N.D.C.C. § 57-38-30.5

Comprehensive Analysis of North Dakota Century Code § 57-38-30.5: The Research and Experimental Expenditure Tax Credit

North Dakota Century Code § 57-38-30.5 establishes a nonrefundable income tax credit for businesses and individuals who incur expenses for qualified research conducted specifically within the borders of North Dakota. This credit allows taxpayers to reduce their state tax liability by a percentage of their research spending that exceeds a calculated historical baseline or average.

The North Dakota Research and Experimental Expenditure tax credit represents a pivotal element of the state’s economic development strategy, designed to incentivize innovation within its borders. By providing a structured tax offset for research and development (R&D) activities, the Legislative Assembly intended to foster a competitive environment for both established corporations and emerging startups. The statute, codified as N.D.C.C. § 57-38-30.5, operates through a complex interplay with federal tax law, specifically Internal Revenue Code (IRC) Section 41, while maintaining distinct North Dakota-specific modifications that restrict eligibility to activities conducted within the state. This report provides an exhaustive examination of the statutory language, the administrative guidance issued by the Office of State Tax Commissioner, the mechanical application of the credit, and the broader economic implications of this fiscal policy.

Legislative Context and Statutory Evolution

The journey of the North Dakota research credit began in 1987 with the passage of House Bill No. 1645. At its inception, the credit was patterned after Minnesota’s tax laws, which had demonstrated success in stimulating corporate investment in technology and innovation. The original legislative intent was clear: to encourage new and existing North Dakota corporations to undertake research and development, thereby diversifying the state’s economic base beyond its traditional reliance on agriculture and extractive industries.

In 1987, the credit was significantly more modest than the current version, offering a corporate income tax credit equal to 8% of the first $1.5 million of excess research expenses and 4% for any amount exceeding that threshold. Over the subsequent decades, the North Dakota Legislative Assembly recognized the need to enhance these incentives to remain competitive with other states. A major turning point occurred in 2007 with House Bill No. 1018, which expanded the credit to individuals and passthrough entities, enriched the credit rates, and introduced the concept of transferable credits for small, primary-sector businesses. These changes were specifically aimed at attracting new businesses to the state and retaining those already engaged in high-value research activities.

Further modifications in 2011 and 2016 refined the tiered rate structure, while the introduction of the Alternative Simplified Computation (ASC) method in 2019 provided taxpayers with more flexibility in how they calculate their baseline. As of 2024, the statute stands as a mature, multi-layered incentive that rewards sustained investment in technological advancement.

Statutory Definitions and the Federal-State Nexus

The efficacy of N.D.C.C. § 57-38-30.5 rests on its integration with the federal Internal Revenue Code. By adopting federal definitions, North Dakota provides a level of administrative consistency for taxpayers; however, the state enforces strict geographic boundaries that do not exist at the federal level.

Qualified Research and Research Expenses

Under the statute, “qualified research” takes its meaning from IRC § 41(d), which mandates a four-part test for eligibility. However, N.D.C.C. § 57-38-30.5(5) explicitly excludes any research conducted outside the state of North Dakota. This geographic nexus is the most critical distinction between the federal and state credits. Similarly, “qualified research expenses” (QREs) are defined by IRC § 41(b) but exclude expenses for basic research conducted outside the state.

The federal four-part test, as applied in North Dakota, requires the following:

• The research must be intended to discover information that would eliminate uncertainty concerning the development or improvement of a “business component,” such as a product, process, software, or formula.
• The activity must be technological in nature, relying on the principles of engineering, physics, chemistry, biology, or computer sciences.
• The research must involve a process of experimentation, which includes a systematic trial-and-error approach or the evaluation of multiple design alternatives.
• The research must have a permitted purpose related to the functionality, quality, reliability, or performance of the business component.

The Base Amount and North Dakota Sourcing

Calculating the credit requires determining a “base amount,” which represents the level of research spending a taxpayer is expected to achieve without the incentive. North Dakota adopts the federal definition found in IRC § 41(c), with the vital caveat that it does not include research conducted or sales made outside the state of North Dakota. This ensures that the credit only rewards incremental investment specifically within the state’s economy.

