R&D Credit Overview

For taxable years beginning after December 31, 2016, the Minnesota R&D credit is equal to 10 percent of qualifying expenses up to a computed base amount of $2 million, and 4 percent for expenses above that level. Qualifying expenses are the same as for the federal R&D credit – defined in Section 41 of the Internal Revenue Code and modified in Minnesota Statutes 290.068 – but must be for research performed in Minnesota. For details in computing the base amount, see the Schedule RD Instructions.

Note: If the earning member of the combined reporting group is unable to claim some or all of the credit in the tax year it is generated, it must be allocated to another member of the combined group. If no combined group member is able to use the credit earned in the tax year it is generated, the earning member may carry over any unused amount up to 15 future years until none remains. Credit carryforward amounts must first be used in future years by the earning member before being allocated to another member of the combined group. For more information, see M.S. 290.068, subdivision 3(a).

The following activities may qualify if they meet the Four-Part Test, have qualified research expenses and are conducted in Minnesota.

• Develop new, improved or more reliable products, processes or formulas.
• Develop new technology.
• Develop new materials.
• Develop new processes.
• Develop new software or hardware.
• Conduct testing of new concepts and technology.

For examples, see Treasury Regulation Section 1.41-4 Qualified Activities.

The QRE is the basic unit of the R&D credit.  QREs are derived from salaries, supplies and contractor expenses.

Salaries

To determine which portions of your workforce’s salaries may qualify, maintain records showing employee information including: 

• Names of those involved in projects that satisfy the Four-Part Test
• Their location
• The amount you pay them
• The portion of their time dedicated to qualified activities
• The activities they perform

Supplies

To determine which portions of your company’s supplies may qualify, maintain records showing:

• The cost of the tangible supplies
• The location the supplies were used
• The projects the supplies were used for
• How the supplies were used in the R&D process
• The invoices for the supplies

Contract Expenses

To determine which portions of your company’s contract expenses may qualify, maintain records showing the contractor’s:

• Scope of work
• Location
• Expectations
• Payment agreement
• Contracts related to expenses