In North Dakota tax law, the “Annual Gross Revenues (Under $750,000)” threshold identifies a “Qualified Research and Development Company,” enabling small primary sector firms to sell or transfer unused R&D tax credits for immediate liquidity. This specific financial ceiling serves as a regulatory gatekeeper, ensuring that the state’s most flexible tax incentives remain targeted toward early-stage startups that have yet to achieve significant commercial scale.

The broader contextual framework for this threshold is found in North Dakota Century Code (N.D.C.C.) § 57-38-30.5, which governs the Research and Experimental Expenditure Tax Credit. While the credit itself is available to a wide array of corporate and individual taxpayers conducting qualified research in the state, the ability to monetize the credit through sale or assignment is strictly reserved for entities meeting this revenue cap, among other requirements. By limiting this benefit to firms with less than $750,000 in annual gross revenues, the North Dakota Legislative Assembly created a targeted mechanism to support the primary sector—businesses that add value to products or processes and bring new wealth into the state—during their most cash-vulnerable phases of development. This threshold is not merely a number but a deliberate policy tool designed to bridge the gap for technology and manufacturing startups, allowing them to reinvest the proceeds from credit sales into further innovation before they have reached a state of consistent profitability.

The Statutory Architecture of the North Dakota R&D Tax Credit

The North Dakota Research and Experimental Expenditure Tax Credit was established in 1987 via House Bill 1645 to incentivize corporations to undertake research and development activities within the state borders. Over the decades, the law has undergone several significant transformations to expand its scope and utility, particularly regarding its application to pass-through entities and the introduction of transferability provisions. The legal structure is inherently tied to federal definitions, yet it maintains distinct North Dakota-specific limitations that shape its impact on the local economy.

The evolution of the credit highlights a shifting priority from broad corporate support to targeted entrepreneurial growth. The initial 1987 enactment provided a corporate income tax credit equal to 8 percent of the first $1.5 million dollars of North Dakota qualified research expenses in excess of base period research expenses, and 4 percent of any amount exceeding that threshold. The restructuring that occurred during the 2007 legislative session was a watershed moment, as House Bill 1412 expanded the availability of the research expense tax credit to pass-through entities, while House Bill 1018 introduced the ability for a taxpayer to sell, transfer, or assign up to $100,000 in unused credits.

Legislative Evolution of N.D.C.C. § 57-38-30.5

The history of the credit is marked by several key legislative updates that have refined the calculation methods and the transferability of the credit.

The 2009 amendment through House Bill 2207 was particularly significant because it added a subsection to safeguard the state’s reference to federal definitions. This ensures that even if the federal government were to allow Internal Revenue Code Section 41 to expire, the North Dakota definitions of “qualified research expenses” and “base amount” would remain effective for state tax purposes, providing a level of regulatory stability that is crucial for long-term business planning.

Federal Alignment and State-Level Divergence

The North Dakota credit relies heavily on federal law for its technical core. N.D.C.C. § 57-38-30.5 explicitly states that “qualified research expenses” and “base amount” have the same meaning as provided in Section 41 of the Internal Revenue Code. However, the state applies a strict geographic filter. Any expenses incurred for research conducted outside of North Dakota are excluded from the calculation of the credit. Similarly, the base amount must only include receipts and expenses attributable to North Dakota operations.

This duality creates a specific compliance burden for taxpayers. While the four-part test for qualified research—being technological in nature, having a permitted purpose, eliminating uncertainty, and involving a process of experimentation—is identical to the federal standard, the accounting must be siloed by state lines. For businesses with operations in multiple states, this requires a rigorous allocation of wages, supplies, and contract research costs specifically to North Dakota-based projects.

Defining the $750,000 Annual Gross Revenue Threshold

The $750,000 revenue threshold is the definitive criterion used to identify a “Qualified Research and Development Company” under the law. This designation is the prerequisite for a taxpayer to elect to sell, transfer, or assign their unused credits. The Office of State Tax Commissioner and the Department of Commerce provide specific administrative guidance on how this threshold is interpreted and verified.

