Navigating the Earning Member Construct in the Minnesota Credit for Increasing Research Activities

An Earning Member in the context of the Minnesota R&D tax credit is the specific entity within a unitary business group that performs qualified research and incurs related expenses in the state. This entity acts as the primary vehicle for generating the credit, though statutory provisions and recent guidance allow for the distribution of these tax benefits across the entire combined group.

The conceptual framework of the Earning Member has become a cornerstone of corporate tax planning for research-intensive firms operating within the North Star State. While the Minnesota Credit for Increasing Research Activities is fundamentally modeled after the federal research credit found in Section 41 of the Internal Revenue Code, its application within the state’s unique combined reporting regime necessitates a nuanced understanding of how credits move between entities. Historically, the designation of an Earning Member carried significant restrictive weight, particularly regarding the longevity and portability of tax attributes. However, a series of administrative pivots and recent legislative overhauls have transformed this construct from a potential trap for unused credits into a sophisticated mechanism for group-wide tax optimization. To understand the Earning Member’s current role, one must analyze the interplay between Minnesota Statutes section 290.068, the evolving administrative guidance from the Minnesota Department of Revenue, and the revolutionary shift toward partial refundability enacted in 2025.

The Statutory Origin and Functional Definition of the Earning Member

The legal existence of the R&D credit in Minnesota is rooted in the 1981 legislative session, which sought to establish a competitive fiscal environment for the burgeoning technology and medical device industries.1 The primary authority, Minnesota Statutes § 290.068, creates a credit against the tax imposed under Chapter 290 for businesses that increase their research efforts within the state’s borders.3 Within this statutory scheme, the Earning Member is the entity that satisfies the criteria for “Qualified Research” and “Qualified Research Expenses” (QREs) as defined in subdivisions 1 and 2.3

The definition of a QRE is essentially a mirror of federal law under IRC Section 41(b) and (e), encompassing wages for research personnel, the cost of supplies used in experimentation, and 65% of contract research expenses.4 However, the Minnesota statute introduces a strict geographic nexus: all research must be performed within Minnesota to count toward the credit calculation.3 Consequently, the Earning Member is identified as the entity that employs the individuals in Minnesota, consumes the supplies in Minnesota labs, and manages the research contracts within the state.5

The functional importance of identifying the Earning Member arises most sharply when a corporation is part of a “unitary business” filing a combined report. Minnesota’s tax system treats a group of related corporations as a single economic unit if they share a unity of ownership, operation, and use.3 While the group reports a collective income, the R&D credit calculation is performed at the member level before being aggregated or shared.10 This member-level calculation requires the Earning Member to establish its own “base amount,” which is a historical measure of research intensity against gross receipts.1

The Evolution of Credit Portability for Unitary Groups

The relationship between the Earning Member and the rest of the unitary group has undergone a significant legal evolution. For decades, the ability of a combined group to utilize a credit generated by one of its members was governed by a restrictive interpretation that often led to “trapped” credits. If the Earning Member lacked sufficient tax liability to use the credit, the excess was often confined to that specific entity for carryforward purposes, even if other members of the group had substantial tax liabilities.8

This environment changed dramatically in June 2020, when the Minnesota Department of Revenue updated its guidance to reflect a broader interpretation of the “Liability for Tax” definition found in § 290.068, Subd. 2(d).8 The Department determined that the collective liability of the entire unitary group should be the limiting factor, rather than the standalone liability of the Earning Member.3 This administrative pivot, retroactively effective to 2013, effectively redefined the Earning Member’s role from a siloed generator of credits to a group-wide benefactor.8

Administrative Guidance and the Mechanics of Credit Sharing

The Minnesota Department of Revenue (MDOR) has issued specific procedural instructions that dictate how the Earning Member must interact with the broader group on tax filings. These rules are primarily encapsulated in the instructions for Schedule RD and through specific administrative bulletins issued in 2020.8 The Department’s position is that the Earning Member serves as the “custodian” of the credit’s history, but the group acts as the “consumer” of the credit’s value.

