This study outlines the United States federal and Minnesota state Research and Development (R&D) tax credit frameworks, detailing eligibility requirements, recent legislative changes, and case law implications for businesses in Saint Paul, Minnesota. It explores how historic industrial foundations in Saint Paul intersect with modern tax administration. Following this introduction are five unique industry case studies—medical devices, advanced materials, industrial sanitation, supercomputing, and legal publishing—alongside specific examples of qualified research and a detailed analysis of the federal and state tax provisions governing these activities.

The United States Federal R&D Tax Credit Framework

The United States federal government utilizes the Internal Revenue Code (IRC) to incentivize domestic innovation, technological advancement, and corporate investment in research and experimental (R&E) activities. The primary mechanisms for these incentives are rooted in IRC Section 41, which governs the Credit for Increasing Research Activities, and IRC Section 174, which governs the deductibility of R&E expenditures. To qualify for the federal R&D tax credit, a taxpayer’s activities must pass a rigid, statutorily defined framework, and the associated costs must strictly align with eligible expenditure categories.

The IRS Four-Part Test for Qualified Research Activities

Under IRC Section 41(d), for an activity to be deemed “qualified research,” it must successfully navigate what tax administration guidance refers to as the “four-part test”. This test must be applied separately to each business component of the taxpayer. Tax administration requires the analysis to be granular and project-specific; aggregate, company-wide declarations of research are routinely disallowed upon examination.

Statutory Exclusions and Special Rules

Even if an activity meets the four-part test, IRC Section 41(d)(4) provides a list of strict statutory exclusions. Research conducted after the beginning of commercial production of a business component is not eligible. Furthermore, the adaptation of an existing business component to a particular customer’s requirement, the duplication of an existing business component (reverse engineering), efficiency surveys, management studies, routine quality control testing, and market research are entirely excluded.

Foreign research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States is excluded from the Section 41 credit. Additionally, research funded by any grant, contract, or otherwise by another person or governmental entity is excluded unless the taxpayer retains substantial rights to the research results and bears the financial risk of failure.

When developing software for internal use (Internal Use Software, or IUS), the IRS imposes a secondary “High Threshold of Innovation” (HTI) test. To qualify, the IUS must be highly innovative, involve significant economic risk, and not be commercially available for use without significant modification. Software developed to be sold, leased, licensed, or embedded into a physical product escapes the restrictive IUS classification.

Qualified Research Expenses (QREs)

When an activity meets the four-part test and avoids all statutory exclusions, the direct costs can be claimed as Qualified Research Expenses (QREs). Under IRC Section 41(b), QREs are limited to three specific financial categories:

In addition to these core categories, regulations permit taxpayers to claim amounts paid for the right to use computers in the conduct of qualified research, commonly applied to cloud computing and server hosting costs (e.g., AWS, Microsoft Azure) utilized explicitly for software development and computational testing environments.

The Evolution of R&E Expensing and Tax Administration

The legislative environment governing the deductibility of R&E expenditures and the administration of the Section 41 credit has undergone extreme volatility, fundamentally altering corporate tax strategy.

From TCJA Amortization to OBBBA Immediate Expensing

Historically, IRC Section 174 allowed businesses to deduct R&E expenses in the year they were incurred. The Tax Cuts and Jobs Act (TCJA) of 2017 dismantled this provision, mandating that for tax years beginning after December 31, 2021, taxpayers were required to capitalize and amortize domestic R&E expenditures over a five-year period, and foreign R&E expenditures over a 15-year period. This capitalization requirement severely impacted corporate cash flows, artificially inflated taxable income, and reduced the immediate financial incentive for domestic innovation.

On July 4, 2025, the enactment of the “One Big Beautiful Bill Act” (OBBBA) radically altered the landscape. The OBBBA enacted a new statutory provision, IRC Section 174A, which permanently restores the ability of taxpayers to fully and immediately expense domestic R&E expenditures in the year they are paid or incurred, effective for taxable years beginning after December 31, 2024.