Calculation Mechanics of Annual Gross Revenues

Guidance from the Department of Commerce, specifically found in the instructions for Form SFN 58638 (Application for Certification), clarifies how gross revenues should be measured for eligibility. The application of the threshold depends on the business’s stage of development.

Established Entities: For companies that have been in operation for multiple years, the gross revenue is calculated as the average gross revenue for the preceding three taxable years. This three-year average prevents a company from qualifying simply because of one anomalous year of low sales.

New Entities and Startups: For businesses that have not been in operation for a full year, the Department allows for a projected revenue amount. This projection must be supported by the company’s business plan and initial operational data.

Consolidated Group Considerations: If a taxpayer is included in a federal consolidated tax return, the guidance requires the submission of pro-forma returns or copies of the federal consolidated return schedule of gross income and deductions. This ensures that the $750,000 limit is applied to the specific entity conducting the research, rather than allowing a large parent company to hide behind a small subsidiary’s revenue.

The definition of “gross revenue” in this context generally mirrors gross receipts attributable to the state. Taxpayers are instructed to include gross receipts but to exclude returns and allowances to reach a net revenue figure that accurately reflects their commercial scale.

Comparative Significance of the Threshold

To understand the policy impact of the $750,000 cap, it is helpful to compare it to other state tax thresholds. The North Dakota R&D credit transfer provision is more restrictive than many other incentives, highlighting its focus on micro-enterprises.

The $750,000 limit is low enough that it primarily captures pre-commercialization or early-stage commercialization firms. By the time a company has established a stable market presence and crossed the $750,000 mark, the state assumes the company is closer to achieving the profitability necessary to use the tax credits against its own liabilities, rather than needing to sell them to third parties.

Primary Sector Business Certification: The Gateway Requirement

The $750,000 revenue threshold does not exist in isolation. To be a “Qualified Research and Development Company,” the taxpayer must first be certified as a “Primary Sector Business” by the Department of Commerce Division of Economic Development and Finance. This certification is the foundational requirement for many of the state’s most potent economic development tools.

The Value-Added and New Wealth Tests

Under North Dakota law, a primary sector business is defined by its ability to add value and create “new wealth”. N.D.C.C. § 1-01-49 provides the baseline definition: an individual, corporation, limited liability company, partnership, or association that, through the employment of knowledge or labor, adds value to a product, process, or service that results in the creation of new wealth.

The concept of “new wealth” is a specific economic term in North Dakota’s regulatory lexicon. It refers to revenues generated by a business in the state through the sale of products or services to customers located outside of North Dakota, or to customers within the state if those products or services were previously unavailable or difficult to obtain from an existing North Dakota business. This definition is designed to prioritize “export-oriented” businesses that bring outside dollars into the state’s economy.

Certification Criteria and the Value-Stream Analysis

The Department of Commerce utilizes a four-step evaluation process for primary sector certification, as detailed in the SFN 52998 form. This process moves beyond simple revenue counts to look at the “value stream” of the business.

• Step 1: Value Transformation: The business must demonstrate that it transforms raw materials or natural resources into goods with greater value (e.g., transforming soybeans into soybean meal) or uses human resources to customize software applications.
• Step 2: Market Breakdown: The applicant must provide a percentage breakdown of their sales. A primary sector business typically shows a significant portion of sales to regional (SD, MT, MN), national, or international markets.
• Step 3: Supplier Status: A business can also qualify if it acts as a supplier or sub-contractor for other North Dakota companies that eventually sell their goods out-of-state. For example, a firm that manufactures high-tech components for a larger machinery manufacturer in Bismarck might qualify even if its direct customer is local, provided the finished machine is exported.
• Step 4: Exclusions: Production agriculture—defined as the regular production of crops and livestock on a farm—is generally excluded from primary sector status. However, value-added processing of agricultural products (like an ethanol plant or a pasta manufacturing facility) is a core part of the primary sector.

