R&D Tax Credits


The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits.

Businesses in Minnesota can earn a 3% state income tax credit for the increase in their annual research and development expenses, compared to the previous two years. To calculate the credit, the eligible expenses incurred for qualifying R&D activities must be identified and calculated, including wages, supplies, and contract research. The credit must be claimed 25% each year for four years. Accurate records and documentation must be kept to determine eligible expenses.

For partnerships or S-corporations that have incurred qualified research and development expenses in Minnesota and are eligible for the Credit for Increasing Research Activities, Schedule RD must also be completed to determine the credit amount. However, these entities cannot directly claim the credit; instead, they must pass it on to their respective partners or shareholders. In such cases, partnerships will indicate each partner’s share of the credit on Schedule KPI, while S-corporations will denote each shareholder’s pro-rata share on Schedule KS.
To actually claim the credit, individual partners or shareholders must complete Schedule M1B, titled Business and Investment Credits. When filing their Minnesota income tax return, they must include both Schedule M1B and either Schedule KPI or KS.

In Minnesota, R&D tax credits are available to companies that engage in qualifying activities to advance knowledge or improve processes, products, or technologies. These must be technological, aid in product development, and involve experimentation. Eligible expenses exclude land, equipment, surveys, customer-specific costs, and government-funded research. Some of the qualifying R&D activities include: Development of new products, Testing and experimentation, Development of prototype, Solving technical problems and the like. Accurate record-keeping is crucial for claiming credits.

Eligible businesses in Minnesota’s enterprise zones can claim for R&D tax credit if they meet legal requirements under the state and federal law. The credit requires 3 years of presence in the same enterprise zone, with prorated credit for businesses opening mid-year. Qualifying R&D activities must advance knowledge or improve processes, products or technologies. It even includes C-corporations and pass-throughs.

R&D Tax Credits in Minnesota

In Minnesota, businesses involved in research and development (R&D) can benefit from the Credit for Increasing Research Activities. This credit is set at 10% for eligible expenditures up to $2 million, and it reduces to 4% for any spending above that amount. To qualify, expenses must align with those outlined in Section 41 of the Internal Revenue Code, with the condition that the research activities take place within Minnesota. Such qualifying costs can include wages related to R&D, material supplies, and research services outsourced from your company. Donations to certified nonprofit organizations that fund grants for emerging technology firms in Minnesota might also be eligible for the credit.

What Goes into the Minnesota R&D Tax Credit as a Qualified Research Expense?​

The Minnesota research and development tax credit allows for businesses to claim a percentage of their qualifying research expenses. 

In order for an expense to qualify it must meet specific research criteria:

  1. Products, services, processes, or software must be new or improved in some way 
  2. Uncertainty must be eliminated as a result of the research 
  3. The research must be technological 
  4. Research must include experimentation processes of some nature

The types of expenses that are applicable to claim under the credit include the following:

Wages paid to employees who are directly involved in the performance of research and development activities within the state of Minnesota. This includes payments made to subcontractors involved in the performance of such activities.

Take Advantage of the
R&D Tax Credit with Source Advisors

Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.