The new legislation deliberately bifurcates the treatment of domestic versus foreign research. While domestic R&E enjoys immediate expensing under Section 174A, foreign R&E expenditures remain subject to the TCJA’s strict 15-year amortization schedule under the amended Section 174. Furthermore, Section 174(d) prohibits the immediate recovery of the unamortized basis in foreign capitalized R&E expenditures upon the disposition, retirement, or abandonment of property. This structural divergence creates a profound domestic policy focus, heavily penalizing the offshoring of scientific talent and engineering operations.

Transition Rules and Retroactive Elections

The OBBBA provides highly technical transition rules for capturing the unamortized basis of domestic R&E expenditures stranded during the 2022–2024 TCJA period. The IRS issued Revenue Procedure 2025-28 to govern these mechanics.

For “eligible taxpayers”—defined as small businesses with average annual gross receipts of $31 million or less over the prior three years—the OBBBA permits a retroactive election. These small businesses can elect to apply the full expensing rules of Section 174A retroactively to tax years 2022, 2023, and 2024 by filing amended returns. This election must be made no later than July 6, 2026.

For larger corporations exceeding the $31 million threshold, amending prior returns is prohibited. Instead, Rev. Proc. 2025-28 dictates an automatic change in accounting method implemented on a cut-off basis. These taxpayers may elect to deduct any remaining unamortized domestic R&E expenditures either entirely in the first tax year beginning after December 31, 2024 (the 2025 tax year), or ratably over two taxable years (2025 and 2026).

Taxpayers utilizing Section 174A must carefully coordinate with IRC Section 280C(c). If a taxpayer claims the gross Section 41 research credit, they must reduce their domestic Section 174A R&E deduction by the exact amount of the credit claimed to prevent a double tax benefit. Alternatively, the taxpayer can make an irrevocable election under Section 280C(c)(2) on a timely filed return to claim a reduced research credit, thereby preserving their full R&E expense deduction.

Federal Case Law and Form 6765 Reporting Enhancements

The IRS has significantly escalated its scrutiny of R&D tax credit claims, demanding rigorous, contemporaneous substantiation. Following the issuance of Chief Counsel Memorandum (CCM) 20214101F, the IRS began requiring detailed narratives identifying every business component, the specific research activities performed, the individuals who performed them, and the specific technological information sought for all refund claims.

To enforce this transparency on original filings, the IRS finalized comprehensive changes to Form 6765 (Credit for Increasing Research Activities) in early 2026, implementing “Section G”. Section G mandates project-specific reporting and detailed business component disclosures, effectively eliminating the prior practice of summary-level aggregate reporting. Taxpayers must now explicitly tie QREs and the four-part test narrative to discrete projects.

Federal tax court jurisprudence over the past several years reflects this heightened evidentiary standard. In Little Sandy Coal Co. v. Commissioner, the Seventh Circuit ruled against the taxpayer because they failed to provide adequate contemporaneous documentation (such as time-tracking data tied to specific projects) to prove that “substantially all” of their activities constituted a process of experimentation. The court explicitly rejected estimations and after-the-fact extrapolations by employees. Similarly, in Meyer, Borgman & Johnson, Inc. v. Commissioner, a structural engineering firm was denied the credit because their contracts failed to prove they bore the financial risk of the research, triggering the “funded research” exclusion under Section 41(d)(4)(H). In Siemer Milling Co. v. Commissioner, the court held that identifying discrete business components and their corresponding technical uncertainties at the outset was absolutely necessary, dispensing with prior precedents that allowed for broader conclusory statements.

The Minnesota State Research and Development Tax Credit Framework

The State of Minnesota operates a sophisticated R&D tax credit program designed to stimulate the local high-technology economy and prevent intellectual property flight to competing jurisdictions. Codified under Minnesota Statutes Section 290.068, the state credit is closely tethered to the federal IRC Section 41 definitions but features critical deviations tailored to isolate and reward domestic state investment.