The interplay between the $750,000 revenue limit and the primary sector requirement ensures that the state is not just subsidizing small businesses, but specifically subsidizing small businesses that are part of the state’s strategic growth industries, such as manufacturing, biotechnology, and energy technology.

Administrative Procedures for “Qualified R&D Company” Status

Once a business has its primary sector certification and has verified its revenue is under $750,000, it must complete the specific certification to become a “Qualified Research and Development Company” before it can sell any credits.

Walkthrough of SFN 58638

The “Application for Certification as a Research and Development Company” (SFN 58638) is the primary document used to secure the right to transfer credits. The form requires several critical pieces of information that align with state revenue office guidance:

Entity Identification: The form is limited to individuals, C-corporations, estates, or trusts. The guidance explicitly states that partnerships, S-corporations, or other pass-through entities are not eligible to sell or transfer the credit, although they may earn the credit to be passed through to their owners.

Timing of Research: The applicant must certify that they did not conduct qualifying research in North Dakota until after December 31, 2006. This timing requirement prevents long-standing companies that have already benefited from the R&D ecosystem from shifting their old credits into the new transferability program.

Research Description: A one-page description of the new research to be conducted must be attached. This allows the Department of Commerce to verify that the activities meet the technological uncertainty standards of the law.

Tax Clearance: While not always on the same form, the guidance notes that a Property Tax Clearance Record or a State Clearance Record may be required to prove the taxpayer is in good standing with the state before receiving the certification.

Upon approval, the Director of Economic Development and Finance issues a certification letter to both the taxpayer and the Tax Commissioner. This letter is the “ticket” that allows the taxpayer to move to the next step: the actual sale of the credit.

Mechanics of the Credit Transfer: Sale, Assignment, and Reporting

The monetization of the R&D tax credit is a unique feature of North Dakota law that provides a vital “cash equivalent” for startups that have no income tax liability. This process is governed by strict timeline and reporting rules enforced by the Office of State Tax Commissioner.

Transfer Limits and Lifetime Caps

The law provides for a lifetime cap on the amount of credit that can be sold or assigned. A “Qualified Research and Development Company” may transfer up to a total of $100,000 in unused credits over any combination of taxable years.

This $100,000 limit is a “hard” lifetime cap. Once a company has reached this total, they can still earn R&D credits for their own use (carrying them back 3 years or forward 15 years), but they can no longer participate in the sale or transfer program. This reflects the policy goal of providing a “jump start” for companies without creating a permanent dependency on selling tax benefits.

The Transfer Process and Form CTS

When a company finds a buyer for its credit, they must jointly file Form CTS (Credit Transfer Statement). This form serves as the official record of the transaction.

• Joint Responsibility: Both the transferor (the seller) and the transferee (the buyer) must complete and sign the form.
• Deadline: Form CTS must be filed with the Office of State Tax Commissioner within 30 days after the date the credit is transferred. Failure to meet this deadline can result in the denial of the credit to the purchaser.
• Gross Proceeds Disclosure: The form requires the parties to disclose the “gross proceeds received” from the sale. This is crucial because the state taxes the proceeds of the sale as income for the seller.

Rights and Limitations of the Credit Purchaser

The purchaser of the tax credit—typically a larger, profitable North Dakota corporation—receives the credit at a discount (the “market price” for such credits is often 85 to 95 cents on the dollar). However, the purchaser inherits certain legal limitations.

The prohibition on the purchaser carrying the credit back ensures that the state does not have to issue immediate cash refunds for past tax years to the purchaser; instead, the credit is used to offset current or future liabilities.

