Form SFN 58638 (Certification Application)

Form SFN 58638 serves as the official certification application for businesses seeking to qualify as research and development companies authorized to sell, transfer, or assign unused North Dakota income tax credits. It functions as a critical regulatory gateway that allows early-stage, pre-revenue innovators to convert non-refundable tax credits into immediate liquidity by facilitating their sale to profitable third-party taxpayers.

The broader operational context of Form SFN 58638 reveals it to be a sophisticated instrument of economic policy, bridging the gap between high-level legislative intent and the practical financial needs of the North Dakota technology and manufacturing sectors. While the Research and Experimental Expenditure Tax Credit, established under North Dakota Century Code (N.D.C.C.) § 57-38-30.5, offers substantial tax relief to established firms, the non-refundable nature of the credit historically provided little benefit to startups that lacked taxable income. By introducing the mechanism for credit transferability, the North Dakota Legislative Assembly created a “synthetic refundability” model, where the value of the credit can be extracted as cash through private-market transactions. Form SFN 58638 is the mandatory prerequisite for entering this market, ensuring that only businesses meeting specific growth, revenue, and primary-sector criteria can participate in the state’s tax-expenditure program. This certification process involves a dual-agency review where the North Dakota Department of Commerce evaluates the economic development potential of the business, while the Office of State Tax Commissioner monitors the resulting fiscal impacts and compliance with state revenue laws.

The Regulatory Framework of the North Dakota Research and Development Tax Credit

The evolution of North Dakota’s research tax credit reflects a legislative journey toward creating a competitive environment for innovation. Originally enacted in 1987 via House Bill No. 1645, the credit was patterned after a successful Minnesota model intended to stimulate local corporate investment in scientific and technological advancements. Over the decades, the statute has been amended to prioritize small businesses and to introduce transferability, a feature that distinguishes North Dakota from many other jurisdictions.

Statutory Authority: N.D.C.C. § 57-38-30.5

The legal foundation for the R&D credit is found in N.D.C.C. § 57-38-30.5, which grants a credit against the tax imposed on corporations and individuals for conducting qualified research within the state. The law explicitly adopts federal definitions but applies a North Dakota-centric filter to the expenditures.

Legal Provision	Description and Application
Qualified Research	Defined by IRC § 41(d), but must be conducted within North Dakota boundaries.
Qualified Research Expenses	Includes wages, supplies, and contract research expenses as defined by IRC § 41(b), excluding activities outside North Dakota.
Base Amount	A calculated threshold representing historical research spending, following IRC § 41(c), but limited to North Dakota receipts and research.
Transferability	The unique provision allowing “Qualified Research and Development Companies” to sell up to $100,000 of unused credits.

The statutory language ensures that the tax benefit remains anchored to the state’s economy. For instance, while federal law may allow for research conducted across state lines, N.D.C.C. § 57-38-30.5 specifically excludes any expenses incurred for research conducted outside of North Dakota, creating a powerful incentive for businesses to establish and maintain their research infrastructure within the state.

The Role of the Department of Commerce in Certification

The North Dakota Department of Commerce, specifically the Division of Economic Development and Finance, acts as the primary administrator for Form SFN 58638. The department’s objective is to verify that applicants are not merely shell companies but are genuine “Primary Sector Businesses” that add value to the state’s economic fabric. This verification is a multi-step process that involves an analysis of the company’s “value-added” processes, its potential to bring in “new wealth,” and its adherence to revenue ceilings designed to target the incentive toward emerging small businesses.

Understanding the “Qualified Research and Development Company” Designation

To successfully navigate the SFN 58638 application, a taxpayer must meet four fundamental qualification criteria. These rules are strictly applied, and failure to meet any single condition results in the denial of the certification and, consequently, the inability to sell unused tax credits.

Eligibility Criteria for SFN 58638 Certification

The following table outlines the mandatory qualifications for a business seeking the designation of a “Qualified Research and Development Company” for credit transfer purposes:

Qualification Category	Specific Requirement
Taxpayer Entity Type	Individual, “C” corporation, estate, or trust. Pass-through entities (S-corps, Partnerships) are ineligible for the sale provision.
Primary Sector Certification	Must be currently certified by the ND Department of Commerce as a Primary Sector Business.
Annual Gross Revenue	Must be less than $750,000 in annual gross revenues (based on the average of the preceding three years or projected for new businesses).
Research History	Must be conducting new research in ND and must not have claimed the ND R&D credit prior to January 1, 2007.

