Within the North Dakota Research and Experimental Expenditure Tax Credit, the 8 percent figure represents the marginal credit rate applied to qualified research expenses that exceed the first $100,000 of incremental spending over the base period. This tiered structure provides a significant 25 percent incentive for initial research investments while maintaining a sustainable 8 percent support level for larger-scale corporate innovation.
The Statutory Architecture of the 8 Percent Tier
The North Dakota Research and Experimental Expenditure Tax Credit, codified under North Dakota Century Code (N.D.C.C.) § 57-38-30.5, serves as the state’s primary fiscal mechanism for incentivizing technological advancement. The legislation is structured to reward incremental increases in research spending, a concept known as an “incremental credit”. The significance of the 8 percent rate lies in its application to the “excess” qualified research expenses (QREs) once the initial incentive threshold has been satisfied. To understand the 8 percent rate, one must first analyze the dual-rate structure of the “Regular Method” of calculation. The statute specifies that the credit is equal to 25 percent of the first $100,000 of excess QREs, followed by 8 percent of all excess QREs surpassing that amount.
This tiered arrangement reflects a deliberate policy choice by the North Dakota Legislative Assembly to maximize the number of participating firms while containing the total fiscal impact on the state’s general fund. By offering a high 25 percent rate at the lower end, the state aggressively recruits small-to-medium enterprises and startups to begin research activities. Conversely, the 8 percent rate provides a more moderate but consistent subsidy for large-scale, multi-year projects typically undertaken by major corporations in the energy, agricultural, and manufacturing sectors. The 8 percent rate acts as the “steady state” incentive for mature research programs, ensuring that North Dakota remains a viable location for long-term industrial modernization without creating an unmanageable budgetary liability.
The Legal Definition of Excess Qualified Research Expenses
The 8 percent rate is only applicable to “excess” expenses, a term of art in tax law that refers to the amount by which a taxpayer’s current-year qualified research expenditures exceed a calculated “base amount”. N.D.C.C. § 57-38-30.5 largely adopts the federal definitions of QREs and base amounts as found in Section 41 of the Internal Revenue Code (I.R.C.), yet it imposes a strict geographic limitation: only activities conducted within the state of North Dakota are eligible.
When a corporation calculates its credit, it must first determine its North Dakota base amount. Under the Regular Method, this is generally calculated by multiplying the taxpayer’s “fixed-base percentage” by the average annual gross receipts attributable to North Dakota for the four preceding years. However, the state imposes a “base amount floor,” stating that the base amount cannot be less than 50 percent of the current year’s QREs. Once the base amount is subtracted from the total QREs, the remaining figure is the “excess.” It is this excess that is subjected to the tiered rates of 25 percent and 8 percent.
| Calculation Component | Statutory Rate / Rule | Application Context |
|---|---|---|
| Primary Tier (First $100k) | 25% | Initial incentive for all claimants |
| Secondary Tier (Excess over $100k) | 8% | Ongoing support for larger projects |
| Minimum Base Amount | 50% of Current QREs | Prevents excessive credits for high-growth firms |
| Geographic Restriction | 100% In-State | Only ND-based expenses and sales included |
Local State Revenue Office Guidance on Calculation Mechanics
The North Dakota Office of State Tax Commissioner provides detailed administrative guidance to ensure taxpayers correctly apply the 8 percent rate. This guidance is primarily disseminated through form instructions, tax booklets, and the North Dakota Administrative Code. Taxpayers are instructed to view the 8 percent tier as a marginal calculation rather than an average one. This distinction is critical for financial forecasting; as a research project scales, the “blended” or effective tax credit rate will gradually decrease from a peak of 25 percent toward a floor of 8 percent.
The revenue office emphasizes that for the purposes of the calculation, QREs must meet the rigorous “Four-Part Test” defined under I.R.C. § 41(d). The guidance clarifies that the 8 percent credit is available for expenditures related to:
- Wages paid to employees performing or directly supervising research activities in North Dakota.
- Supplies used in the conduct of qualified research within the state.
- Contract research expenses, limited to 65 percent of the amount paid to third parties for research performed in North Dakota.
Mathematical Application: The 8 Percent Marginal Calculation
To illustrate the state’s guidance on the tiered calculation, consider a business component development project with the following financial data.
Project Data:
- Total North Dakota QREs for the Current Year: Q = $1,000,000
- North Dakota Base Amount: B = $600,000
- Total Excess QREs: E = Q – B = $400,000
Step-by-Step Credit Determination (C):
- Calculate the Primary Tier Credit (C1):
The first $100,000 of excess is multiplied by 25 percent.
C1 = $100,000 × 0.25 = $25,000 - Calculate the Secondary Tier Credit (C2):
The remaining excess ($400,000 – $100,000 = $300,000) is multiplied by 8 percent.
