The Technical Architecture of Innovation: Analyzing the Discovery of Technological Information in the Minnesota R&D Tax Credit

Discovering technological information refers to the application of hard science principles—such as engineering, physics, or computer science—to resolve technical uncertainties during the creation or improvement of a business component. Within the Minnesota regulatory framework, this requirement mandates that research activities fundamentally rely on these scientific disciplines rather than social sciences, aesthetic design, or routine data collection.1

The discovery of technological information acts as the scientific gateway for the Minnesota Credit for Increasing Research Activities, ensuring that tax incentives are directed toward activities that push the boundaries of a taxpayer’s internal knowledge base through the “hard sciences”.3 To satisfy this requirement, a business must demonstrate that the information being sought is not merely a matter of artistic taste or seasonal style but is instead an attempt to uncover technical facts regarding the capability, method, or design of a product or process.2 This necessitates a systematic process where the taxpayer turns to the physical sciences, biological sciences, engineering, or computer science to navigate through technical barriers.1 The “discovery” does not require that the information be new to the world or the industry at large; rather, it must be new to the taxpayer, who must conduct their own experimentation to obtain the information because it is not readily available through standard practice or public domain resources.1

Statutory Framework: The Genesis and Evolution of Section 290.068

The Minnesota Credit for Increasing Research Activities, codified under Minnesota Statutes Section 290.068, represents the state’s primary legislative vehicle for incentivizing local innovation.8 Established in 1981, the credit was explicitly patterned after the federal research credit found in Section 41 of the Internal Revenue Code (IRC), creating a symbiotic relationship between state and federal tax policy that persists to this day.10 This alignment ensures that Minnesota businesses can rely on a consistent set of definitions when evaluating their research and development (R&D) activities for both federal and state purposes.3

The legislative intent behind Section 290.068 is to attract and retain high-tech industries, create high-paying jobs, and stimulate the development of new products within the state.10 By providing a credit against corporate franchise or individual income taxes, Minnesota reduces the after-tax cost of innovation, encouraging firms to invest in more experimental projects than they might otherwise pursue.14 The credit is structurally “incremental,” meaning it is designed to reward companies that increase their research spending relative to a historical “base amount”.10 This structure prevents the credit from becoming a simple subsidy for baseline operations and instead focuses the incentive on new, expanded research efforts.3

Since its inception, the credit has undergone several significant modifications to adapt to changing economic conditions. For instance, between 2010 and 2012, the legislature made the credit refundable to provide immediate liquidity to businesses during the economic recovery following the Great Recession.3 While it returned to a nonrefundable status in 2013, the 2025 legislative session has once again introduced a partial refundability mechanism, recognizing the critical role cash flow plays for modern startups and pre-revenue technology firms.14

The credit is available to C corporations, individual partners in partnerships, and shareholders in S corporations, provided the underlying research activities are conducted within the borders of Minnesota.8 This geographic limitation is a fundamental departure from the federal credit, which allows for research across the entire United States.6 For Minnesota taxpayers, the “discovery” must occur in a local lab, office, or manufacturing facility to generate state-level tax benefits.2

Dissecting the “Technological in Nature” Standard

The requirement to discover information that is “technological in nature” serves as the scientific filter of the research credit. It mandates that the process used to resolve a technical uncertainty must be grounded in the “hard sciences”.1 This ensures that the state is not subsidizing purely aesthetic, commercial, or social science research, which does not contribute to the state’s technical infrastructure in the same manner as physical or engineering breakthroughs.1

The Role of Physical and Biological Sciences

In the context of the Minnesota R&D credit, physical and biological sciences include disciplines such as chemistry, physics, and biology.2 For a Minnesota-based medical device company, discovering technological information might involve applying the principles of biochemistry to develop a new coating for a stent that prevents blood clots.7 The uncertainty here involves whether a specific chemical compound will interact safely with human tissue while maintaining its structural integrity under physiological pressure.5 By conducting laboratory tests to observe these chemical interactions, the company is discovering technological information that is fundamentally biological and chemical in nature.2

Engineering as a Primary Pillar of Discovery

Engineering represents perhaps the most common field through which technological information is discovered in Minnesota’s robust manufacturing sector.10 Whether it is mechanical, electrical, or chemical engineering, the process involves using established scientific laws to design, test, and refine complex systems.1 For example, a manufacturer of industrial furnaces might seek to discover how a new heat exchanger design affects thermal efficiency.2 The “discovery” occurs during the iterative testing phase where engineers use thermodynamics and fluid dynamics to analyze airflow and heat transfer rates.4 If the success or failure of the design depends on these engineering principles, the activity satisfies the technological in nature test.2