Calculation Methodologies

Taxpayers in North Dakota have two primary methods for calculating the Research Expense Credit: the Regular Method and the Alternative Simplified Computation (ASC) method. The choice of method can significantly impact the dollar value of the credit, and taxpayers are permitted to choose the most advantageous method on an annual basis, though the choice is binding for the specific tax year in which it is made.

The Regular Method

The Regular Method is the original calculation mechanism and remains the default for many established businesses. It rewards taxpayers for spending in excess of a base amount calculated using historical gross receipts and a fixed-base percentage.

For most current claims (those beginning after 2011), the credit rates under the Regular Method are:

1. 25% of the first $100,000 of qualified research expenses in excess of the base amount.
2. 8% of the qualified research expenses in excess of the base amount that exceed $100,000.

Historically, different rates applied. Between 2007 and 2016, for example, the rate on the excess over $100,000 was 20% for those who began research in that window. For those who earned credits before 2007, a phased rate of 7.5% in 2007, 11% in 2008, 14.5% in 2009, and 18% in 2010 applied to the excess over $100,000.

The Alternative Simplified Computation (ASC) Method

Beginning with the 2019 tax year, North Dakota introduced the ASC method, mirroring the federal ASC found in Form 6765. This method is particularly beneficial for companies that lack historical gross receipt records or those whose R&D spending has fluctuated significantly.

Under the ASC, the credit is calculated based on “North Dakota alternative excess research and development expenses,” which is the amount by which current-year QREs exceed 50% of the average QREs for the three preceding taxable years.

The ASC rates are:

1. 17.5% of the first $100,000 of the alternative excess.
2. 5.6% of the alternative excess over $100,000.

If a taxpayer has zero qualified research expenses in any one of the three preceding tax years, the statute provides a special default rate: 7.5% of the first $100,000 of current-year QREs plus 2.4% of the QREs in excess of $100,000.

Comparison of Methods: A Strategic Example

To understand the practical implications of these choices, consider “Bismarck Biotech,” a mid-sized firm that has conducted research in North Dakota for several years.

Step 1: Regular Method Calculation

Assuming a fixed-base percentage of 3% (common for startups or early-growth companies):

• Average Gross Receipts (prior 4 years): $4,250,000 (assumed for simplicity).
• Base Amount: $4,250,000 x 3% = $127,500.
• Total Excess over Base: $600,000 – $127,500 = $472,500.
• Credit on first $100k: $100,000 x 25% = $25,000.
• Credit on remaining $372.5k: $372,500 x 8% = $29,800.
• Total Regular Credit: $54,800.

Step 2: ASC Method Calculation

• Average QRE for T-1, T-2, T-3: ($500k + $400k + $300k) / 3 = $400,000.
• ASC Base (50% of Average): $400,000 x 50% = $200,000.
• Alternative Excess: $600,000 – $200,000 = $400,000.
• Credit on first $100k: $100,000 x 17.5% = $17,500.
• Credit on remaining $300k: $300,000 x 5.6% = $16,800.
• Total ASC Credit: $34,300.

In this scenario, Bismarck Biotech would clearly benefit from electing the Regular Method, gaining an additional $20,500 in tax credits.

Eligibility and Ownership Structure

The North Dakota research credit is versatile, applying to various business types, but the mechanism for claiming the credit depends heavily on the entity’s tax classification.

Corporations and Consolidated Groups

C-corporations claim the credit against the tax imposed under N.D.C.C. § 57-38-30. For corporations that are part of a consolidated North Dakota income tax return, the credit is particularly powerful: it can be used to reduce the aggregate tax liability of all corporations included in that return. However, the statute explicitly notes that this aggregate application does not apply to tax credits received or purchased from other taxpayers; those must be used by the specific purchasing entity.