C2 = $300,000 × 0.08 = $24,000 - Sum for Total Research Expense Credit (Ctotal):
Ctotal = $25,000 + $24,000 = $49,000
In this scenario, the effective credit rate is 12.25 percent ($49,000 / $400,000). For a much larger project with $10,000,000 in excess, the effective rate would be approximately 8.17 percent, demonstrating how the 8 percent rate serves as the foundational incentive for massive industrial investments.
The Alternative Simplified Computation (ASC) Method and its Comparative Rates
Since 2019, North Dakota has allowed taxpayers to elect the Alternative Simplified Computation (ASC) method, which offers a different rate structure that serves as a proxy for the 8 percent Regular Method rate. The ASC method is designed to simplify the administrative burden for taxpayers who may not have the historical gross receipts data required to calculate a fixed-base percentage or for whom the 50 percent base amount floor under the Regular Method would be disadvantageous.
Under the ASC method, the “8 percent” equivalent is the 5.6 percent marginal rate. The tiers for the ASC method are as follows:
- 17.5 percent of the first $100,000 of North Dakota alternative excess research and development expenses.
- 5.6 percent of the North Dakota alternative excess research and development expenses exceeding $100,000.
“Alternative excess” is defined as the current-year QREs in excess of 50 percent of the average QREs for the three preceding taxable years. The guidance from the Office of State Tax Commissioner clarifies that once a taxpayer elects the ASC method for a taxable year, it is binding for that year but can be changed on a year-to-year basis, providing strategic flexibility for firms with fluctuating research budgets.
| Calculation Feature | ASC Method Rule | Regular Method Rule |
|---|---|---|
| High Tier Rate | 17.5% (First $100k) | 25% (First $100k) |
| Low Tier Rate | 5.6% (Over $100k) | 8% (Over $100k) |
| Base Period | 3-Year Average QREs | 4-Year Gross Receipts |
| Base Amount | 50% of 3-Year Average | Fixed-Base % of Receipts |
| New Research Rate | 7.5% / 2.4% (Zero QRE prior years) | 6% (First-time claimants) |
The “New Research Rate” under the ASC method is particularly important for businesses that have not conducted research in the state during any of the three preceding years. In such cases, the credit is equal to 7.5 percent of the first $100,000 of total QREs and 2.4 percent of the total QREs over $100,000. This lower rate structure prevents companies from receiving a windfall for research that is not truly “incremental” relative to their historical presence in the state.
Historical Evolution and Standardization of the 8 Percent Rate
The current 8 percent rate is the result of decades of legislative refinement. When the North Dakota Research Expense Tax Credit was first enacted in 1987 via House Bill 1645, it was modeled after a successful Minnesota program and featured an 8 percent rate on the first $1.5 million of excess research expenses, with a 4 percent rate for any excess beyond that amount.
The legislature’s objective in 1987 was to foster a competitive environment for newly established corporations. However, as the state’s economy evolved, specifically during the energy boom of the early 2000s, the legislature sought to make the credit more aggressive for startups while capping the total exposure from legacy firms. Between 2007 and 2016, the tiered system was highly complex, with secondary rates that varied based on the year the taxpayer first began conducting research in North Dakota. For those who began research before 2007, the second-tier rate was 18 percent for the 2010 through 2016 period, intended to stimulate immediate investment during a period of high economic growth.
For any credits claimed in taxable years beginning after December 31, 2016, the legislature standardized the secondary tier at 8 percent for all taxpayers, regardless of their historical research start date. This standardization provided a clear, predictable framework for business planning and simplified the state’s audit and collection processes.
| Historical Period | Tier 1 Rate | Tier 2 Rate (Marginal) | Key Legislative Change |
|---|---|---|---|
| 1987 – 2006 | 8% (First $1.5M) | 4% (Over $1.5M) | Original Enactment |
| 2007 – 2010 | 25% (First $100k) | 7.5% – 14.5% (Variable) | Shift to focus on startups |
| 2011 – 2016 | 25% (First $100k) | 18% or 20% (Based on start date) | Targeted growth incentives |
| 2017 – Present | 25% (First $100k) | 8% (Fixed for all) | Standardization and Stability |
Strategic Liquidity: Transferability for Small Primary Sector Businesses
One of the most distinctive features of the North Dakota R&D tax credit—and one that specifically interacts with the 8 percent and 25 percent tiers—is the provision for credit transferability. This mechanism allows “Qualified Research and Development Companies” to sell their unused tax credits to other North Dakota taxpayers, providing immediate cash flow for businesses that may not yet have a state income tax liability.