Calculation Methodology: The Regular Method vs. ASC

Understanding the value of the credit being transferred requires a mastery of the calculation methods. Since 2019, North Dakota has allowed taxpayers to choose between the “Regular Method” and the “Alternative Simplified Computation” (ASC) method on a year-to-year basis.

The Regular Calculation Method

The regular method is incremental, meaning it rewards businesses for increasing their research spending relative to their historical performance. For most modern claimants (those starting research after 2010), the calculation uses a tiered percentage system.

The credit is equal to:

• 25% of the first $100,000 of qualified research expenses in excess of the base amount.
• 8% of the excess qualified research expenses over $100,000.

This “front-loaded” structure—where the first $100,000 in excess spending earns a much higher rate—is specifically beneficial for the small companies targeted by the $750,000 revenue threshold. It allows a startup with a modest R&D budget to maximize its credit early on.

The Alternative Simplified Computation (ASC) Method

The ASC method, introduced by 2019 Senate Bill 2207, provides a simpler calculation for businesses that might have volatile revenue or research spending. It does not require historical gross receipts, only the last three years of research expenses.

Under the ASC method, the credit is:

• 17.5% of the first $100,000 of “alternative excess research and development expenses”.
• 5.6% of the alternative excess expenses over $100,000.

“Alternative excess research and development expenses” is defined as the amount by which qualified research expenses in North Dakota exceed 50 percent of the average qualified research expenses for the three preceding taxable years. If a company had zero research expenses in any of the prior three years, the rates are further reduced to 7.5 percent and 2.4 percent respectively.

Operational Example: Impact of the Revenue Threshold on a Tech Startup

To demonstrate the application of the law and the revenue office guidance, consider the case of “Northern Bioscience Corp,” a fictional startup based in Grand Forks.

Scenario: Northern Bioscience Corp Year 2

In 2024, Northern Bioscience is in its second year of operations. It is developing a new biofuel catalyst using local agricultural waste.

Revenue Profile: In 2023, it had zero revenue. In 2024, it received a $300,000 federal grant and $150,000 from its first pilot sales. Its projected 2025 revenue is $600,000. Since its average gross revenue (including projections as a new company) is $350,000, it meets the “under $750,000” threshold.

Primary Sector Status: The company applies to the Department of Commerce. Because it transforms agricultural waste (value-added) and sells its pilot products to a refinery in Illinois (new wealth), it is certified as a primary sector business.

R&D Expenses: The company spent $400,000 on qualified research in 2024, all within North Dakota. Its base amount (using the ASC method with a limited history) is determined to be $100,000.

Credit Calculation: The excess QRE is $300,000.

• 25% of first $100,000 = $25,000.
• 8% of remaining $200,000 = $16,000.
• Total Credit Earned: $41,000.

Monetization: Northern Bioscience has no tax liability. It has already been certified as a “Qualified Research and Development Company” via SFN 58638. It negotiates a sale with a local energy company.

The Sale: They execute the transfer of the full $41,000 credit for $36,900 in cash. They file Form CTS within 30 days.

Tax Reporting: On its 2024 North Dakota tax return, Northern Bioscience reports the $36,900 as taxable income. The purchasing energy company uses the $41,000 credit to offset its own state taxes.

This example highlights how the threshold allows Northern Bioscience to convert an abstract tax benefit into concrete cash that can be used to pay salaries or buy lab equipment, accelerating their development path before they hit the commercial scale that would disqualify them from the program.

Economic Impact and Statistical Landscape of the R&D Credit

The North Dakota Legislative Council periodically evaluates the fiscal and economic impact of the research expense tax credit. These studies provide a look at the trade-offs the state makes to support innovation.

Participation and Direct Claims

According to the 2017-2018 interim study conducted by the Taxation Committee, the R&D credit is widely used by both individuals (via pass-through entities) and corporations.

The disparity between individual and corporate claims highlights the importance of the 2007 amendment that allowed pass-through entities to participate. Many North Dakota primary sector businesses are structured as LLCs or S-corporations, meaning the credit “flows through” to the owners’ individual returns.