The Exclusion of Pass-Through Entities from the Sale Provision

One of the most critical nuances in the guidance provided by the State Tax Commissioner is the distinction between earning the credit and selling the credit. While a partnership or an S-corporation is fully eligible to conduct qualified research and earn the North Dakota R&D tax credit, the entity level itself cannot sell, transfer, or assign the credit. Instead, the credit “passes through” to the individual shareholders, partners, or members in proportion to their ownership interest, who then claim the credit on their personal North Dakota income tax returns.

The “Qualified Research and Development Company” status specifically allows a “C” corporation or an individual taxpayer (operating a sole proprietorship) to sell the credit because these entities bear the tax liability directly at the reporting level. This structural requirement forces emerging businesses to evaluate their choice of entity early in the research lifecycle if their strategic goal is to monetize credits for cash rather than carrying them forward to offset future personal tax liabilities.

The Primary Sector Requirement and “New Wealth” Creation

A business cannot receive certification via SFN 58638 without first satisfying the definitions of a Primary Sector Business under N.D.C.C. § 1-01-49. This requirement is intended to ensure that state tax subsidies are directed toward companies that expand the economic base rather than those that simply provide services to the existing local population.

The Department of Commerce defines a Primary Sector Business as one that, through the employment of knowledge or labor, adds value to a product, process, or service that results in the creation of “new wealth”. This is often assessed using Form SFN 52998, where a business must prove that a significant portion of its sales comes from customers outside the state or that it provides a product previously unavailable in North Dakota. For the purposes of R&D credit transferability, this ensures that the research being conducted has the potential to lead to a scalable, export-oriented business model.

Detailed Analysis of Form SFN 58638 Components and Filing Requirements

The application for certification as a Qualified Research and Development Company is a relatively concise document, yet it requires substantial supporting evidence to be approved. The North Dakota Department of Commerce updated the form in June 2022 to reflect modern filing standards and confidentiality requirements.

Information Disclosure and Confidentiality

The form requires the disclosure of sensitive business information, including the Federal Employer Identification Number (FEIN) or Social Security Number (SSN). Consistent with N.D.C.C. § 57-38-30.5 and North Dakota’s privacy laws, information provided in the shaded areas of the form is kept strictly confidential within the Department of Commerce and the State Tax Department. This protection is essential for businesses conducting proprietary research, as it prevents competitors from accessing details about their innovation pipelines or financial performance through public record requests.

Mandatory Attachments for SFN 58638

To complete the application, the business must provide more than just basic identifying information. The Department of Commerce requires a detailed look into the company’s financial and technical operations.

1. Research Narrative: A one-page description of the new research and development to be conducted in North Dakota. This document is analyzed to ensure the activities align with the federal “Four-Part Test” for qualified research.
2. Federal Income Tax Returns: Copies of page one of the applicant’s federal income tax returns for the preceding three years are required. For companies that have existed for less than three years, all available years must be provided.
3. Proforma Returns for Consolidated Groups: If the applicant was included in a federal consolidated tax return, they must provide page one of their proforma returns or the federal consolidated return schedule of gross income and deductions to isolate their specific revenue and expenditures.
4. Revenue Certification: The applicant must specify whether the $750,000 revenue figure is a projected amount (for new startups) or the actual average gross revenue from the preceding three years.

Submission and Review Workflow

Once a completed application and all attachments are sent to the Economic Development & Finance Division in Bismarck, a review process begins. If the Department of Commerce approves the application, it certifies the business as a “Qualified Research and Development Company.” This certification is then forwarded to the North Dakota State Tax Department for final review and to be placed on file for future credit transfer activities. The certification effectively “activates” the company’s ability to use Form CTS to execute a credit sale.

Mechanics of the North Dakota R&D Tax Credit Calculation

Before a company can use SFN 58638 to certify its ability to sell credits, it must first accurately calculate the credit it has earned. North Dakota offers two primary methodologies for this calculation: the Regular Method and the Alternative Simplified Computation (ASC) Method.

The Regular Calculation Method

The Regular Method is the traditional way of computing the credit and is generally more beneficial for companies with a consistent or declining base amount relative to their current research spending. The credit is based on “excess qualified research expenses,” which are current-year QREs minus a “base amount”.