To qualify for this provision, a taxpayer must undergo a rigorous certification process with the North Dakota Department of Commerce Division of Economic Development and Finance. The requirements for certification emphasize small, primary sector businesses that are new to the state’s research ecosystem:
- Primary Sector Certification: The business must be certified as a primary sector business, which typically includes manufacturing, food processing, or specific value-added service industries.
- Revenue Limitation: The company must have annual gross revenues of less than $750,000.
- Research Novelty: The company must be conducting research in North Dakota for the first time.
- Transfer Cap: A qualified company may sell, transfer, or assign up to a lifetime total of $100,000 of its unused tax credit.
The transferability of the credit effectively makes the 25 percent and 8 percent tiers a “refundable” asset for the first $100,000 of credit value. For a small manufacturing startup, generating $100,000 in tax credits through significant R&D investment would represent $100,000 in liquid capital that can be reinvested in equipment, payroll, or further experimentation, regardless of whether the company has reached profitability.
The Role of Form CTS in the Transfer Process
The Office of State Tax Commissioner provides strict procedural guidance for these transfers. Both the transferor (the research company) and the transferee (the purchaser of the credit) must jointly complete and file Form CTS – Credit Transfer Statement. This statement must be filed within 30 days of the execution of the purchase agreement. The purchaser of the credit receives the same rights to the credit as the transferor, with one significant exception: the purchaser may not carry back the credit to prior years, though they may carry it forward for the remainder of the 15-year statutory period.
State Revenue Office Guidance on Filing and Compliance
The administrative burden of claiming the North Dakota R&D tax credit is managed through the filing of specific forms and the maintenance of contemporaneous records. The state revenue office does not provide a single, dedicated R&D worksheet equivalent to the federal Form 6765; instead, the credit is claimed as a line item on the taxpayer’s respective income tax return.
Required Forms by Entity Type
The guidance specifies that the credit must be claimed on the following forms:
- Individual or Sole Proprietor: Schedule ND-1TC, Line 9a. Supporting documentation must be attached to the Form ND-1.
- C Corporation: Form 40, Schedule TC, Line 6. For corporations filing a consolidated combined return, the credit may be applied against the aggregate tax liability of the entire group, provided the credit was generated by a member of that group and not purchased from an outside party.
- S Corporation: Form 60, Schedule K. The credit is calculated at the entity level and then passed through to shareholders in proportion to their ownership interests.
- Partnership/LLC: Form 58, Schedule K. Like S-corps, the credit passes through to partners or members.
- Fiduciary (Estates/Trusts): Schedule 38-TC.
The Property Tax Clearance Requirement
A critical and often overlooked piece of revenue office guidance is the requirement for a Property Tax Clearance Record. To be eligible for the R&D tax credit, a taxpayer must be in “good standing” with respect to property taxes in North Dakota. The corporation must complete and include this clearance as certification that it is not delinquent in any county where the corporation or its responsible officers own at least a 50 percent interest in real property. Failure to meet this requirement can lead to the disqualification of the entire research credit claim, regardless of the validity of the research expenditures.
Audit Guidelines and Record Retention
The Office of State Tax Commissioner reserves the right to audit R&D claims to ensure compliance with both state law and the incorporated federal definitions. The guidance recommends that taxpayers retain all records related to an R&D claim for at least four years following the filing of the return or the utilization of a carryforward.
Documentation must be sufficient to demonstrate that the 8 percent and 25 percent rates were applied to qualified activities. Essential records include:
- Project narratives describing the technical uncertainties and the process of experimentation.
- Detailed payroll records and time tracking for employees involved in R&D.
- Invoices and receipts for all research supplies.
- Copies of contracts and payment records for third-party research conducted in North Dakota.
Statistical Insights into Credit Utilization and Economic Impact
The North Dakota Legislative Assembly and the Office of State Tax Commissioner periodically evaluate the effectiveness of the R&D tax credit, specifically monitoring how the 8 percent and 25 percent tiers influence industrial behavior. A comprehensive review by the 2017-18 interim Taxation Committee provided a quantitative window into the program’s success.
Participation and Claims Data
Historically, the credit has seen broad participation across the North Dakota business landscape. Between 2007 and 2016, approximately 1,800 taxpayers claimed the credit. In the 2016 tax year alone, individuals claimed over $4.5 million in research credits, while corporations claimed over $500,000. The smaller corporate claim figure is often attributed to the large depreciation deductions and net operating losses common in capital-intensive industries, which frequently lead to the accumulation of unused credits that must be carried forward.
| Fiscal Metric | Impact Magnitude (Estimated over 20 years) |
|---|---|
| Annual GDP Contribution | $80,000,000 per year |
| Total Job Creation | 1,100 jobs at peak utilization |
| Total State Revenue Generated | $213,000,000 |
| Direct State Cost (Tax Foregone) | $66,000,000 |
| Net Economic Impact | Highly Positive |
The “Net Budget Liability” Paradox
An interesting finding from the state’s evaluation is that the R&D tax credit is a net liability to the state budget, resulting in an estimated $30 million less in total tax collections over 20 years than if the credit did not exist. However, this “liability” is viewed as a necessary investment, as it generated over $213 million in secondary revenue through increased economic activity, population growth, and business expansion. The 8 percent rate, specifically, allows the state to support large-scale industrial projects that provide high-paying jobs in professional and technical services—sectors that are essential for diversifying the state’s economy beyond its traditional reliance on raw commodity exports.