Passthrough Entities

For partnerships, S-corporations, and LLCs not taxed as corporations, the credit is “passed through” to the owners based on their respective ownership interests in the entity. The entity itself does not use the credit; instead, the owners claim their proportional share on their individual, corporate, or fiduciary returns. The credit must be claimed in the same taxable year in which the passthrough entity’s taxable year ends.

Individuals and Sole Proprietors

Individuals, including those acting as sole proprietors, claim the credit against the individual income tax imposed by N.D.C.C. § 57-38-30.3. For these taxpayers, the credit is reported on Schedule ND-1TC.

Monetization Through the Transfer Mechanism

Perhaps the most unique feature of § 57-38-30.5 is the ability for certain small, innovative companies to monetize their unused tax credits by selling them to other North Dakota taxpayers. This provision acts as a de facto grant for startups that are investing heavily in R&D but have not yet achieved the profitability required to use the nonrefundable credits themselves.

The “Qualified Research and Development Company”

To sell a credit, a taxpayer must be certified by the North Dakota Department of Commerce as a “qualified research and development company”. The criteria for this certification are strict:

• Entity Type: Limited to individuals, C-corporations, estates, or trusts. Notably, partnerships and S-corporations are ineligible for the transfer provision.
• Primary Sector Focus: The company must be a certified “primary sector business”. This means the business adds value to a product or process, creating new wealth for the state.
• Revenue Cap: Annual gross revenues must be less than $750,000.
• First-Time Research: The company must have conducted research in North Dakota for the first time after December 31, 2006 (or December 31, 2016, for more recent applicants).
• No Prior Claims: The taxpayer must not have previously earned or claimed the North Dakota research credit.

Transfer Mechanics and Limits

A qualified company is permitted to sell or transfer up to a lifetime total of $100,000 of unused tax credits. The process involves several mandatory steps overseen by both the Department of Commerce and the Tax Commissioner.

1. Application for Certification (SFN 58638): The taxpayer must submit a completed application to the Department of Commerce, including a one-page description of the new research and copies of federal tax returns from the preceding three years.
2. Certification Letter: Upon approval, the Director of Commerce issues a certification letter to both the taxpayer and the Tax Commissioner.
3. Credit Purchase Agreement: The transferor (seller) and transferee (buyer) execute a formal agreement for the sale of the credits.
4. Form CTS (Credit Transfer Statement): Both parties must jointly file Form CTS with the Tax Commissioner within 30 days of executing the purchase agreement.
5. Use by Transferee: The purchaser must claim the credit starting in the taxable year the agreement was executed. While the purchaser can carry the credit forward for up to 15 years, they are strictly prohibited from carrying the credit back to prior years or re-transferring it.
6. Taxation of Proceeds: The transferor must assign the gross proceeds received from the sale to North Dakota for income tax purposes.

Administrative Guidance and Compliance

The Office of State Tax Commissioner provides the operational framework for the credit through administrative rules and published guidelines. Compliance requires a high degree of precision in both calculation and record-keeping.

Filing Procedures

Taxpayers must claim the Research Expense Credit when filing their annual North Dakota income tax return. The Tax Commissioner does not provide a single “named” state form equivalent to the federal 6765; instead, taxpayers are required to attach a detailed schedule or worksheet showing how the credit was computed.

The specific forms used for the claim include:

• Form 40 (C-Corporation): Reported on Schedule TC or Schedule CR.
• Form ND-1 (Individual): Reported on Schedule ND-1TC.
• Form 38 (Estate/Trust): Reported on Schedule 38-TC.
• Form 58/60 (Partnership/S-Corp): Reported on Schedule K for distribution to owners.

Carryback and Carryforward Provisions

North Dakota offers generous carryover terms for unused research credits, among the most flexible in the nation. If the credit exceeds the taxpayer’s liability:

• 3-Year Carryback: The credit must first be carried back to the earliest of the three preceding taxable years and then to each successive year. A claim for carryback must be filed within three years of the return’s due date for the year the credit was earned.
• 15-Year Carryforward: Any remaining credit may be carried forward to offset tax liability for up to 15 years.