The tiered credit rates for the Regular Method are as follows:

Expenditure Tier	Credit Rate
First $100,000 of Excess QREs	25%
Excess QREs above $100,000	8%

A key restriction in the regular method is that the “base amount” cannot be less than 50% of the current year’s qualified research expenses. This rule, often called the “minimum base amount,” prevents companies from claiming a credit on 100% of their spending, even if their historical research levels were near zero.

The Alternative Simplified Computation (ASC) Method

Introduced for tax years 2019 and beyond, the ASC method simplifies the calculation for businesses that may not have extensive historical records or those with high historical base amounts. Under the ASC method, the credit is based on the “North Dakota alternative excess research and development expenses,” which is the amount by which current QREs exceed 50% of the average QREs from the three preceding tax years.

The ASC rates are:

ASC Expenditure Tier	Credit Rate
First $100,000 of ASC Excess	17.5%
ASC Excess above $100,000	5.6%

For new companies with no QREs in the prior three years, a special “start-up” ASC rate applies: 7.5% of the first $100,000 of QREs and 2.4% of the amount exceeding $100,000.

Comparative Example of Credit Calculations

Consider a newly certified Qualified Research and Development Company with $300,000 in current-year QREs and zero historical spending.

Using the Regular Method:

1. Current QREs: $300,000
2. Base Amount (50% Floor): $150,000
3. Excess QREs: $150,000
4. Credit on First $100,000: $100,000 × 25% = $25,000
5. Credit on Remaining $50,000: $50,000 × 8% = $4,000
6. Total Credit: $29,000

Using the ASC Method (for a new company):

1. Current QREs: $300,000
2. Credit on First $100,000: $100,000 × 7.5% = $7,500
3. Credit on Remaining $200,000: $200,000 × 2.4% = $4,800
4. Total Credit: $12,300

In this scenario, the Regular Method provides a significantly higher benefit. However, the ASC method can be more advantageous for established companies with large historical research bases that would otherwise result in a very high “base amount” under the regular formula.

Local State Revenue Office Guidance on Credit Transfers

The Office of State Tax Commissioner provides strict procedural guidance for the actual sale and transfer of credits once the SFN 58638 certification has been obtained. This process is governed by the joint filing of Form CTS (Credit Transfer Statement).

The 30-Day Mandatory Filing Window

A critical administrative rule highlighted in both the Tax Commissioner’s website and Form CTS instructions is the filing deadline. The transferor (the company that earned the credit) and the transferee (the purchaser) must jointly file Form CTS with the Tax Commissioner within 30 days of the date the purchase agreement is fully executed. Failure to meet this 30-day window can result in the denial of the transfer, rendering the purchase agreement ineffective for tax purposes.

Financial and Tax Implications of the Sale

When a company sells its unused R&D credit, the transaction has significant federal and state tax consequences that must be reported correctly.

1. Proceeds as Taxable Income: For federal and state income tax purposes, the gross proceeds from the sale of a state tax credit are generally considered taxable income.
2. North Dakota Specific Assignment: North Dakota law stipulates that the entire gross proceeds from the sale of the R&D credit are assignable to North Dakota and are subject to income tax on the transferor’s North Dakota return. These proceeds cannot be apportioned outside the state, nor can they be reduced by losses or deductions allowed for other North Dakota income tax purposes.
3. Reporting Formats: Individual sellers must report the proceeds on Schedule ND-1CS, while “C” corporations report them on the applicable line of Form 40.

Restrictions and Limitations on the Transferee

The guidance for practitioners also clarifies the rights and limitations of the entity purchasing the credit.

• No Carryback for Purchasers: While a company that earns the credit can carry it back three years to get a refund of past taxes, a company that purchases a credit is prohibited from carrying it back. The purchaser may only use the credit to offset current or future tax liability.
• 15-Year Carryforward: The purchaser may carry any unused portion of the purchased credit forward for up to 15 succeeding taxable years.
• Irrevocability: Once the credit is transferred via Form CTS, the sale is irrevocable. The purchaser cannot subsequently sell, assign, or transfer the credit to another party.

Case Study: Agri-Tech Solutions, Inc.

To illustrate the end-to-end application of Form SFN 58638 and the R&D credit transfer, consider a hypothetical example based on current North Dakota tax law and administrative guidance.

