Strategic Analysis of the Major Portion of a Trade or Business within the Minnesota Research and Development Tax Credit Framework

A major portion of a trade or business is defined as a viable, self-sustaining segment of an enterprise whose transfer necessitates historical adjustments to a taxpayer’s research expense and gross receipt records. These adjustments ensure the Minnesota Research and Development tax credit remains strictly incremental by aligning the acquirer’s base period hurdle with the newly integrated research activities of the acquired business unit.1

Theoretical and Legislative Foundations of the Minnesota Research Credit

The Minnesota Credit for Increasing Research Activities, colloquially known as the R&D tax credit, represents a significant pillar of the state’s economic policy, designed to foster a robust environment for technological innovation. Codified under Minnesota Statutes Section 290.068, the credit serves as a strategic offset against corporate franchise and individual income tax liabilities for entities that invest in qualified research conducted specifically within the borders of Minnesota.2 The credit’s structure is fundamentally incremental, a design choice intended to ensure that state tax expenditures incentivize new research rather than merely subsidizing existing, routine operational activities. This incremental nature is achieved through the use of a “base amount,” which acts as a historical benchmark that a taxpayer must exceed in the current tax year to qualify for the incentive.4

The legislative history of Section 290.068 reveals a consistent evolution toward closer alignment with federal standards while maintaining a distinct state-specific focus. Established in 1981, the credit was patterned after the federal research credit under Internal Revenue Code (IRC) Section 41.5 Over decades, the Minnesota legislature has modified the credit’s rates, refundability status, and calculation methodologies to respond to shifting economic priorities. For instance, while the credit was temporarily refundable between 2010 and 2012 to stimulate the economy following the Great Recession, it transitioned back to a nonrefundable carryforward credit for several years before the landmark 2025 legislation reinstated a partial refundability mechanism.7 Understanding the “major portion of a trade or business” requires a deep dive into how these historical shifts intersect with current corporate restructuring activities.

The Role of Section 290.068, Subdivision 5

The specific treatment of business acquisitions and dispositions is governed by Subdivision 5 of Section 290.068, which mandates that any taxpayer acquiring or disposing of a major portion of a trade or business—or a major portion of a separate unit thereof—must adjust their qualified research expenses (QREs) and base amount.1 The statute explicitly adopts the methodology provided in IRC Section 41(f)(3), effectively federalizing the definitions and mechanics used to determine how a business’s research history follows its assets and operations during a merger or acquisition.1 This adoption is critical for tax parity; it prevents a large corporation from acquiring a research-intensive start-up and immediately claiming an massive credit due to a mismatch between its own high historical sales and the start-up’s high current QREs. By forcing an adjustment of the base period, the law requires the acquirer to “inherit” the target’s historical sales and research hurdles, thereby maintaining the integrity of the incremental credit model.11

Defining the “Major Portion” and “Separate Unit”

To apply the law correctly, practitioners must move beyond the text of the Minnesota statutes and consult the federal Treasury Regulations that the state incorporates by reference. The Internal Revenue Service (IRS) guidance, specifically within Treasury Regulation 1.41-7(b), points toward the definitions found in Treasury Regulation 1.52-2(b) to establish the criteria for what constitutes a “major portion” or “separate unit”.12

The Viable Trade or Business Test

A major portion is not defined by a simple percentage of assets or revenue. Instead, the regulatory focus is on whether the transferred segment constitutes a “viable trade or business” capable of operating as a self-sustaining enterprise.14 This distinction is vital in differentiating between a simple asset sale and a business acquisition. If a company sells a warehouse and its fleet of trucks, it has likely not disposed of a major portion of its trade or business. However, if it sells a distinct manufacturing plant along with its specialized engineers, patents, and customer contracts, it has transferred a separate unit.12

The presence of goodwill is frequently cited by auditors as a primary indicator of a separate unit transfer. The allocation of goodwill to a segment suggests that the segment possesses an intangible value beyond its physical components, typically derived from its established market presence and operational independence.14 Other qualitative factors that indicate a “major portion” transfer include the retention of a specialized workforce, the transfer of a specific brand name or intellectual property portfolio, and the acquisition of a distinct geographic territory.14