Audit and Record Retention

The Tax Commissioner has the authority to audit returns and assess additional tax. Generally, the assessment window is three years from the date the return was filed or its due date, whichever is later. However, this window extends to six years if there is a substantial change (over 25%) in taxable income or tax liability.

To withstand an audit, taxpayers should maintain comprehensive documentation that proves the research met the federal four-part test and was conducted entirely within North Dakota. Recommended records include:

• Payroll records showing time spent by specific employees on R&D projects.
• Detailed lists of supplies and materials used in experimentation.
• Contracts and invoices for research performed by third parties within the state.
• Technical white papers, project logs, or lab notebooks documenting the uncertainties faced and the experimental process followed.

Economic Impact and Statistical Overview

The Research Expense Credit has been the subject of periodic review by the Legislative Management to ensure it meets its intended economic goals. Data provided by the Tax Department and studies by the Bank of North Dakota reveal a program with significant reach and a net positive impact on the state’s economy.

Participation and Demographics

Between 2007 and 2016, approximately 1,800 taxpayers claimed the credit. The distribution of claims highlights the importance of the credit to small business owners and high-income individuals who invest in innovation through passthrough entities.

This disparity suggests that while large corporations like Basin Electric Power Cooperative (which averaged 529 R&D employees from 2014-2016) earn significant credits, they often have other deductions—such as large depreciation allowances—that eliminate their tax liability, leading to massive carryforwards rather than immediate claims. Basin Electric, for instance, accumulated $10.3 million in credits but saw $1.6 million expire unused.

Economic Multipliers

A comprehensive evaluation by the Bank of North Dakota found that at its peak, the research credit was responsible for:

• 1,100 new jobs in North Dakota, primarily in the professional services sector.
• $80 million in annual contributions to the state’s Gross Domestic Product (GDP).
• $213 million in state revenue generated over a 20-year period.

While the direct cost of the credit to the general fund was estimated at $66 million over 20 years, with an additional $182 million in indirect costs for infrastructure and services for the increased population, the resulting revenue meant the state’s budget liability was $30 million less than it would have been without the incentive. This “dynamic” impact assessment validates the credit as a core pillar of North Dakota’s fiscal architecture.

Specialized Sector Support and Complementary Incentives

The R&D credit does not exist in a vacuum. It is part of a broader suite of incentives aimed at specific high-growth sectors.

Biologic Manufacturing and Bioscience

In 2023, the Legislative Assembly enacted House Bill No. 1455, creating a sales and use tax exemption for raw materials and reagents used in biologic manufacturing. This exemption is designed to reduce operational costs for companies already performing R&D, allowing them to reinvest those savings into further research activities. The goal is to strengthen the state’s biologic manufacturing industry and attract new investment in the bioscience sector.

Energy and Agriculture

The tiered rate structure of the Regular Method—25% on the first $100,000 of excess expenses—is specifically designed to provide a strong incentive for smaller-scale innovation in agriculture and energy. This has driven significant usage in areas such as crop genetic research and the development of new extraction technologies for the Bakken oil fields. These industries often face high “technological uncertainty” (meeting the federal four-part test) but may operate as smaller, specialized engineering or biotech firms that benefit from the transferability of the credit.

Strategic Considerations for Businesses

Navigating § 57-38-30.5 requires more than just performing research; it requires a strategic approach to tax positioning and administrative compliance.

The Impact of Federal Tax Changes

Because North Dakota’s tax code is so closely tied to the Internal Revenue Code, federal legislative shifts create immediate “ripple effects” in the state. For example, the federal “One Big Beautiful Bill Act” (OBBBA) of 2025 made several permanent changes to individual and corporate tax provisions. While federal credit changes do not always directly impact state calculations, changes to the definition of taxable income (the starting point for North Dakota) or federal amortization requirements for R&D expenses (IRC § 174) can significantly alter the “base amount” and the net value of the state credit.