Fiscal Cost Analysis for the State

While the credit contributes to GDP, it is a net cost to the state’s general fund. A 20-year projection indicated that while the state received $213 million in revenue resulting from the credit’s economic activity, it faced direct costs of $66 million and indirect costs of $182 million. The indirect costs are primarily driven by the need for state services (education, infrastructure) for the 1,000 additional residents attracted by the R&D-driven jobs.

The state concluded that the credit resulted in $30 million less in the state budget than if it had not existed. However, the Legislative Assembly has maintained the credit, viewing the $30 million as a strategic investment in diversifying the economy away from a sole reliance on commodity agriculture and raw oil extraction.

Sector-Specific Insights: The Basin Electric Case Study

The Taxation Committee’s review included specific testimony from Basin Electric Power Cooperative, illustrating the challenges of the credit for large energy producers. Between 2014 and 2016, the cooperative had over 500 employees engaged in R&D for environmental compliance and process improvement. Because Basin Electric already had large depreciation deductions, they often had net operating losses, leading to the accumulation of $10.3 million in credits that they could not use immediately.

This case study highlights why the $750,000 threshold and the transferability provision are so vital for small companies. A large entity like Basin Electric can afford to carry forward $8.7 million in credits for 15 years; a startup with limited cash reserves cannot. The $750,000 revenue cap ensures that the state’s limited capacity to allow “monetized” credits is reserved for the entities that are most at risk of failure due to lack of liquidity.

Local Tax Guidance: Filing Requirements and Documentation

The North Dakota Office of State Tax Commissioner provides a clear set of filing requirements to ensure that credits are claimed accurately. Whether a business is under or over the revenue threshold, certain rules apply to all claimants.

Necessary Forms for the Regular Filing Season

Taxpayers do not use a single, dedicated R&D form equivalent to the federal Form 6765. Instead, they must attach a self-created schedule or worksheet showing the computation of the credit according to N.D.C.C. § 57-38-30.5.

• Individuals: Claim the credit on Schedule ND-1TC. If they have purchased a credit from another taxpayer, they enter it on the specific line for “purchased research expense tax credit”.
• Corporations: Claim the credit on Form 40, following the instructions in the Corporate Income Tax Credits Booklet.
• Pass-through Entities: Must provide a statement to each owner (partner, shareholder, member) showing their share of the credit based on their interest in the entity.

The Role of the Property Tax Clearance Record

A frequently overlooked aspect of the guidance is the “Property Tax Clearance Record.” Under N.D.C.C. § 57-38-30.5, a taxpayer must be in good standing with each county where they (and their responsible officers) own at least a 50 percent interest in real property. The Tax Commissioner may deny the R&D credit if the taxpayer has delinquent property taxes in the state. This serves as a “cross-compliance” mechanism to ensure that businesses receiving state incentives are fulfilling their local tax obligations.

Audit Readiness and Record Retention

The Office of State Tax Commissioner advises taxpayers to retain records for at least four years after the return is filed. For companies participating in the credit transfer program, the documentation burden is higher. They must maintain:

• The primary sector certification letter.
• The SFN 58638 certification as a “Qualified R&D Company”.
• Detailed payroll records and time tracking for employees engaged in research.
• Copies of invoices and proof of payment for supplies used in the research process.
• Documentation of the technological uncertainty and the specific process of experimentation used to resolve it.

If an audit by the Internal Revenue Service or the North Dakota Tax Commissioner results in an adjustment to the credit amount, the transferor (seller) is legally required to report the adjusted amount to the purchaser within 30 days of the final determination. This “clawback” potential is a key risk factor for purchasers of state tax credits.

Tax Treatment of the Sale of Credits

One of the most complex areas of guidance relates to the taxation of the money received when a credit is sold. The North Dakota Tax Commissioner is explicit that the sale of a state tax credit for value is a taxable event.