Defining Trade or Business in the Research Context

The term “trade or business” in the context of the R&D credit is interpreted more broadly than in other areas of the tax code. It generally encompasses any activity carried on for the production of income through the sale of goods or the performance of services.15 For research purposes, a taxpayer is often treated as meeting the trade or business requirement even if the research is conducted with the intent of using the results in a future trade or business, provided that the taxpayer is actively pursuing that goal.16 This nuance is particularly relevant for Minnesota startups that may be acquired before they have reached commercial production. If such a startup is acquired, it still carries a research history that must be integrated into the acquirer’s base period under the major portion rules.12

The Mechanics of Base Amount Adjustments

The core operational requirement of Subdivision 5 is the mathematical adjustment of the base amount. In Minnesota, the base amount is the product of a taxpayer’s “fixed-base percentage” and its “average annual gross receipts” for the four years preceding the credit year.3

Adjustment for the Successor (Acquirer)

When a taxpayer acquires a major portion of a trade or business, they must increase their own historical QREs and historical Minnesota gross receipts by the amounts attributable to the acquired unit for all periods prior to the acquisition.12 This adjustment applies to every year used in the credit calculation, including the four-year lookback for gross receipts and the 1984–1988 base period if the taxpayer is using the regular credit method.4

Table 1: Mandatory adjustments for successors following a major portion acquisition.12

Adjustment for the Predecessor (Seller)

Conversely, a taxpayer disposing of a major portion of a trade or business must decrease its historical QREs and Minnesota gross receipts by the amounts attributable to the divested unit.2 This prevents the seller from being burdened by a “base amount” that reflects a scale of operations it no longer maintains. The symmetry of these rules ensures that the total “research history” within the state of Minnesota is neither duplicated nor lost, but rather properly allocated to the entity currently performing the research.1

Comprehensive Example: The “Lakeside Medical” Divestiture

To clarify the practical application, consider a scenario where a large Minnesota conglomerate, “Gopher Industries,” decides to sell its “Lakeside Medical” division to a specialized healthcare firm, “Premier Health MN.”

Step 1: Evaluating the Transaction

Lakeside Medical operates as a distinct division with its own R&D facility in Duluth, a dedicated staff of 40 researchers, and several active medical device patents. The purchase agreement includes the transfer of all facility leases, employment contracts, and intellectual property. Because Lakeside Medical is capable of operating as a self-sustaining enterprise and its sale includes the transfer of a viable business unit, it qualifies as a “major portion of a separate unit” under Section 290.068, Subd. 5.2

Step 2: The Data Exchange

Premier Health MN must obtain the following historical data from Gopher Industries for the Lakeside Medical division to correctly calculate its future Minnesota R&D credits:

• Minnesota-specific sales for the four years preceding the acquisition (e.g., 2020–2023).
• Minnesota QREs incurred by the division during those same lookback years.
• If using the regular credit method, the division’s Minnesota sales and QREs from the 1984–1988 period (or the first years of the division’s existence if it is a newer “start-up” unit).4

Step 3: Recalculating the Base Amount

For the first full tax year following the acquisition, Premier Health MN will calculate its credit by adding Lakeside Medical’s current year expenses to its own. However, it must also add Lakeside Medical’s $2 million average annual Minnesota sales to its own average of $8 million. This increases Premier’s “average annual gross receipts” to $10 million. If Premier’s fixed-base percentage is 5%, its base amount “hurdle” increases from $400,000 ($8M x 5%) to $500,000 ($10M x 5%).4 This adjustment ensures that Premier only receives a credit for research spending that exceeds the combined historical effort of both its existing operations and the newly acquired Lakeside Medical unit.4

Minnesota Revenue Office Guidance and Administrative Requirements

The Minnesota Department of Revenue (MDOR) provides administrative clarity through its tax forms and instructions, primarily Schedule RD, “Credit for Increasing Research Activities”.3 Taxpayers must navigate these requirements with precision to ensure compliance and mitigate audit risk.