Computer Science and the Modern Innovation Landscape

The Minnesota Department of Revenue explicitly includes computer science as a qualifying field for the discovery of technological information.2 However, there is a sharp distinction between routine software development and research that is technological in nature. To qualify, software development must go beyond the mere application of existing tools or standard coding practices to solve a business problem.2 It must instead involve the development of new algorithms, the optimization of complex data structures, or the resolution of hardware-software integration challenges that require the application of computer science principles.3

The “Discovery” Doctrine: New to the Taxpayer vs. New to the Industry

One of the most misunderstood aspects of the technological information test is the definition of “discovery.” Taxpayers often mistakenly believe they must be the first in their industry or the first in the world to find a solution to a problem.6 In reality, both federal and Minnesota guidance clarify that the discovery requirement is satisfied if the information is new to the taxpayer.1

This “Discovery Rule” acknowledges that even if a competitor has already solved a technical problem, the information regarding how they solved it—the specific chemical formulas, the exact engineering tolerances, or the underlying source code—is typically proprietary and not available to others.15 Therefore, a Minnesota company that undertakes its own process of experimentation to solve the same problem must still “discover” the technological information required to achieve its specific goals.4

However, the information cannot be readily ascertainable by a person with ordinary skill in the relevant field through standard procedures.15 If a solution is published in a trade journal or is a matter of common industry knowledge, the taxpayer is not discovering information; they are merely applying known facts.1 The “discovery” must be the result of a systematic attempt to eliminate uncertainty where the path forward was not clear at the beginning of the project.1

Technical Uncertainties and the Section 174 Intersection

To understand the meaning of “discovering technological information,” one must analyze its relationship with IRC Section 174, which governs the “Elimination of Uncertainty Test”.5 This test is the first hurdle of the Four-Part Test and requires that the activity aim to eliminate uncertainty regarding the “capability,” “method,” or “design” of a business component.1

1. Capability Uncertainty: This exists when the taxpayer does not know at the outset whether the desired objective is even possible to achieve within technical constraints.1
2. Method Uncertainty: Here, the taxpayer may know the goal is possible but does not know the specific procedure or technical path to reach it.1
3. Design Uncertainty: Even if capability and method are known, the taxpayer may be uncertain about the final technical specifications or configuration that will optimize performance.1

The discovery test builds upon this by specifying that the way these uncertainties are resolved must be through technological means.2 If a company eliminates design uncertainty by conducting a focus group on which color consumers prefer, they have eliminated an uncertainty, but they have not discovered technological information.2 Conversely, if they eliminate design uncertainty by testing which of three different geometric configurations best dissipates heat in a circuit board, they have discovered technological information through the application of physics and engineering.4

The Process of Experimentation in Minnesota Labs

The “Process of Experimentation Test” is the mechanism by which technological information is discovered.1 In Minnesota, this requires that substantially all of the research activities constitute a systematic evaluation of alternatives.2 This is not a haphazard “try and see” approach but a rigorous scientific method.1

The Minnesota Department of Revenue looks for evidence of a structured cycle 2:

• Identification of Uncertainty: Defining the technical challenge that prevents the project from moving forward.4
• Formulation of Alternatives: Proposing multiple potential solutions or “hypotheses” grounded in the hard sciences.2
• Evaluation of Alternatives: Testing these hypotheses through modeling, simulation, prototyping, or systematic trial and error.1
• Refinement or Discarding: Using the data gathered from testing to refine the approach or abandon unsuccessful paths and try new alternatives.2

This process is what distinguishes qualified research from routine development. In an audit, the Minnesota DOR will often ask to see the results of “failed” experiments.2 If a company can only show a straight line from start to finish with no iterations, it suggests that there was no technical uncertainty to begin with, and therefore no discovery of technological information occurred.1 The presence of “technical risk”—the possibility that the project might fail due to technical barriers—is a hallmark of a genuine discovery process.2

Qualified Research Expenses (QREs) and the Discovery Connection

For an expense to be eligible for the Minnesota R&D tax credit, it must have a direct nexus to the activity of discovering technological information.5 The Minnesota Department of Revenue categorizes these into four main buckets, each with its own documentation requirements.2