Minnesota Statute § 290.068 Eligibility and Mechanics

To claim the Credit for Increasing Research Activities in Minnesota, the core activities must meet the federal four-part test as defined in IRC Section 41(d). However, Minnesota imposes a strict geographic limitation: all QREs claimed for the state credit must be incurred for research physically conducted within the borders of Minnesota. Expenses for research conducted in other states or internationally are wholly excluded from the state calculation.

The Minnesota R&D credit utilizes a tiered rate structure designed to disproportionately reward smaller to mid-sized research budgets while still providing a ceilingless incentive for massive corporate conglomerates. For taxable years beginning after December 31, 2016, the credit equals:

• Tier 1: 10 percent of the first $2,000,000 of the excess (if any) of the Minnesota qualified research expenses for the taxable year over the base amount.
• Tier 2: 4 percent on all such excess expenses over $2,000,000.

The calculation of the “base amount” is a crucial area where Minnesota law deviates from federal law. Under Minnesota law, the base amount is calculated using the traditional federal methodology (fixed-base percentage multiplied by average annual gross receipts). However, for tax years after May 30, 2017, the average annual gross receipts and aggregate gross receipts must be calculated using only Minnesota sales or receipts apportioned under Section 290.191. Furthermore, taxpayers with QREs but zero gross receipts can still claim the Minnesota R&D credit, a vital lifeline for pre-revenue biotechnology firms.

2025 Legislative Overhaul: Partial Refundability

Historically, the Minnesota R&D credit was strictly nonrefundable (with a brief exception between 2009 and 2013). Unused credits could only be carried forward to offset future corporate franchise tax liabilities for up to 15 years. This structure severely disadvantaged early-stage startups that incurred massive R&E expenditures but generated zero taxable income, effectively locking their tax benefits behind years of prospective operational losses.

On June 14, 2025, Minnesota Governor Tim Walz signed House File 9 (H.F. 9) into law, revolutionizing the state’s innovation incentives by making the R&D credit partially refundable. For tax years beginning after December 31, 2024, if a taxpayer’s R&D credit exceeds their Minnesota tax liability (after the liability has been reduced to zero), they may make an irrevocable election on a timely filed return (via Schedule RD) to receive a cash refund of the excess credit.

The refundability is subject to strict scaling rates outlined in Minn. Stat. § 290.068, Subd. 3b:

• Tax Year 2025: 19.2 percent of the excess unused credit.
• Tax Years 2026 and 2027: 25 percent of the excess unused credit.
• Tax Years 2028 and Beyond: The lesser of 25 percent or an adjusted rate determined annually by the Commissioner of Revenue. This adjustable rate is designed to ensure total statewide R&D refunds do not exceed a legislative target cap of $25,000,000 per year.

Any portion of the credit that is not refunded continues to be available as a carryover for up to 15 years. This legislative change immediately alters the cash flow dynamics for loss-generating enterprises in Saint Paul, enabling them to reinvest state-provided liquidity directly back into local payroll and supply chains. For S corporations and partnerships that generate the credit, the election is made at the pass-through level by the partners, members, or shareholders.

Minnesota Case Law: General Mills and IBM

Minnesota’s tax administration framework has been heavily shaped by landmark litigation, most notably the consolidated tax court decisions of General Mills, Inc. v. Commissioner of Revenue and International Business Machines (IBM) Corporation v. Commissioner of Revenue.

These cases dealt primarily with the 2011 tax year and focused on the statutory interpretation of the “base amount” under Minn. Stat. § 290.068 prior to the 2017 legislative amendments. The Minnesota Supreme Court affirmed the Tax Court’s ruling on two critical fronts. First, it held in favor of the Commissioner that Minnesota implicitly incorporated the federal “minimum base amount” limitation. Found in IRC Section 41(c)(2), this rule dictates that the base amount can never be less than 50 percent of the current year’s QREs, preventing taxpayers from generating excessively large credits simply because their historical base was near zero.