Schedule RD and Reporting Protocols

Schedule RD is the primary vehicle for claiming the credit. The form requires detailed disclosures regarding the types of research conducted and the location where the work was performed. Crucially, all QREs must be conducted within the state of Minnesota to be eligible.2 The MDOR requires taxpayers to affirm that their research meets the “Four-Part Test” derived from IRC Section 41:

1. Permitted Purpose: The research must be intended to develop a new or improved business component related to function, performance, reliability, or quality.3
2. Elimination of Uncertainty: The activity must seek to discover information that eliminates uncertainty regarding the capability or method of developing the component.3
3. Process of Experimentation: The taxpayer must evaluate one or more alternatives through a systematic process, such as modeling, simulation, or trial and error.3
4. Technological in Nature: The process must rely on the principles of physical or biological sciences, engineering, or computer science.3

Audit Triggers and Recordkeeping

The MDOR has identified several factors that may trigger a review of a taxpayer’s R&D credit claim. A “spike” in the current year’s QREs relative to the base period is a significant audit red flag, as is a change in the fixed-base percentage from prior years.23 Acquisitions and dispositions are considered high-risk areas because of the complexity involved in reconstructing historical base data.19

Taxpayers are required to maintain contemporaneous records to substantiate their claims. For major portion acquisitions, the burden of proof rests on the acquirer to provide documentation created at the time the research was conducted, even if that research was conducted by the predecessor company.3 Required records include:

• Project lists and descriptions of the research goals.
• Wages and payroll records identifying the time spent by specific employees on qualified activities.
• Invoices for tangible supplies used in the research process.
• Contracts and scope-of-work documents for contracted research services.3

Statistical Insights and Fiscal Impact

The fiscal significance of the R&D credit has grown dramatically, highlighting its importance to the Minnesota business community. The state’s Tax Expenditure Budget provides a window into the scale of these incentives.

Table 2: Minnesota R&D tax credit expenditure estimates showing the substantial increase in credit utilization starting in 2024.4

The notable surge in 2024 and 2025 is a result of both expanded corporate investment and legislative enhancements. As the total value of these credits approaches $150 million annually, the state’s scrutiny of the “base amount” calculation—particularly following acquisitions—is expected to intensify to ensure fiscal responsibility.4

The 2025 Refundability Paradigm Shift

A pivotal moment in Minnesota tax history occurred on June 14, 2025, when Governor Tim Walz signed House File 9 (HF 9) into law.9 This legislation fundamentally altered the R&D credit by introducing a partial refundability mechanism, a feature that significantly changes the strategic value of acquired business units.9

Refundability Rates and Targets

Effective for tax years beginning after December 31, 2024, taxpayers may elect to receive a cash refund for a portion of their unused research credits.3 This provision is especially beneficial for startups or companies in a loss position that have historically had to carry forward their credits for up to 15 years.8

Table 3: Schedule of refundability rates for the Minnesota R&D tax credit under the HF 9 Omnibus Tax Act.3

The 2028 rate will be adjusted annually to ensure that the total state expenditure on refunds does not exceed $25 million per year.9 This hard cap means that the MDOR will likely implement a rigorous vetting process for refund claims, making the proper documentation of “major portion” adjustments even more critical for success.

Impact on Mergers and Acquisitions

The introduction of refundability transforms the R&D credit from a potential future tax offset into a near-cash asset. In an acquisition context, the buyer must now evaluate the target’s QRE history not just to calculate its own future base amount, but to determine its eligibility for immediate cash refunds. If a “major portion” is acquired, the buyer’s ability to elect refundability will depend on its status as the legal successor to the target’s research history.2 Furthermore, because the election is irrevocable for each year, careful planning is required during the integration phase of a merger to decide whether to monetize the credit immediately or carry it forward to offset future projected tax liabilities.9

Unitary Business and Combined Reporting Dynamics

Minnesota’s use of the “unitary business” concept for corporate taxation adds another layer of complexity to the major portion rules. For a group of corporations conducting a single, integrated business, the R&D credit is calculated on a combined report.2

Credit Sharing Among Combined Group Members

For tax years beginning after December 31, 2012, Minnesota law allows the R&D credit to be shared among all members of a combined group.7 Under current MDOR interpretation, if the member that earned the credit (the “earning member”) cannot use the full amount against its own tax liability, the excess must be used by other group members.7