Background and Research Activities

Agri-Tech Solutions, Inc. is a Fargo-based “C” corporation that develops AI-driven sensor technology for precision agriculture. In 2024, the company incurred $250,000 in wages for software engineers and $50,000 in supplies for building sensor prototypes. All activities were conducted in a facility in Cass County, North Dakota.

• Qualified Research Expenses (QREs): $300,000
• Entity Status: “C” Corporation (Eligible for sale)
• Revenue: $150,000 (Under the $750,000 cap)
• Prior Claims: None (New research after 2007)

Certification and Calculation

Agri-Tech first applies for Primary Sector certification (Form SFN 52998) to prove it adds value to the agricultural sector and brings in “new wealth” through exportable sensor technology. After obtaining Primary Sector status, they file Form SFN 58638 with the Department of Commerce, attaching their research narrative and federal tax returns.

They calculate their credit using the Regular Method. With zero historical spending, their base amount is set at the 50% floor of $150,000.

• Excess QREs: $150,000 ($300k – $150k)
• Credit Calculation: (100,000 × 25%) + (50,000 × 8%) = $25,000 + $4,000 = $29,000

The Sale Transaction

Agri-Tech has no state tax liability for 2024. They find a profitable North Dakota energy company willing to purchase the $29,000 credit at a discounted rate of $0.85 per dollar.

• Sale Price: $24,650 ($29,000 × 0.85)
• Agreement Date: November 1, 2024
• Filing Deadline: Form CTS must be filed by December 1, 2024 (30 days).

Agri-Tech receives $24,650 in cash to fund further research. They report this amount as North Dakota income on their 2024 Form 40. The energy company reduces its 2024 North Dakota corporate tax by $29,000, realizing a net financial gain of $4,350 ($29,000 credit – $24,650 purchase price).

Statistical Trends and Fiscal Analysis of the Research Tax Credit

The North Dakota Legislative Management and the State Tax Commissioner provide data on the usage of the research tax credit through biennial reports and committee memorandums. This data highlights the credit’s importance to the state’s fiscal policy.

Individual and Corporate Claim Statistics

The following table summarizes the historical performance of the credit, demonstrating its growth and the impact of the 2007 legislative changes that introduced transferability.

Tax Year	Individual Claims (Total Amount)	Number of Individual Returns	Corporate Claims (Total Amount)	Number of Corporate Returns
2007	$530,888	75	$1,944,382	15
2009	$856,534	132	$3,502,244	16
2011	$1,383,298	173	$5,381,168	19
2012	$2,256,413	187	$6,570,148	16
2013	$2,211,488	148	$2,547,115	20
2014	$949,391	133	(Withheld – confidential)	< 5

The 2007 expansion of the credit to include individuals and the transferability provision for small businesses led to a significant increase in the total amount of credits claimed. This reflects the state’s transition from a credit primarily used by large industrial corporations to one that also supports a wider array of technology startups and small engineering firms.

Fiscal Impact on the General Fund

When the research tax credit was first established in 1987, the fiscal impact was a modest $90,000 reduction in general fund revenues for the biennium. Following the 2007 expansion, which included the transferability mechanism enabled by Form SFN 58638, the estimated reduction in general fund revenues grew to $2.47 million for the 2007-09 biennium. As of the 2023-2025 biennium, the credit remains a key component of a suite of business incentives that drive a total biennial tax collection of approximately $11.1 billion.

Administrative Compliance: Tax Clearance Records

A significant administrative hurdle for any business claiming or transferring a North Dakota tax incentive is the “Tax Clearance” requirement established in N.D.C.C. § 54-35-26. Since August 1, 2017, the State Tax Commissioner is prohibited from granting or allowing a tax incentive if the taxpayer is delinquent on any state or local tax obligations.

State Tax Clearance Record (SFN 28220)

This record is required primarily for local tax incentives, but it sets the standard for good standing within the state. It involves a check of:

• Income tax filings and payments
• Sales and use tax collection and permits
• Employee withholding tax compliance

Property Tax Clearance Record (SFN 28202)

For the Research Expense Tax Credit specifically, the taxpayer must obtain a property tax clearance record from each North Dakota county in which they hold a 50% or more ownership interest in real property. This form certifies that all property taxes are paid and there are no outstanding liens of record.