Second, the Court held in favor of the taxpayers (General Mills and IBM), ruling that under the older version of the statute, the term “aggregate gross receipts” used in the fixed-base percentage denominator referred to federal (worldwide) aggregate gross receipts, not just Minnesota-apportioned receipts. IBM successfully argued that the state statute adopted the federal definition by reference without an explicit carve-out.

While the Minnesota legislature subsequently amended the statute in 2017 to explicitly require Minnesota-only receipts for the base amount computation (nullifying the IBM finding for future years), the rulings established a strong legal precedent regarding how deeply Minnesota law intertwines with the IRC. The court stipulated that unless the state legislature specifically overrides a federal definition in writing, the federal mechanical rules apply to the state calculation.

Other notable state jurisprudence includes Humana MarketPoint, Inc. v. Commissioner, where the Minnesota Supreme Court upheld “look-through” market sourcing for intercompany transactions, affecting how out-of-state receipts are apportioned for tax liability, and Uline, Inc. v. Commissioner, which ruled that market research performed by sales representatives does not protect a company from Minnesota franchise taxation under Public Law 86-272, thereby establishing strict nexus thresholds for out-of-state firms claiming Minnesota credits.

Saint Paul’s Industrial Geography and Economic History

The economic development of Saint Paul, Minnesota, is inextricably tied to its geography and infrastructure. Positioned at the confluence of the Mississippi and Minnesota Rivers, Saint Paul emerged in the mid-19th century as a primary frontier trading post and the absolute head of navigation for commercial steamboats traveling north from the Gulf of Mexico. Its topography—characterized by high river bluffs—provided a natural fortress for early infrastructure and commercial outposts.

As the 19th century progressed, Saint Paul rapidly evolved from a river port into a colossal national transportation and rail center. Railroad tycoons, notably James J. Hill of the Great Northern Railway, headquartered their empires in Saint Paul, turning the city into a distribution nexus that connected the agricultural bounty of the Midwest with the industrial manufacturing centers of the East Coast and Chicago. This geographic advantage birthed the “Midway” district, a vast industrial and warehousing corridor strategically positioned between the downtowns of Saint Paul and Minneapolis, built alongside the Minnesota Transfer Railway.

The Midway district, along with the East Side of Saint Paul, became the incubators for heavily concentrated manufacturing. Historically, the area was dominated by livestock processing at the massive Union Stockyards in South Saint Paul, large-scale commercial brewing (such as Hamm’s Brewery), and early automotive manufacturing, crowned by the completion of the Ford Motor Company Twin City Assembly Plant in 1925.

Over the decades, as heavy, smokestack industries shifted due to global economic pressures and the offshoring of commodity manufacturing in the 1970s and 1980s, Saint Paul’s workforce and infrastructure were forced to adapt. The city pivoted its immense engineering talent pool toward advanced manufacturing, specialty chemicals, medical technology, and software computing. Today, Saint Paul is characterized by “light industry”—high-technology laboratories, advanced precision manufacturing, clean tech, and life sciences. This transition has been fostered heavily by the Saint Paul Port Authority, which leads the nation in the strategic remediation of environmentally distressed “brownfield” sites, redeveloping former heavy industrial zones into modern, mixed-use business centers that support immense R&D activity.

The following five case studies examine unique industries that were born out of Saint Paul’s specific historical and geographic conditions, detailing their evolution and demonstrating how modern operations within these sectors qualify for both the United States Federal and Minnesota State R&D tax credits under current law.

Medical Device Manufacturing (Cardiovascular Technology)

Historical Development in Saint Paul: Minnesota’s dominance in the medical device industry—a geographic cluster colloquially known as “Medical Alley”—is rooted in a mid-20th-century synergy between the state’s clinical research institutions and its precision manufacturing workforce. While much of the early pacemaker development by Earl Bakken and Dr. C. Walton Lillehei occurred across the river at the University of Minnesota, the Saint Paul ecosystem became a vital epicenter for the advanced machining and material science required for cardiovascular technology.