Wages for Qualified Services

Wages represent the largest portion of research claims in Minnesota, typically accounting for about three-quarters of the total QREs claimed by C corporations.10 These wages must be for employees performing “qualified services,” which are divided into three types:

1. Direct Research: The actual “hands-on” work of performing experiments, writing code, or building prototypes.1
2. Direct Supervision: First-line management of the individuals performing the research. This includes a lead engineer reviewing the technical work of a junior engineer or a lab manager validating test protocols.1 It does not include high-level corporate strategy or human resource management.1
3. Direct Support: Activities that assist the research process, such as a technician cleaning lab equipment or a programmer maintaining a dedicated research server.1

Costs of Supplies

Supplies include any tangible property used and consumed during the research process.2 This often includes chemicals, specialized alloys, or materials used to create mockups.14 It is critical to note that general administrative supplies, land, and depreciable property (such as the lab building itself) are excluded.2

Contract Research Expenses

Many Minnesota firms outsource portions of their technical discovery to universities or specialized labs.10 Taxpayers can claim 65% of the amounts paid to these third parties, provided the research is conducted in Minnesota.3 To qualify, the contract must be structured so that the taxpayer bears the “economic risk” (i.e., they must pay even if the research fails) and retains “substantial rights” to the results.15

Minnesota Department of Revenue: Guidance, Audits, and Compliance

The Minnesota Department of Revenue (DOR) provides specific guidance to help taxpayers substantiate their claims for the discovery of technological information. The primary document for making these claims is Schedule RD, Credit for Increasing Research Activities.2

Documentation Standards and the Audit Manual

The OLA has historically criticized the DOR for providing “limited guidance” on documentation, leading to a high degree of scrutiny during audits.10 However, current DOR publications emphasize that records must be “contemporaneous”—meaning they must be created at the time the research is being performed.2

During an audit, the DOR will likely request the following items to verify the discovery process 2:

1. List of Research Activities: A narrative describing the specific new or improved products or processes worked on.2
2. Description of Improvements: An explanation of how each business component became better in terms of “function, performance, reliability, or quality”.2
3. Experimentation Process Documentation: A timeline or outline of the steps taken to resolve technical uncertainties.2
4. Raw Research Data: Lab reports, test results, project checklists, and project authorization records.2

Schedule RD: Analyzing the 2024 and 2025 Forms

The Schedule RD form includes specific questions designed to gauge the reliability of a taxpayer’s claim.25 On Page 3 of the form, taxpayers must disclose:

• Whether a CPA, attorney, or consultant assisted in the calculation or conducted a formal R&D study.25
• The method of calculation for wages, supplies, and contract research, with check-boxes for “Review of contemporaneous records,” “Estimation,” or a “Combination”.25

This focus on the method of calculation suggests that the DOR places much higher value on claims backed by time-tracking software and real-time project management data than on “after-the-fact” estimates.2

The Impact of Judicial Rulings on Discovery Interpretation

The Minnesota Supreme Court has provided critical clarity on the technicalities of calculating the research credit, which indirectly affects how much discovery activity must be proven to achieve a certain credit value.

The General Mills and IBM Precedents

In 2019, the Minnesota Supreme Court ruled on two pivotal cases: General Mills, Inc. v. Commissioner of Revenue and IBM v. Commissioner of Revenue.13 These cases centered on the calculation of the “base amount,” which is the threshold of research spending a company must cross to earn a credit.13

The Court affirmed that Minnesota law incorporates the federal “minimum base amount” limitation found in IRC Section 41(c)(2).13 This rule states that the base amount can never be less than 50% of the current year’s qualified research expenses.13 This is a critical finding for Minnesota-based multistate businesses. Because their Minnesota base amount is calculated using only state-specific gross receipts (which may be low), but their state-level research expenses may be high (relative to their local operations), many companies would otherwise qualify for an enormous credit.13 The 50% floor ensures that even the most innovative Minnesota companies only receive a credit on, at most, half of their total QREs.16

Furthermore, the cases established that for the 2011 tax year, “aggregate gross receipts” referred to federal receipts, not just Minnesota receipts, which impacted the “fixed-base percentage” calculation.13 While the legislature has since refined these definitions to use Minnesota sales for more recent tax years, these rulings demonstrate the state’s commitment to aligning its technical calculations with federal standards while maintaining safeguards against excessive tax expenditures.2

The 2025 Pivot: Partial Refundability and its Strategic Implications

The introduction of partial refundability in 2025 represents a tectonic shift in Minnesota’s tax policy.18 By allowing companies to receive cash for unused credits, the state has significantly enhanced the “real-world” value of discovering technological information for startups that have not yet reached profitability.9