Case Study: Large Utility Cooperative Utilization
The impact of the 8 percent tier is most evident in large-scale operations. Testimony from Basin Electric Power Cooperative revealed that between 2014 and 2016, the cooperative averaged 529 employees dedicating significant work time to R&D activities. These activities were focused on environmental compliance, carbon capture, and safety technologies—projects where the “excess” expenditures easily moved into the 8 percent marginal tier. During this period, the cooperative accumulated $10.3 million in credits. While they could only use a portion due to large depreciation deductions, they successfully carried forward $8.7 million in credits, showcasing the long-term value of the 15-year carryforward period in conjunction with the 8 percent rate.
Carryback and Carryforward: Strategic Timing of the 8 Percent Tier
Because the North Dakota R&D tax credit is nonrefundable for most taxpayers, the rules regarding the carryover of unused credits are paramount. The state offers a generous flexibility that allows firms to realize the benefit of the 8 percent marginal rate across different economic cycles.
The 3-Year Carryback
If the credit generated in a current tax year exceeds the taxpayer’s liability, the excess must first be carried back to each of the three preceding taxable years. This carryback can result in an immediate tax refund for the prior years, providing a vital source of liquidity during economic downturns or periods of heavy reinvestment. Claims for carryback must be filed within three years of the due date of the return for the year in which the credit was earned.
The 15-Year Carryforward
Following the carryback, any remaining unused credit may be carried forward for up to 15 succeeding taxable years. For major capital projects, where the research phase may take years to yield a profitable product, this 15-year window is essential. It ensures that the “8 percent” value of a massive research investment made today can be used to offset taxes on the profits generated by that innovation a decade later.
This carryforward duration is significantly longer than the carryover periods for other North Dakota incentives. For example, the Geothermal/Solar energy credit and the Automation Tax Credit typically offer only a 5-year carryforward. The 15-year provision for R&D reflects the state’s understanding that true scientific and industrial innovation occurs over much longer time horizons.
The 8 Percent Rate in a Multi-State Context
For corporate tax planners, the 8 percent marginal rate makes North Dakota a highly competitive jurisdiction. While many states offer a flat credit rate between 5 percent and 10 percent, North Dakota’s tiered 25 percent and 8 percent structure often results in a higher “blended” rate for projects under $1 million in excess spending.
Furthermore, North Dakota’s adoption of the federal definitions for QREs reduces the compliance burden for firms operating in multiple states. However, the “ND-sourced” requirement for the base amount means that a firm cannot simply use its federal base amount; it must perform a state-specific calculation that excludes out-of-state sales and research activity. This requirement ensures that the 8 percent rate specifically incentivizes “on-shoring” research jobs to North Dakota from other states.
Final Thoughts: The 8 Percent Tier as a Pillar of North Dakota’s Innovation Policy
The 8 percent credit percentage is a central pillar of the North Dakota Research and Experimental Expenditure Tax Credit, functioning as the primary driver of value for the state’s most ambitious industrial projects. By pairing a high-octane 25 percent rate for initial research entry with a sustainable 8 percent rate for ongoing investment, the state has created a balanced incentive that appeals to both the emerging startup and the established industrial leader.
The revenue office guidance surrounding this rate emphasizes a commitment to geographic focus and technical rigor. Through the incorporation of I.R.C. § 41, the state ensures that only genuine scientific and technological experimentation is rewarded, while the “ND-sourced” requirement guarantees that the economic benefits—in the form of high-paying jobs and GDP growth—remain within the state’s borders.
With the added flexibility of the Alternative Simplified Method, a generous 15-year carryforward, and a unique transferability provision for small primary sector businesses, the North Dakota R&D credit offers a sophisticated toolkit for corporate tax strategy. As the state moves toward a future defined by energy transition and agricultural automation, the stability of the 8 percent marginal rate will continue to serve as a beacon for firms seeking a stable and supportive environment for long-term innovation. For the professional peer navigating the North Dakota tax landscape, understanding the mechanics, history, and administrative nuances of this 8 percent tier is not merely a compliance task, but a strategic imperative for optimizing the return on research and development investment.
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What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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