In 1976, an entrepreneur named Manny Villafana founded St. Jude Medical in Little Canada, an inner-ring suburb intrinsically tied to the Saint Paul industrial supply chain. St. Jude Medical was established specifically to develop and commercialize a revolutionary bi-leaflet artificial heart valve, an invention that emerged from the trial-and-error engineering of the era and was co-developed with University of Minnesota surgeon Dr. Demetre Nicoloff. Saint Paul’s existing base of precision machinists, initially trained by the railroad and automotive sectors, possessed the exact metallurgical skills required to machine pyrolytic carbon for implantable valves. St. Jude Medical grew into a multi-billion-dollar global enterprise (later acquired by Abbott Laboratories for $25 billion in 2017), permanently anchoring cardiovascular engineering as a premier industry in the Saint Paul region.

Modern R&D Application:

A Saint Paul-based medical technology startup is developing a novel, minimally invasive transcatheter aortic valve replacement (TAVR) system utilizing a new bio-absorbable polymer intended to reduce post-operative thrombosis.

Application of the Federal Four-Part Test (IRC § 41):

• Permitted Purpose: The objective is to develop a new business component (a Class III medical device) that improves product performance and patient safety.
• Technological in Nature: The development relies heavily on the principles of biological sciences, fluid dynamics, and mechanical engineering.
• Elimination of Uncertainty: At the project’s inception, the engineering team was uncertain of the exact polymer thickness required to withstand systolic blood pressure while maintaining flexibility for catheter delivery.
• Process of Experimentation: The firm engineers multiple valve prototypes, conducts in vitro pulse duplicator testing, runs computational fluid dynamics (CFD) software simulations, and iterates on the geometric design based on stress-failure analysis.

Federal and State Tax Credit Eligibility: Under the federal OBBBA rules, the startup can immediately expense the domestic engineering wages, prototype materials, and laboratory overhead under IRC Section 174A in the 2025 tax year, eliminating the prior TCJA need for five-year amortization. To claim the Section 41 credit, the startup must document the specific hours spent by its mechanical engineers on CFD simulations and tie those wages to the TAVR project in Section G of Form 6765.

For the Minnesota State Credit, because all the bench testing and polymer formulation occurs in their Saint Paul laboratory, 100 percent of these expenses are Minnesota-eligible QREs under Minn. Stat. § 290.068. If the startup is in the clinical trial phase and generating no state tax liability, it can utilize the 2025 H.F. 9 legislation to elect a 19.2% cash refund on its excess state R&D credits, securing vital non-dilutive capital to fund the FDA 510(k) clearance process.

Advanced Materials and Specialty Chemicals

Historical Development in Saint Paul: The advanced materials industry in Saint Paul is synonymous with the Minnesota Mining and Manufacturing Company, globally recognized as 3M. Founded originally as a failed corundum mining venture in Northern Minnesota in 1902, the company relocated its factory to Saint Paul in 1910. The relocation was driven by the financial backing of Saint Paul magnate Lucius P. Ordway, who sought to leverage the city’s unparalleled railroad access to raw materials and national distribution markets.

Settling on Saint Paul’s East Side near the Chicago, Saint Paul, Minneapolis and Omaha rail lines, 3M transformed from producing basic sandpaper into a powerhouse of chemical engineering and adhesives. Under the leadership of William McKnight, 3M established one of the nation’s first dedicated Central Research Laboratories in Saint Paul in 1937. The company institutionalized the concept of corporate R&D by creating the “15 percent rule,” allowing scientists dedicated time to experiment. This environment led to the invention of masking tape, Scotch tape, and eventually advanced fluorochemicals developed via electrofluorochemical processes pioneered in Saint Paul labs.

Modern R&D Application:

An advanced materials manufacturer located in the Saint Paul Port Authority’s Williams Hill Business District is developing an ultra-thin, heat-dissipating thermal interface adhesive designed to bind solid-state electric vehicle (EV) battery arrays without degrading the lithium-ion cells.