The June 2020 guidance from the MDOR further clarified that this sharing requirement also applies to credit carryovers from prior years.7 When a corporation acquires a major portion of a business and brings it into a unitary group, the acquired unit’s historical research data becomes part of the group’s collective base period calculation. This can either dilute or enhance the group’s overall credit profile, depending on the relative research intensity of the acquired unit compared to its historical gross receipts.7

Judicial Interpretations: Syngenta Seeds and Beyond

The Minnesota Tax Court provides the definitive interpretation of how federal R&D concepts apply to state law. The 2019 case of Syngenta Seeds, Inc. v. Commissioner remains a cornerstone for understanding base amount calculations.24

Lessons from Syngenta Seeds

The court reached two critical conclusions that affect major portion adjustments:

1. Incorporation of Federal Floor: The court ruled that the federal “minimum base amount” (which prevents the base amount from falling below 50% of current year QREs) must be included in the Minnesota calculation.24
2. Gross Receipts Denominator: The court held that federal gross receipts should be used to determine the fixed-base percentage’s denominator, even though the final base amount calculation uses Minnesota-specific receipts for the four-year lookback.24

For a taxpayer acquiring a major portion of a business, this ruling means they must maintain a “dual track” of historical records: federal records for the fixed-base percentage calculation and Minnesota-specific records for the average annual gross receipts calculation.3 Failure to maintain this distinction during a business transition is a common error that leads to disallowance of the credit upon audit.

Navigating the Federal Conformity Landscape: Section 174 and OBBBA

The state of Minnesota generally conforms to the Internal Revenue Code as of a specific date. This leads to a “conformity gap” when the federal government makes rapid changes to tax law, as it did with the Tax Cuts and Jobs Act (TCJA) and the “One Big Beautiful Bill Act” (OBBBA) of 2025.25

The Amortization Requirement

One of the most significant recent shifts involves IRC Section 174. Starting in 2022, the TCJA required businesses to amortize R&D expenses over five years (domestic) or fifteen years (foreign) rather than expensing them immediately.4 While the OBBBA of 2025 restored immediate expensing for domestic research under a new Section 174A, Minnesota’s conformity to these changes is not always automatic.25

Currently, Minnesota requires taxpayers to continue amortizing domestic research expenditures over a five-year period for the purpose of determining Minnesota taxable income, unless a new state conformity date is enacted.4 While this amortization requirement does not change the definition of what constitutes a QRE for the research credit, it creates complex timing differences between federal and state tax liabilities that must be accounted for during a business acquisition.25

Risk Management and Strategic Planning for M&A

Given the complexity of the major portion rules, businesses must integrate R&D tax considerations into their broader M&A strategy.

Due Diligence Considerations

When evaluating a potential acquisition in Minnesota, tax departments should move beyond high-level financial statements and perform a “deep dive” into the target’s research records. Key questions include:

• Has the target correctly classified its Minnesota-based research projects according to the four-part test?
• Are there documented payroll records that link specific employees’ time to those projects?
• Has the target previously acquired or disposed of any business units that would have required a base amount adjustment?
• Does the target have significant R&D credit carryovers, and are they substantiated by records that would survive a state audit? 3

Structuring the Transaction

The way a transaction is structured—as an asset purchase versus a stock purchase—can have different implications for the “major portion” adjustment. However, Section 290.068, Subd. 5 is broad enough to cover any transaction where a “viable trade or business” is transferred.2 In a stock purchase, the legal entity remains intact, but its inclusion in a new unitary group still triggers a collective recalculation of the group’s research hurdle. In an asset purchase, the “major portion” rules explicitly require the transfer of the historical base data from the seller to the buyer to prevent the loss of the historical benchmark.1

Conclusion

The “major portion of a trade or business” is a sophisticated regulatory mechanism designed to maintain the integrity of Minnesota’s incentive for technological growth. By requiring the historical recalibration of research hurdles during business transitions, the state ensures that the R&D tax credit continues to reward true incremental innovation rather than mere corporate restructuring.1 As the Minnesota tax landscape enters a new era of refundability and increased credit utilization, the ability of taxpayers to navigate these complex adjustments will define the success of their research-driven investment strategies. For the modern enterprise, the R&D credit is no longer just a calculation at the end of the year; it is a vital asset that must be managed, protected, and correctly adjusted at every stage of the business lifecycle.9

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