Federal and State Income Recognition

Based on federal precedents such as Tempel v. Commissioner and IRS Chief Counsel Advice 201147024, the gross proceeds from the sale of a state tax credit are includable in gross income for federal income tax purposes. Because North Dakota taxable income begins with federal taxable income, these proceeds are also taxed at the state level.

The guidance provided on Form CTS and Schedule ND-1CS establishes specific rules for this income:

• No Apportionment: The entire gross proceeds are assignable to North Dakota. A multi-state business cannot “apportion” part of the sale income to another state, even if they have operations elsewhere.
• No Deductions: The gross proceeds may not be reduced by any loss or deduction allowed for state income tax purposes. The state treats the credit as property with a “zero basis” for the seller, meaning the entire sale price is gain.
• Reporting for Individuals: Individuals who sell a credit or hold an interest in a pass-through entity that sells a credit must complete Schedule ND-1CS. This schedule ensures that the income from the credit sale is taxed at the correct North Dakota rate.

This “tax on the sale” effectively reduces the net benefit of the monetization provision. For example, if a company sells $100,000 in credits for $90,000, and then pays 2% state tax on that $90,000, their net cash benefit is $88,200. Despite this, for a startup with zero other income, the immediate cash remains more valuable than a $100,000 credit they might not be able to use for a decade.

Strategic Implications for the North Dakota Business Ecosystem

The $750,000 revenue threshold and the accompanying R&D tax credit policies have created a specific niche in the North Dakota business landscape.

For Entrepreneurs and Founders

The existence of a “Qualified R&D Company” status that allows for credit sales provides a form of non-dilutive capital. Founders can use this to extend their “runway” without giving up equity to venture capitalists or taking on high-interest debt.

However, entrepreneurs must strategically manage their growth. As a company approaches the $750,000 revenue mark, they must be aware that their ability to sell credits will cease once they cross that threshold. This creates a “cliff” effect where a company might experience a temporary cash flow crunch as they transition from selling credits to needing to be profitable enough to use them.

For Angel Investors and Venture Capitalists

The R&D credit transferability provision acts as a de-risking mechanism for early-stage investors. When combined with the Angel Fund Investor Tax Credit—which offers a 35% credit on investments into qualified businesses—the state provides a robust safety net for local capital.

If an angel fund invests in a North Dakota primary sector startup, they know that the company’s R&D spend will be partially rebated by the state (via the credit sale), effectively stretching the investor’s dollars further.

For Profitable “Purchaser” Corporations

For established North Dakota companies, the R&D credit market offers a way to reduce their state tax liability while supporting the local startup ecosystem. By purchasing credits at a discount, a manufacturer in West Fargo or a service provider in Bismarck can achieve a lower effective tax rate while essentially providing “community venture capital” to the state’s emerging tech firms.

Final Thoughts: The $750,000 Threshold as a Policy Success

The “Annual Gross Revenues (Under $750,000)” threshold is the lynchpin of North Dakota’s strategy to foster a high-tech, value-added economy. By creating a very specific and relatively low revenue ceiling, the state has ensured that its most aggressive monetization incentives are reserved for the entities that need them most—the true startups that are still in the process of proving their technology.

The integration of this threshold with primary sector certification, federal R&D definitions, and a rigorous administrative transfer process creates a balanced system. It provides immediate liquidity for innovators, tax savings for established profitable businesses, and a mechanism for the state to track and measure the growth of “new wealth” industries.

While the fiscal analysis shows that the credit is a net cost to the state budget, the secondary and tertiary effects—including the addition of 1,100 high-paying professional jobs and an $80 million annual contribution to GDP—suggest that the $750,000 threshold is effectively targeting the “right” kind of economic activity. For the North Dakota business professional, understanding these nuances is essential for maximizing the state’s generous incentive landscape and driving the next generation of industrial innovation in the Great Plains.