Application of the Federal Four-Part Test (IRC § 41):

• Permitted Purpose: The goal is to develop a new adhesive product with improved thermal conductivity and sheer strength.
• Technological in Nature: The project is rooted in organic chemistry, thermodynamics, and material science.
• Elimination of Uncertainty: The researchers are uncertain of the optimal ratio of alumina fillers to silicone matrix required to achieve a thermal conductivity of >5 W/m·K without losing adhesive tack or increasing viscosity to unmanufacturable levels.
• Process of Experimentation: Chemists formulate dozens of distinct chemical batches in the lab. Each batch is subjected to rigorous stress testing, including thermal cycling chambers, lap shear strength tests, and rheology evaluations to iteratively refine the formula.

Federal and State Tax Credit Eligibility: The wages of the chemists and laboratory technicians, as well as the cost of the raw chemical supplies consumed during the testing iterations (e.g., silicone resins, alumina powder, test substrates), are highly defensible QREs. The federal credit requires meticulous documentation of these iterations to defend against IRS scrutiny regarding routine quality control; the company must prove they are creating a new formulation, not merely batch-testing an existing one.

Under Minnesota law, the company can claim the 10% credit on the first $2,000,000 of excess QREs generated at the Williams Hill lab. Because the gross receipts utilized for the base amount calculation are restricted solely to Minnesota-apportioned sales, a multinational chemical firm with a vast global footprint but smaller localized sales within the state of Minnesota may see an advantageous fixed-base percentage calculation, thereby lowering the base amount hurdle and maximizing the credit yield on the Saint Paul lab’s expenditures.

Industrial Cleaning and Water Management Technologies

Historical Development in Saint Paul: The industrial cleaning and water management sector developed in Saint Paul entirely due to the entrepreneurial vision of Merritt J. Osborn. In 1923, Osborn founded “Economics Laboratory” in the basement of the Endicott Building in downtown Saint Paul. Osborn observed that local hotels and meatpackers suffered from severe boiler scale issues and carpet stains. Rather than merely selling chemicals, Osborn innovated a service-based model—guaranteeing the economic outcome of a clean boiler or scale-free pipe.

To fulfill these guarantees, the company (which eventually rebranded as Ecolab) had to constantly engineer better, highly concentrated chemical detergents and automated dispensing machines to ensure precise dosing and reduce human exposure to caustic materials. The presence of massive food processing and livestock centers in nearby South Saint Paul (such as the Union Stockyards) provided a direct, local testing ground for these sanitation chemicals and dairy sterilizers. Today, Ecolab is a Fortune 500 company driving global water resilience and infection prevention, maintaining a massive R&D footprint in the region.

Modern R&D Application:

A Saint Paul-based sanitation engineering firm is developing a closed-loop, automated wastewater filtration and chemical recapture system for commercial poultry processing plants.

Application of the Federal Four-Part Test (IRC § 41):

• Permitted Purpose: Developing a new industrial process and physical equipment system to improve water recycling efficiency.
• Technological in Nature: Grounded in chemical engineering, hydrodynamics, and mechanical engineering.
• Elimination of Uncertainty: The company faces uncertainty regarding the appropriate membrane pore size and operating pressure needed to filter out protein-heavy organic waste without causing catastrophic membrane fouling.
• Process of Experimentation: Engineers build pilot-scale filtration skids, running varied concentrations of simulated wastewater through the system at different flow rates, measuring effluent purity and pressure drops to optimize the system architecture.

Federal and State Tax Credit Eligibility: The cost of constructing the pilot-scale filtration skid (materials and supplies) and the mechanical engineering labor qualify as QREs. Under the newly enacted OBBBA, the firm can immediately expense the domestic costs of building this pilot model under IRC Section 174A in 2025. However, the firm must be careful to coordinate IRC 174A with IRC 280C(c). If they claim the federal Section 41 R&D credit, they must reduce their 174A deduction by the amount of the credit, or elect to take a reduced credit on a timely filed return.

