North Dakota R&D Tax Credit Overview
The North Dakota Research and Experimental Expenditure Tax Credit incentivizes innovation with a 25% credit on the first $100,000 of excess qualified research expenses and 8% on amounts exceeding that threshold. Alternatively, taxpayers may elect the ASC method with rates of 17.5% and 5.6%. Unused credits can be carried back 3 years or forward 15 years, and qualified small businesses may transfer up to $100,000 annually.
| Glossary Term | Definition |
|---|---|
| Research and Experimental Expenditure Tax Credit | A state tax incentive rewarding North Dakota businesses for conducting qualified research and development activities. |
| N.D.C.C. § 57-38-30.5 | The North Dakota Century Code section authorizing and governing the research and experimental expenditure tax credit. |
| Qualified Research Expenses (QREs) | Eligible costs for wages, supplies, and contract research incurred while conducting qualified research in North Dakota. |
| North Dakota-Sourced Research | Research activities physically performed within North Dakota, a strict requirement for claiming the state credit. |
| Internal Revenue Code (IRC) Section 41 | The federal tax code section defining qualified research, adopted by North Dakota to determine eligibility. |
| IRC Section 174 | Federal code governing the deduction and amortization of research expenditures, impacting state credit calculations. |
| Base Amount (for R&D Credit) | A calculated baseline of research spending used to measure the incremental increase in current-year research. |
| Excess Qualified Research Expenses | The amount by which current-year qualified research expenses exceed the calculated base amount. |
| Tiered Credit Rates | North Dakota’s statutory credit structure applying different percentage rates to specific tiers of excess expenses. |
| Credit Percentage (25%) | The tax credit rate applied to the first $100,000 of excess qualified research expenses in North Dakota. |
| Credit Percentage (8%) | The tax credit rate applied to any excess qualified research expenses exceeding the initial $100,000 tier. |
| Alternative Simplified Computation (ASC) | An optional calculation method using a rolling average of prior-year expenses to determine the credit. |
| Alternative Excess Research and Development Expenses | The amount by which current QREs exceed 50% of the average QREs from the prior three years. |
| ASC Credit Rate (17.5%) | The Alternative Simplified Credit rate applied to the first $100,000 of alternative excess research expenses. |
| ASC Credit Rate (5.6%) | The Alternative Simplified Credit rate applied to alternative excess research expenses exceeding $100,000. |
| Credit Carry Forward | The provision allowing unused tax credits to be saved and applied against future tax liabilities. |
| Maximum Carry Forward Period (15 years) | The fifteen-year limit for carrying forward unused North Dakota research tax credits to future years. |
| Credit Carryback | The provision allowing unused current-year credits to be applied retroactively to previous tax years. |
| Maximum Carryback Period (3 years) | The three-year limit for carrying back unused North Dakota research tax credits to prior years. |
| Maximum Credit Cap (Pre-2007) | A historical $2 million annual limit on research credits earned before January 1, 2007. |
| Qualified Research and Development Company | A certified primary sector business with under $750,000 revenue eligible to transfer research tax credits. |
| Primary Sector Business | A business certified by the Department of Commerce as adding new wealth to the state economy. |
| Annual Gross Revenues (Under $750,000) | The revenue ceiling for a Qualified Research and Development Company to be eligible for credit transfer. |
| Transferable Credit | A mechanism allowing eligible small businesses to sell or transfer unused research credits to other taxpayers. |
| Maximum Transferable Amount ($100,000) | The annual cap on the amount of research tax credits a qualified business may transfer. |
| Form SFN 58638 (Certification Application) | The application form required to certify a business as a Qualified Research and Development Company. |
| Form CTS (Credit Transfer Statement) | The official form used to report and document the transfer or sale of research tax credits. |
| North Dakota Department of Commerce | The state agency responsible for certifying businesses as eligible for the R&D credit transfer program. |
| North Dakota Office of State Tax Commissioner | The regulatory body administering the state’s tax laws and overseeing research credit compliance. |
| Passthrough Entity | A business structure where tax credits flow through to the individual owners’ personal tax returns. |
| Allocation to Owners Pro-Rata | The distribution of tax credits to partners or shareholders based on their ownership percentage. |
| Individual Income Tax | The personal tax liability of owners against which passed-through research credits can be applied. |
| Corporate Income Tax | The tax liability of C-Corporations against which the North Dakota research credit is directly claimed. |
| Wages for Qualified Services | Compensation paid to employees for performing, supervising, or directly supporting qualified research activities. |
| Supplies Used in Research | Tangible property consumed directly during the conduct of qualified research, excluding land and improvements. |
| Contract Research Expenses | Payments made to third parties for conducting qualified research, typically eligible at 65% of the cost. |
| In-House Research Expenses | Internal costs for wages and supplies incurred by the taxpayer for their own research activities. |
| Four-Part Test | The set of four statutory criteria a project must meet to qualify as research under IRC Section 41. |
| Technological in Nature | The requirement that research rely on principles of engineering, physics, biology, or computer science. |
| Permitted Purpose | The research must intend to improve the function, performance, reliability, or quality of a business component. |
| Elimination of Uncertainty | The requirement that research attempts to discover information to eliminate capability, method, or design uncertainty. |
| Process of Experimentation | A systematic process of evaluating alternatives to resolve technical uncertainty regarding the business component. |
| Business Component | The specific product, process, software, or technique being developed or improved by the research. |
| Acquisition or Disposition of a Business | Corporate changes requiring adjustments to historical base amounts and gross receipts for credit calculations. |
| Major Portion of a Trade or Business | A significant segment of a company whose transfer impacts the calculation of research credit base amounts. |
| Fixed-Base Percentage (Startups) | A statutory percentage used to calculate the base amount for companies with limited history. |
| North Dakota Gross Receipts | Revenue generated within the state, used to calculate the base amount for the regular credit method. |
| Form 40 (Corporate Income Tax Return) | The standard North Dakota corporate tax return where the research credit is claimed and reported. |
| Credit Claim Worksheets | Supporting documents used to calculate the allowable credit before entering the total on the tax return. |