The Mechanics of the 2025 Refund

Under the new law (H.F. 9), a taxpayer can elect to have a portion of their current-year credit refunded once their tax liability has been reduced to zero.2 This is not a 100% refund of the unused credit; instead, it is a percentage-based cash payment.9

The refundability rate is set as follows 2:

• 2025: 19.2% of the excess credit.
• 2026–2027: 25.0% of the excess credit.
• 2028 and beyond: A rate determined annually by the Commissioner of Revenue, not to exceed 25%, to ensure total state refunds do not exceed a $25 million annual cap.14

For a pre-revenue biotech firm in Rochester or a software startup in Minneapolis, this means that for every $100 in R&D credit they generate through technological discovery, they could receive up to $25 in immediate cash flow—with the remaining $75 still carrying forward to offset future taxes for up to 15 years.9

Strategic Considerations for Pass-Through Entities

For partnerships and S corporations, the credit is generated at the entity level but flows through to the individual partners or shareholders.10 These individuals receive their share of the credit on Schedule KPI or Schedule KS.3 Under the new 2025 rules, the election for refundability is made by these individual partners or shareholders on their own tax returns.2 This requires careful coordination between the business entity (which must track and document the discovery of technological information) and the owners (who must decide whether to take the cash refund or the long-term carryforward).9

Comparative Analysis: Minnesota vs. Federal R&D Standards

While Minnesota’s credit is patterned after the federal version, there are several “traps for the unwary” where the two systems diverge. These differences can significantly impact the calculation and substantiation of the discovery process.12

The Exclusion of the Alternative Simplified Method (ASM)

At the federal level, many companies use the Alternative Simplified Method (ASM) to calculate their credit, which requires only three years of historical data and avoids the need to track gross receipts from the mid-1980s.6 Minnesota, however, does not allow the ASM.2 All Minnesota taxpayers must use the “Regular Research Credit” method, which involves calculating a fixed-base percentage based on 1984–1988 data (or using the “start-up” company rules if they did not exist then).16

Geographic Sourcing

Federal credits can be claimed for research performed anywhere in the U.S. and its possessions.6 Minnesota credits are strictly limited to research performed within the state.2 This creates a high documentation burden for companies with multi-state operations, as they must accurately “segment” the discovery of technological information to identify only those wages and supplies used in Minnesota labs.2

Unitary Group Allocation

One unique advantage of the Minnesota system is the ability to share credits within a “unitary business group”.8 If one member of a consolidated group in Minnesota performs the research and discovers technological information, the resulting credit can be used to offset the tax liability of any other member of the same unitary group.17 Since 2020, the DOR has clarified that even “carryforward” credits from prior years can be shared among group members, maximizing the utility of the credit for large, multi-entity corporations.19

Sector-Specific Realities: Biotech, Software, and Manufacturing

The discovery of technological information manifests differently across Minnesota’s diverse industrial landscape. Each sector faces unique technical uncertainties and scientific barriers.7

Biotechnology and Life Sciences

Minnesota is home to a world-class medical device and biotech cluster.7 In this sector, discovery often centers on clinical trials and pharmacological research.7

• Qualifying Discovery: Investigating the efficacy of a new drug delivery method; testing the biocompatibility of a heart valve; conducting Phase I-III clinical trials to discover information required for FDA approval.7
• Excluded Activities: Marketing research on physician prescribing habits; routine quality control testing of mass-produced medical supplies; packaging design.2

Advanced Manufacturing

From circuit boards to aerospace components, Minnesota manufacturers use the credit to refine production processes.4

• Qualifying Discovery: Developing a new high-speed assembly process using robotics; experimenting with 3D printing techniques for titanium parts; discovering how to reduce material waste through new chemical etching processes.4
• Excluded Activities: Aesthetic changes to the casing of a product; routine tool repair; “reverse engineering” a competitor’s machine to copy its design.2

Software Development

With the rise of “SaaS” (Software as a Service) companies in the Twin Cities, software R&D has become a major claimant of the credit.3

• Qualifying Discovery: Inventing a new data compression algorithm; solving technical latency issues in a cloud-based gaming platform; developing a new encryption protocol.3
• Excluded Activities: Designing the “look and feel” of a user interface; routine bug fixing; customizing a standard software package for a specific customer.2

Agriculture and Ag-Tech

Minnesota’s agricultural heritage is increasingly driven by technology.18

• Qualifying Discovery: Breeding new crop varieties with higher drought resistance; developing autonomous tractors using LIDAR and computer vision; researching new biopesticides.4
• Excluded Activities: Traditional crop rotation studies; market price forecasting; standard soil testing for fertilizer application.1

Comprehensive Illustrative Case Study: “Superior Robotics of St. Paul”

To provide a concrete example of how the discovery of technological information applies to the Minnesota R&D tax credit, consider the following scenario for a fictional company, Superior Robotics, based in St. Paul, MN.