On the state level, these activities qualify under Minn. Stat. § 290.068. The integration of proprietary sensors and data-analytics software into the dispensing equipment also qualifies. Because this software is developed to be embedded into a physical product for commercial sale, it escapes the restrictive federal “Internal Use Software” high-threshold of innovation test, making the software engineering wages fully eligible for both the federal and state credits.

High-Performance Computing and Software Engineering

Historical Development in Saint Paul: One of the most profound industrial shifts in Saint Paul’s history was the birth of the modern supercomputing industry. In 1946, a group of former US Navy codebreakers (including Howard Engstrom and William Norris) partnered with investment banker John Parker to establish Engineering Research Associates (ERA). Seeking a secure, discreet location to fulfill classified military contracts away from the probing eyes of Washington, Parker utilized his former wooden glider factory located at 1902 West Minnehaha Avenue in Saint Paul’s Midway industrial district.

In this unassuming Saint Paul factory, ERA developed the “Atlas I,” one of the world’s first stored-program computers. Critically, leveraging the nearby material science expertise of 3M, ERA engineers invented and perfected magnetic drum memory, replacing fragile mercury delay lines and vacuum tubes with stable, rotating metallic cylinders coated in magnetic material. ERA was eventually acquired by Remington Rand to become their UNIVAC division, and ERA alumni (such as Seymour Cray) subsequently founded Control Data Corporation and Cray Research. This lineage transformed the Twin Cities into a premier national hub for mainframe computing, avionics, and software systems.

Modern R&D Application:

A software and hardware engineering firm in the Midway district is developing a proprietary quantum-encryption software protocol designed to integrate seamlessly into existing legacy banking mainframes without requiring physical hardware overhauls.

Application of the Federal Four-Part Test (IRC § 41):

• Permitted Purpose: Developing new computer software to improve the security and performance of banking infrastructure.
• Technological in Nature: Purely rooted in the principles of computer science and algorithmic mathematics.
• Elimination of Uncertainty: There is deep technological uncertainty regarding whether a quantum-resistant cryptographic algorithm can be compressed and optimized to execute efficiently on legacy 32-bit mainframe architectures without inducing system-crashing latency.
• Process of Experimentation: Software engineers write multiple variations of the code in assembly and C++, compiling and executing them in sandbox environments. They utilize performance-profiling tools to identify processing bottlenecks, continually rewriting the logic tree to eliminate micro-second delays until a viable execution state is achieved.

Federal and State Tax Credit Eligibility: Under federal scrutiny, software claims are heavily audited. However, because this software is being developed to be licensed or sold to external banking clients, it avoids the IUS exclusion and qualifies under the standard four-part test. The wages of the software developers represent the bulk of the QREs. The firm must ensure they do not run afoul of the “funded research” exclusion under Section 41(d)(4)(H); their contracts with the banks must stipulate that the Saint Paul firm retains the intellectual property rights to the base algorithm and is only paid if the software functions successfully (bearing the financial risk).

Under Minnesota law, software development unequivocally qualifies if the coding is performed in-state. Because computing firms possess highly compensated engineering teams, the Minnesota tiered structure offers significant tax offsets for high payroll footprints localized in Saint Paul. If the firm is pre-profit, they can leverage the 2025 refundability election to recover 19.2% of the credit as cash to pay for the expensive developer talent.

Legal Publishing, Database Technology, and Data Science

Historical Development in Saint Paul: The intersection of publishing, law, and eventually data science took root in Saint Paul in 1872 when a 17-year-old named John B. West began selling law books to local attorneys. West recognized a critical inefficiency: lawyers desperately needed prompt access to Minnesota Supreme Court decisions, but no centralized distribution system existed. In 1876, West founded the West Publishing Company in downtown Saint Paul, situated on the bluffs overlooking the Mississippi River.