Hierarchical Application of Current-Year Credits

When an Earning Member generates a credit in the current tax year, the MDOR mandates a three-step hierarchy for its application. This sequence ensures that the credit is used locally before being distributed through the combined report.8

The first priority is the reduction of the Earning Member’s own tax liability. If the Earning Member has a franchise tax obligation, it must apply its generated credit to reduce its tax to zero.8 Only after the Earning Member’s liability is fully extinguished can the remaining “excess” credit be allocated to other members of the unitary group.3 This allocation is not optional; if other group members have tax liabilities, the credit must be shared to reduce those liabilities before any amount can be designated as a carryforward.8

If, after sharing the credit among all eligible members of the combined group, a portion of the credit remains unused, that amount becomes a carryover.8 Under current guidance, this carryover is technically “held” by the Earning Member but remains available for group-wide sharing in future years.8 This mechanism prevents the expiration of credits as long as the group as a whole maintains some degree of profitability over the 15-year carryforward period.1

The 2020 Policy Shift and Retroactive Refund Opportunities

The June 17, 2020, updated guidance was a response to a realization by the MDOR that the previous instructions on Schedule RD were inconsistent with the broader statutory intent of treating unitary businesses as single taxpayers.8 The Department explicitly stated that for tax years beginning after December 31, 2012, credit carryovers must be applied to other group members in the same manner as current-year credits.8

This change created a substantial opportunity for companies to revisit past tax years. Because the guidance was retroactive, corporations that had “trapped” credits in an Earning Member while other group members paid tax were encouraged to file amended returns using Form M4X.5 For businesses within the 3.5-year statute of limitations, this administrative correction resulted in significant tax refunds by allowing the carryovers to offset historical liabilities across the entire combined return.8

The 2025 Legislative Reform: Partial Refundability and the Earning Member

On June 14, 2025, Minnesota Governor Tim Walz signed H.F. 9, which represents the most significant structural change to the R&D credit since its inception.11 This legislation introduces partial refundability for the credit, a move designed to support startups and research-heavy companies that are in a loss position and cannot immediately benefit from a nonrefundable credit.11

For an Earning Member, this new provision adds a layer of elective complexity. For tax years beginning after December 31, 2024, a taxpayer may elect to receive a partial refund of the unused portion of the current-year credit.3 The election is irrevocable for the tax year in which it is made and must be filed with a timely return, including extensions.6

Refundability Rates and Caps

The refund is calculated by taking the excess credit amount—after the current year’s liability has been reduced to zero for all group members—and multiplying it by a statutory refundability rate.3 The rates are tiered over time to manage the state’s fiscal impact. For 2025, the rate is set at 19.2%.3 In 2026 and 2027, the rate increases to 25%.3 Starting in 2028, the rate will be the lesser of 25% or a rate determined by the Commissioner of Revenue to ensure that total state-wide refunds do not exceed an annual cap of $25 million.3

This change has profound implications for the Earning Member’s financial strategy. Previously, a carryforward was a “promise” of a future 9.8% reduction in tax liability (the current Minnesota corporate tax rate). Now, the Earning Member must decide between a certain, immediate cash infusion at the 19.2% or 25% refund rate versus the potential future value of a full 100% carryover.11 For a unitary group, this decision must be made at the Earning Member level on Schedule RD but is based on the group’s collective inability to use the credit.3

Qualifying Research Activities and Expenses in Minnesota

To act as an Earning Member, an entity must engage in activities that meet the stringent federal and state definitions of research and development. The foundational “Four-Part Test” from IRC § 41(d) is applied, but with a specific eye toward the nature of the work performed within Minnesota’s technology, medical, and manufacturing corridors.5

Technical Components of the Four-Part Test

For an activity to qualify, it must be technological in nature, meaning it relies on engineering, physics, biology, or computer science.5 This excludes research in social sciences, humanities, or business management.5 Furthermore, the activity must be intended to discover information that would eliminate technical uncertainty regarding the development of a business component, such as a product, process, formula, or software.5

The most rigorous part of the test is the “process of experimentation,” which requires that the Earning Member evaluate one or more alternatives through a systematic trial-and-error process.5 This must relate to a permitted purpose, specifically improving the function, performance, reliability, or quality of the component.5 Research conducted for aesthetic purposes or seasonal design changes is explicitly excluded.5

Categorization of Minnesota Qualified Research Expenses

The Earning Member must meticulously categorize its spending to calculate the credit accurately. Minnesota QREs are generally limited to the following categories, provided they occur within the state 4:

• Wages: This includes salaries and benefits paid to employees directly involved in research, those directly supervising researchers, and those directly supporting research (e.g., lab assistants).1 If an employee spends at least 80% of their time on research, 100% of their wages may be included.6
• Supplies: Tangible materials consumed in the research process are qualifying. This excludes general administrative supplies, land, and depreciable property.4
• Contract Research: Payments to third parties for research activities are qualifying, but only at 65% of the actual cost.5 For payments to certain qualified research organizations for basic research, the rate may be higher (75%).6
• Computer Use: Amounts paid to use computers to conduct research (such as cloud computing for large-scale simulations) are qualifying if the research itself is performed in Minnesota.6
• Nonprofit Contributions: Minnesota uniquely allows a credit for contributions to qualified nonprofit corporations established to promote business expansion in the state, provided the funds are used for small, technology-based businesses.6