The Project: High-Precision Surgical Robot Arm

Superior Robotics is developing a new robotic arm intended for use in microsurgery. The goal is to achieve a precision level of 0.01mm while ensuring the arm can compensate for the natural tremors of a human surgeon’s hand in real-time.

Phase 1: Identifying Technical Uncertainty

At the start of the project, the engineering team faces three core uncertainties 1:

1. Capability: Can current sensor technology provide data fast enough to allow for real-time tremor compensation without a “lag” that would endanger the patient?
2. Design: What geometric configuration of the arm’s joints will provide the maximum range of motion without sacrificing the 0.01mm precision?
3. Method: How can the control software filter out “tremor” signals from “intentional” surgical movements?

Phase 2: Discovering Technological Information

The team turns to the hard sciences to find answers 2:

• Mechanical Engineering: They use stress-testing and material science to evaluate different carbon-fiber composites for the arm’s structure. This discovery is “technological in nature”.2
• Computer Science: They develop a proprietary “Kalman Filter” algorithm to process sensor data. This relies on advanced mathematics and computer science principles.3
• Physics: They model the vibrations of the robot arm at different speeds to identify and eliminate “resonant frequencies” that could cause the arm to shake.2

Phase 3: The Process of Experimentation

Superior Robotics follows a systematic path 1:

• They build three different prototypes, each with a different joint configuration.2
• They conduct “stress-to-failure” tests in their St. Paul lab.2
• The first prototype fails because the carbon fiber is too brittle; they discard this design and refine the composite mix.2
• The second prototype has too much “latency” in the software; they spend four months optimizing the C++ code to reduce processing time.3

Phase 4: Calculating the 2025 Credit and Refund

Superior Robotics incurs the following QREs in Minnesota for 2025:

• Wages: $1,500,000 for 10 engineers and 2 supervisors.
• Supplies: $200,000 for carbon fiber, sensors, and prototype components.
• Contract Research: $100,000 paid to the University of Minnesota for robotic vision testing (65% = $65,000).
• Total QREs: $1,765,000.

Assume Superior Robotics is a “start-up” for credit purposes with a base amount of $500,000.

• Excess QREs: $1,765,000 – $500,000 = $1,265,000.
• Minnesota R&D Credit: $1,265,000 \times 10\% = \$126,500$.14

Because the company is still in the “pre-revenue” phase and has zero tax liability, they make the 2025 refundability election on their timely filed tax return 2:

• Refundable Portion: $\$126,500 \times 19.2\% = \$24,288$ cash refund.9
• Carryforward Portion: $\$126,500 – \$24,288 = \$102,212$ to be used over the next 15 years.9

Conclusion: The Strategic Value of Technological Discovery

The requirement to “discover technological information” is far more than a technicality in a tax statute; it is the defining standard for innovation in the State of Minnesota. For the business community, understanding this meaning is essential for unlocking significant financial incentives that can transform the trajectory of a company. By focusing on the hard sciences—engineering, physics, chemistry, biology, and computer science—Minnesota ensures that its tax dollars are invested in activities that build lasting technical capacity and economic resilience.

The 2025 legislative changes, specifically the move toward partial refundability, have made the discovery of technological information more valuable than ever, particularly for the startup ecosystem. However, this value comes with the responsibility of meticulous documentation. As the Minnesota Department of Revenue continues to refine its audit procedures, the ability to demonstrate a clear link between technical uncertainty and a scientific process of experimentation will be the difference between a successful claim and a costly disallowance.

For companies operating in Minnesota, the message is clear: innovation is not merely about having a good idea or an attractive product. It is about the rigorous, systematic, and technological quest to solve the “impossible” barriers of science. In the eyes of the Minnesota R&D tax credit, it is this quest—the discovery of technological information—that serves as the true engine of progress. In an increasingly competitive global economy, those who master both the science of discovery and the art of tax compliance will be best positioned to lead Minnesota’s next industrial revolution.

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