West Publishing revolutionized American law by inventing the “National Reporter System” and the “Key Number System,” a brilliant, uniform indexing grid for all American legal cases that enabled lawyers nationwide to find precedent. As the 20th century progressed, the sheer volume of printed legal volumes became unsustainable. Leveraging the emerging computer technologies in the region fostered by ERA and Univac, West Publishing launched “Westlaw” in 1975, successfully digitizing millions of case files into a searchable electronic database. This transition from physical book printing to digital data aggregation laid the foundation for the Twin Cities’ modern strengths in information services, data processing, and software publishing.

Modern R&D Application:

A legal-tech startup based in downtown Saint Paul is developing an Artificial Intelligence (AI) platform utilizing Natural Language Processing (NLP) to autonomously ingest, summarize, and cross-reference contradictory rulings in complex, multi-jurisdictional tort litigations.

Application of the Federal Four-Part Test (IRC § 41):

• Permitted Purpose: Developing a new software platform to improve the performance and functionality of legal research.
• Technological in Nature: Relies on the principles of computer science, specifically machine learning and NLP.
• Elimination of Uncertainty: The primary uncertainty lies in the algorithmic design: Can a neural network be trained to accurately parse the semantic nuances of appellate court jargon and correctly identify “overruled” or “distinguished” precedents without generating high rates of false positives?
• Process of Experimentation: Data scientists train algorithmic models using different neural network architectures (e.g., recurrent neural networks vs. transformer models). They feed test sets of legal data into the models, evaluate the accuracy of the summarization output, adjust the weighted parameters, and retrain the system in an iterative loop.

Federal and State Tax Credit Eligibility: The wages of the data scientists and cloud-computing infrastructure costs rented exclusively to run the research environments (e.g., AWS or Azure server costs) qualify as QREs under IRC Section 41(b)(1)(A). Regarding federal documentation, the firm must meticulously align these server costs and AI engineering hours with the specific NLP algorithm components in Section G of the new Form 6765. Furthermore, any costs associated with routine data entry or manual legal research by lawyers to build the training set do not qualify, as they fail the “Technological in Nature” test, which requires hard computer science.

From a Minnesota perspective, if this startup is currently operating at a net-operating loss while heavily investing in data science payroll in Saint Paul, the 2025 HF 9 refundability provision is highly lucrative. They can elect to surrender their carryforward position in exchange for a 19.2% immediate cash refund on their calculated Minnesota R&D credit, drastically improving their operational runway and allowing them to expand their Saint Paul footprint.

Final Thoughts

The Research and Development tax credit, at both the federal and state levels, remains one of the most vital financial mechanisms for fostering corporate innovation in the United States. The federal landscape is currently experiencing a period of intense transition. The IRS’s rigorous project-level enforcement via the redesigned Form 6765 demands unprecedented substantiation of the four-part test, while the enactment of the OBBBA in 2025 has mercifully restored the immediate expensing of domestic R&E under Section 174A, repairing the cash-flow damage inflicted by the TCJA.

Concurrently, the State of Minnesota has aggressively modernized its tax policy to defend its status as a premier technology hub. By introducing partial refundability to Minn. Stat. § 290.068, Minnesota has ensured that its credit is no longer just a tax-liability offset for established, profitable conglomerates, but a tangible cash-flow generator for high-burn, pre-revenue startups. The state’s adherence to federal base-amount mechanics, clarified by the General Mills and IBM rulings, provides a predictable, albeit complex, calculation framework.

Saint Paul’s industrial history—from the steamboat logistics that supplied West Publishing, to the railroad yards that enabled 3M and Ecolab, to the wartime glider factories that incubated the American computing industry—demonstrates that technological advancement does not happen in a vacuum. It requires an intersection of geographic utility, specialized labor, and institutional support. By meticulously aligning their modern engineering and software development efforts with the strict parameters of the tax code, Saint Paul’s contemporary businesses can continue to leverage federal and state incentives to finance the next century of industrial evolution.

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.