Calculating the Credit: The Incremental and Tiered Approach

The Minnesota R&D credit is an “incremental” credit, meaning it only rewards research spending that exceeds a specific historical “base amount”.1 This structure is designed to incentivize growth in research efforts rather than subsidizing existing activities.4

Determining the Base Amount and Fixed-Base Percentage

For the Earning Member, calculating the base amount involves a lookback at the previous four years of Minnesota gross receipts.1 The Earning Member must also determine its “fixed-base percentage,” which for established companies is the ratio of QREs to gross receipts from 1984 through 1988.1 Start-up companies or those without a historical baseline use a statutory fixed-base percentage of 3% for the first five years, which then phases in according to federal rules.4

The base amount is the product of the fixed-base percentage and the average annual gross receipts for the prior four years.9 Crucially, Minnesota law dictates that the base amount can never be less than 50% of the current year’s QREs.3 This “minimum base” rule prevents the credit from becoming an overly large percentage of total research spending, particularly for companies that are growing rapidly.4

The Two-Tiered Rate Calculation

Once the Earning Member has calculated its excess QREs (Current QREs minus Base Amount), it applies a two-tiered rate structure.1

For tax years starting after 2016, the rates are:

• 10% of the first $2,000,000 in excess QREs.1
• 4% of any excess QREs above $2,000,000.3

Comprehensive Case Study: The Earning Member in a Unitary Group

To clarify how these rules apply in a real-world scenario, consider a corporate structure named “Innovation Corp,” which includes two distinct subsidiaries operating as a unitary business in Minnesota.

Entities Involved (Tax Year 2025)

• Alpha Labs (The Earning Member): Conducts high-level medical device research in St. Paul. It is currently in a pre-revenue stage for its newest product and has a standalone Minnesota tax liability of $5,000 (minimum fee).25
• Beta Sales (Group Member): Sells finished products throughout Minnesota. It conducts no research but has a standalone Minnesota tax liability of $250,000.4

Alpha Labs Credit Calculation

Alpha Labs has the following financials:

• Current Year Minnesota QREs: $4,000,000 9
• Average Prior 4-year Gross Receipts: $2,000,000 9
• Fixed-Base Percentage: 10% 9

First, we determine the base amount.

• Historical Calculation: 10% of $2,000,000 = $200,000.9
• Minimum Base Check: 50% of $4,000,000 = $2,000,000.3
• Final Base Amount: Since $2,000,000 is greater, it is used as the base.9

Next, we calculate the excess QREs:

• $4,000,000 – $2,000,000 = $2,000,000 in excess QREs.9

Applying the tiered rates:

• Tier 1 (10% of first $2M): 10% × $2,000,000 = $200,000.3
• Tier 2 (4% above $2M): Alpha Labs has no excess over $2,000,000 in this scenario.9
• Total Tentative Credit: $200,000.10

Hierarchy of Application and Allocation

Following the MDOR’s hierarchical sharing rules, the credit is applied in the following sequence:

1. Alpha Labs (Earning Member) Offset: Alpha Labs uses $5,000 of its credit to reduce its own liability to zero.8 Unused credit remaining is $195,000.
2. Beta Sales (Group Member) Offset: Alpha Labs is required to share the remaining $195,000 with Beta Sales.8 Beta Sales uses all $195,000 to reduce its $250,000 liability.8
3. Final Group Position: The combined group has a final liability of $55,000 ($250,000 – $195,000). There is no carryover and no refund available because the credit was fully exhausted by the group’s liability.3

Alternative Scenario: High Credit, Low Liability

If we assume Beta Sales only had a liability of $50,000 instead:

1. Alpha Labs uses $5,000 (Remaining: $195,000).
2. Beta Sales uses $50,000 (Remaining: $145,000).
3. Refundability Election (2025): Alpha Labs, as the Earning Member, elects for a refund.3

• Refund: 19.2% of $145,000 = $27,840 cash payment.6
• Carryforward: The remaining 80.8% ($117,160) is carried forward for up to 15 years by Alpha Labs.11

Procedural Compliance and Schedule RD Reporting

Claiming the R&D credit requires rigorous adherence to reporting protocols, especially for C corporations filing combined returns. The primary document is Schedule RD, “Credit for Increasing Research Activities,” which must be attached to the Corporation Franchise Tax Return (Form M4).5

Critical Lines for Earning Members

The modern Schedule RD has been updated to reflect the 2020 and 2025 changes. Earning Members must pay particular attention to the “Unitary businesses” section.10