Apportionment and Remote Workforce

For companies with operations in multiple states, N.D. Admin Code 81-03-05.1-06 provides a critical rule: only amounts incurred in or attributable to North Dakota can be included in the base amount. In an era of remote work, this poses a challenge. If a researcher lives in Minnesota but works for a North Dakota company, their wages may not qualify for the state credit unless the research is physically conducted in North Dakota. Companies must track the physical location of R&D activities with precision to satisfy the geographic nexus required by the statute.

Optimization of the Calculation Method

The ability to choose between the Regular Method and the ASC on a year-to-year basis is a powerful optimization tool. Generally:

• The Regular Method is superior for companies with low historical gross receipts or those who have seen a massive, steady increase in R&D spending compared to their receipts.
• The ASC Method is superior for companies with high historical gross receipts that might “drown out” their research spending under the regular formula, or for companies with erratic R&D spending patterns where a 3-year rolling average provides a lower hurdle than a gross-receipts-based baseline.

Comprehensive Narrative Example: “Great Plains Robotics”

To tie all these elements together, let us examine “Great Plains Robotics” (GPR), a C-corporation headquartered in Fargo. GPR is a certified “primary sector business” that designs autonomous weeding drones for sugar beet farmers.

Year 1: Starting the Research

In its first year of operation (2022), GPR spends $200,000 on research. Because it has no prior research history and no prior gross receipts, its base amount for the Regular Method is $0 (or 50% of current expenses depending on the startup election).

• Current QRE: $200,000.
• Base: $100,000 (50% election).
• Excess: $100,000.
• Credit: $100,000 x 25% = $25,000.

Since GPR has no income and thus no tax liability, and it is a certified primary sector business with $0 revenue, it applies for certification as a “Qualified R&D Company” through the Department of Commerce (Form SFN 58638). Once certified, it sells its $25,000 credit to a local manufacturing plant for $20,000 cash to fund more prototypes. Both parties file Form CTS.

Year 4: Scaling Up

By 2025, GPR has grown. Its 2025 ND QREs are $800,000. Its gross receipts for the previous four years have grown to an average of $1,000,000.

• Regular Method:
  • Base (3% of $1M): $30,000.
  • Excess: $770,000.
  • Credit on first $100k: $25,000.
  • Credit on remaining $670k: $53,600 (8%).
  • Total Regular Credit: $78,600.
• ASC Method:
  • Average QRE (prior 3 years): $400,000 (assumed).
  • Base (50% of Avg): $200,000.
  • Excess: $600,000.
  • Credit on first $100k: $17,500.
  • Credit on remaining $500k: $28,000 (5.6%).
  • Total ASC Credit: $45,500.

GPR elects the Regular Method and uses the $78,600 to offset its now-substantial corporate income tax bill. If it still had no liability, it could continue to sell up to its lifetime limit of $100,000 in credits.

Final Thoughts: Strategic Value and Future Outlook

North Dakota Century Code § 57-38-30.5 is far more than a simple tax deduction; it is a sophisticated financial instrument designed to catalyze the state’s technological future. By anchoring the credit to the federal IRC while maintaining a strictly local nexus, North Dakota has created a system that is both familiar to tax professionals and fiercely protective of the state’s own economic growth.

The dual-track calculation system ensures that companies at all stages of their lifecycle—from pre-revenue biotech startups to multi-billion dollar energy cooperatives—can find a path to tax relief. Furthermore, the $100,000 transfer provision provides a unique “liquidity bridge” for early-stage primary sector businesses that is rarely found in other states.

As we look toward the 2025-2027 biennium, the credit will likely face continued scrutiny through the Legislative Management’s interim committees to ensure its $80 million annual GDP impact remains cost-effective. For businesses operating in North Dakota, the Research Expense Credit remains the single most important tool for reducing the “risk-adjusted cost” of innovation. Success requires a proactive stance on documentation, an annual review of calculation methods, and a close eye on the Department of Commerce for certification opportunities. For those who master the nuances of § 57-38-30.5, the rewards are a direct, dollar-for-dollar strengthening of their competitive position within the Peace Garden State.