The Property Tax Clearance Record must be attached to the tax return (Form 40 or Form ND-1) for each year the R&D credit is claimed. For companies filing electronically, the record should be submitted as a PDF attachment. If a delinquency is found by a county official, the official will not complete the certification, effectively blocking the taxpayer from claiming the research credit for that year until the debt is settled.

Interaction with Other North Dakota Tax Incentives

Form SFN 58638 does not exist in a vacuum; it is part of a broader ecosystem of tax incentives managed by the Department of Commerce. Businesses pursuing the R&D credit often leverage other programs to maximize their after-tax capital.

Angel Investor Tax Credit (SFN 59140)

While the R&D credit rewards the company for its spending, the Angel Investor Tax Credit rewards the investor for providing capital. An angel fund or individual investor can receive a credit of up to 35% for investing in a “qualified business”. Like the R&D credit, the “qualified business” for the angel investor credit must be a primary sector business.

Automation Tax Credit (SFN 61292)

For companies that have completed their research phase and are moving into manufacturing, the Automation Tax Credit provides a 15% credit on the purchase or capital lease of equipment to automate a manufacturing or animal agricultural process. This program is also limited to primary sector businesses and is capped at $3 million statewide per year.

Coordination of Certifications

The Department of Commerce facilitates these incentives through a centralized Primary Sector Certification process. By obtaining this certification once, a business significantly streamlines its applications for the R&D Company Certification (SFN 58638), the Angel Fund Qualified Business designation, and the Automation Tax Credit.

Practical Guidance for Business Practitioners and Tax Professionals

Navigating the intersection of federal IRC Section 41 and North Dakota N.D.C.C. § 57-38-30.5 requires a high level of technical precision. Professionals should adhere to the following best practices when preparing Form SFN 58638 and claiming the associated credits.

Documentation Requirements for Qualified Research

Audit activity in the R&D space often focuses on the substantiation of qualified activities and expenses. To defend a claim, a business should maintain:

• Project narratives that explicitly address the “Four-Part Test” (Technological in nature, Elimination of uncertainty, Process of experimentation, Permitted purpose).
• Payroll records that map employee time specifically to qualified research projects.
• Detailed lists of supplies and materials consumed during the development of prototypes.
• Contracts and invoices for third-party research services, ensuring the 65% statutory limitation is applied.

Strategic Timing for Form SFN 58638 Filings

Because the $750,000 revenue cap is a hard limit for “Qualified Research and Development Company” status, timing is critical. Startups approaching commercialization should apply for certification while their revenue is still low to ensure they can monetize their early-stage credits. Once a company exceeds the $750,000 threshold, it can no longer sell its credits and must instead carry them forward to offset future tax liabilities.

Evaluating the LIFETIME $100,000 Cap

Taxpayers and their advisors must keep in mind that the ability to sell, assign, or transfer the R&D credit is subject to a lifetime total of $100,000 per company. This cap applies to the amount of credit transferred, not the cash proceeds received. Once a company has transferred $100,000 in credits over any number of years, its certification as a “Qualified Research and Development Company” for transfer purposes effectively expires, though it may still continue to earn and claim credits for its own use.

Final Thoughts

Form SFN 58638 represents a highly successful policy bridge that translates North Dakota’s legislative commitment to innovation into concrete financial support for early-stage companies. By providing a clear, certified pathway to credit transferability, the state has addressed the most significant drawback of traditional tax credits: their lack of utility for pre-revenue entities.

For the modern North Dakota entrepreneur, the certification process is not merely a bureaucratic hurdle but a vital financial tool. It allows for the monetization of intellectual property development at the precise moment when cash flow is most strained. Furthermore, the integration of “Primary Sector” definitions ensures that this benefit is reserved for companies that contribute to the long-term growth and diversification of the state’s economy.

As North Dakota continues to refine its tax code—evidenced by the 2025 legislative focus on property tax reform and expanded business incentives—the R&D credit remains a permanent and central pillar of the state’s economic development strategy. Practitioners who master the nuances of Form SFN 58638, the calculation methodologies of N.D.C.C. § 57-38-30.5, and the procedural requirements of Form CTS will find themselves well-positioned to drive significant value for the state’s most innovative enterprises. The synergy between the Department of Commerce’s economic vision and the Tax Commissioner’s administrative rigor ensures that the North Dakota Research and Experimental Expenditure Tax Credit will continue to be a model for state-level innovation support for years to come.