• Line 1–6 (Qualified Expenses): These lines aggregate the wages, supplies, and contract costs incurred by the Earning Member in Minnesota.10
• Line 34 (Allocation Out): The Earning Member reports the amount of its current credit that it is providing to other members of the group.10
• Line 37 (Allocation In): A member receiving credit from an Earning Member reports the amount here and must provide the Earning Member’s name and Minnesota tax ID.10
• Line 41–42 (Carryover Allocation): These lines manage the sharing of carryforwards among members.18
• Line 46 (Future Carryforward): Any credit remaining after sharing and refund elections is recorded here as the carryover for the subsequent year, assigned back to the Earning Member.14

Documentation and Substantiation Strategy

Given the complexity of the Earning Member construct and the potential for sharing large tax attributes, the MDOR frequently audits R&D credit claims.1 The Legislative Auditor has noted that while the credit generates growth, the Department’s guidance on documentation has historically been limited.1 Consequently, a proactive defense strategy is essential.

Earning Members must maintain contemporaneous records, including project notes, lab results, and meeting minutes that prove a process of experimentation occurred.5 Furthermore, for wage claims, the Earning Member should maintain a nexus between specific employees and the projects they worked on, ideally through time-tracking software or detailed periodic certifications.5

Pass-Through Entities and the Earning Member Construct

While the term “Earning Member” is most often used in the context of C corporation combined groups, the principles of generating and sharing credits apply equally to pass-through entities (PTEs) such as partnerships and S corporations.1

Mechanics for Partnerships and S Corporations

For a partnership or S corporation, the entity itself acts as the “Earning Member” in that it incurs the QREs and completes Schedule RD.4 However, because these entities do not pay income tax directly, the credit is “passed through” to the partners or shareholders based on their ownership percentage.3

These individuals receive their share of the credit on Schedule KPI (for partners) or Schedule KS (for shareholders).7 The individuals then claim the credit on their own individual income tax returns (Form M1).8

Refundability for Individuals

The 2025 refundability provisions also apply to pass-through owners.6 The election to receive a refund of unused credits is made at the individual partner or shareholder level, not at the entity level.6 This allows individual investors to monetize the credit even if the pass-through business—or the individual’s other investments—generated a tax loss for the year.22

It is important to note that the credit for a partner is limited to the amount of tax attributable to their share of the partnership’s taxable income.3 This “limitation by entity” ensures that the R&D credit from one business cannot be used to wipe out tax liability generated by an entirely unrelated income source.3

Broader Policy Context and Economic Impact

The R&D tax credit is a significant “tax expenditure” for the state of Minnesota, with an annual cost that has grown significantly over the last decade.1 The Office of the Legislative Auditor (OLA) has conducted several evaluations to determine if the credit is achieving its likely goals: creating jobs, increasing research activity, and attracting businesses to Minnesota.1

Fiscal Impact Statistics

According to OLA estimates and Department of Revenue tax expenditure budgets, the R&D credit results in nearly $150 million in annual tax reductions for Minnesota businesses.4 C corporations account for roughly two-thirds of the total claims, with the largest 20% of corporations (by sales) receiving the majority of the benefits.1

Effectiveness and Policy Debates

The OLA has noted that while the credit does increase jobs and earnings growth, the overall growth has been “relatively small” and the credit “does not pay for itself” in terms of direct net fiscal benefits to the state.1 This has led to recommendations that the Legislature more explicitly define the purposes of the credit, such as whether it is intended to create new jobs or specifically retain existing high-tech industries.1

The introduction of refundability in 2025 is a direct response to some of these concerns, as it targets the incentive specifically toward innovation-stage companies that may be more sensitive to cash flow than large, established corporations.22 By allowing these firms to monetize their credits, the state hopes to accelerate the growth of a new generation of Earning Members.22

Conclusion: Strategic Takeaways for the Earning Member

The Earning Member is the operational heart of the Minnesota R&D credit, serving as the nexus where scientific uncertainty is converted into tax value. For corporate tax departments, the management of the Earning Member’s status and its relationship with the unitary group is no longer a simple matter of form-filling but a high-stakes strategic exercise.

The administrative shifts of 2020 have effectively removed the “use-it-or-lose-it” risk that previously plagued centralized research departments in a combined reporting environment. Today, an Earning Member can confidently generate credits for the benefit of the entire unitary group, knowing that carryforwards are just as shareable as current-year amounts. However, the introduction of partial refundability in 2025 adds a new dimension of choice. Companies must now evaluate their long-term tax positions to decide if a discounted refund today is more valuable than a full tax offset in the future.

Ultimately, the successful utilization of the Minnesota R&D credit requires a dual focus: maintaining impeccable contemporaneous records to survive a Department of Revenue audit and mastering the complex sharing mechanics that allow the Earning Member’s research effort to lower the tax burden for the entire enterprise. As Minnesota continues to refine its R&D incentives, the role of the Earning Member will remain central to the state’s vision of a thriving, innovation-led economy.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/