pays qualified R&D expenses in Minnesota then the entity must complete Schedule RD, Credit for Increasing Research Activities. They will then receive their share of the credit on schedule KPI if they are a partnership; or Schedule KS if they are an S-Corporation.

To claim the credit on the Minnesota tax return, the taxpayer must complete Schedule M1C, Business and Investment Credits or Schedule M1B for tax years before 2013. When filing Form M1, the Individual Income Tax, the taxpayer must include a copy of Schedule M1B or M1C and Schedule KPI or Schedule KS.