Minnesota Refunds Unused R&D Credits for 2025 and 2026: What That Is Worth

What Actually Changed in Minnesota

The change came from H.F. 9, signed in June 2025, which added subdivisions 3a and 3b to Minnesota Statutes section 290.068. That was more than a year ago, so this is not breaking news. What makes it worth reading now is that 2025 is the first tax year the election exists, which means the 2025 filing season is the first time anyone actually has to decide.

That decision is being made right now, on returns sitting in preparers' queues. It is irrevocable. And it is easy to miss, because it is not automatic and it does not look like anything that existed on a Minnesota return before.

How Much of the Credit Is Actually Refundable?

A percentage of the leftover credit, not a percentage of your research spending. This is the single most misread part of the new rule.

The refundability rate is applied to the current year credit that remains after your Minnesota tax liability has already been reduced to zero. It is not applied to your qualified research expenses, and it is not applied to your total credit.

The Minnesota credit itself is unchanged: 10% of the first $2 million of qualified research expenses above the base amount, and 4% above that. Our Minnesota R&D tax credit page covers the base amount calculation, the Minnesota-only expense rule, and the four-part test in full. Nothing there changed.

Be clear-eyed about the scale here. On $1.2 million of research spending, the 2025 cash refund is roughly eleven and a half thousand dollars. That is real money for a company burning cash, and it is worth having. It is not a windfall, and anyone presenting it as one is selling you something.

There is also a natural ceiling worth understanding. Because the base amount can never be less than 50% of current year expenses, the excess can never exceed 50% of expenses. For a company whose entire excess falls inside the first $2 million tier, that caps the Minnesota credit at 5% of qualified Minnesota research expenses, which in turn caps the 2025 cash refund at just under 1% of those expenses. Model it that way and you will not be disappointed by the result.

Who Makes the Election, the Business or the Owner?

This is where most Minnesota companies will get tripped up, and it matters enormously for the pass-through entities that make up most of Minnesota's business base.

According to the Minnesota Department of Revenue, the refundable portion can be calculated and claimed by a C corporation, an estate, an individual, or a trust. For S corporations and partnerships that generate an R&D credit, the election is made by the partners, members, or shareholders, not by the entity.

Practically, that means two things have to happen in sequence:

1. The entity computes the credit and reports each owner's share on the entity return, which for calendar-year filers is due months before the owners' returns.
2. Each owner then decides, individually and on their own return, whether to elect the refund on their share.

Two owners of the same S corporation can reach different answers, and both can be right. An owner with substantial Minnesota income from other sources may absorb their whole share against liability and have nothing left to refund. An owner whose only Minnesota income is from the loss-making business may have the full share available.

The failure mode is obvious once you see it. The entity return gets filed, everyone assumes the credit is handled, and nobody at the owner level makes an election that only exists at the owner level.

Can a Schedule C or Schedule F Business Claim This?

Not directly, based on how the credit is written and how the Minnesota form is built. This matters more in Minnesota than in most states, because a large share of the state's farms and owner operated businesses report on Schedule F or Schedule C.

Minnesota's credit is allowed to a corporation, to partners in a partnership, and to shareholders in an S corporation. A sole proprietor reporting business or farm income on Schedule C or Schedule F is none of those three. Minnesota's Schedule RD is built the same way: it is headed "Name of Corporation," its instructions address only C corporations, partnerships, and S corporations, and the refundable credit line routes to Form M4, the corporation franchise tax return.

That does not mean an individual never claims this credit. An individual does claim it, and can make the refundability election, when the credit reaches them as a partner in a partnership or a shareholder in an S corporation. Minnesota passes the credit through on Schedule KPI for individual, estate, and trust partners, and on Schedule KS for S corporation shareholders. In that situation the individual is claiming a credit an entity generated, not one their sole proprietorship generated.

For a Minnesota farm or owner operated business, that turns into three practical questions:

1. How is the business actually taxed today? A single member LLC that has not elected corporate treatment files on Schedule C or Schedule F and is treated as a sole proprietorship for this purpose, whatever the LLC paperwork says.
2. Is there a related entity? Plenty of farms run a partnership or an S corporation alongside the individual return. If the qualified research sits inside that entity, the credit and the election live there.
3. Is the federal credit still in play? The federal research credit under IRC section 41 does not carry Minnesota's entity restriction. These are separate questions with separate answers, and the Minnesota answer does not settle the federal one.

If your Minnesota research is happening inside a sole proprietorship, entity structure is worth raising with your CPA before the next tax year, because in that case it is the structure, not the research, standing between you and the state credit.

When Does the Election Have to Be Made?

On a return filed by its original due date or its extended due date. The statute is explicit that the election applies only to a credit claimed on a return filed on or before those dates.

That has one consequence people consistently underestimate: there is no amended return path. An amended return can fix a great many things on a Minnesota return. It cannot make this election after the fact. If the deadline passes without an election, the refund for that year is gone, permanently, even though the credit itself survives.

Extended due dates differ by return type, and Minnesota does not simply mirror the federal calendar. Minnesota grants corporations an automatic seven month extension to file Form M4, which pushes extended calendar-year corporate returns further into the year than many filers expect. Pass-through owners are working to their own individual return dates, not the entity's. Confirm your specific extended due date with your preparer rather than assuming it matches a federal date you already have in your calendar.

If your 2025 Minnesota return is on extension, the practical version of this is short: the election is a live question on a return that is currently being prepared, and it should be a conscious decision rather than a default.

What If You Miss the 2025 Election?

You still have the credit. Only the cash timing is lost.

Any portion of the credit that is not refunded carries forward for up to 15 succeeding tax years. Minnesota does not permit carryback. So a company that does not elect for 2025 keeps the full credit as a carryforward asset and can elect on its 2026 return, when the rate is higher at 25%.

This is worth stating plainly because the pressure around a first-year election tends to produce bad decisions. Missing the 2025 election is a timing cost, not a loss of the credit. If the work to substantiate a Minnesota credit is not done and documented properly, filing something thin to catch a date is the worse outcome, because the credit still has to survive a Minnesota Department of Revenue review.

Why This Matters Most for Loss-Stage and Low-Liability Companies

Because a nonrefundable credit is worth nothing to a company that owes nothing.

The companies most affected by this change are the ones that generated Minnesota credits and then watched them sit unused: businesses in a loss year, businesses in a heavy reinvestment cycle, businesses whose Minnesota liability is small relative to their research footprint, and early-stage companies with real engineering payroll and little revenue. Minnesota already allowed a company with qualified expenses and zero gross receipts to claim the credit. It simply never paid anything out.

For those companies, refundability converts a portion of a long-dated asset into current cash. If your business has been in that position, our guide to claiming the R&D tax credit while operating at a loss covers how the federal and state pictures fit together.

What Stays Exactly the Same

Everything about qualifying. Refundability changed how the credit is paid, not who earns it.

• Only research conducted in Minnesota counts. Research performed elsewhere is excluded, even by a Minnesota company.
• The federal four-part test still governs whether an activity qualifies.
• Minnesota still does not allow the federal alternative simplified method.
• The base amount still uses Minnesota sales or receipts.
• Documentation standards are unchanged. Minnesota follows federal recordkeeping rules, and reconstructing activities from employee interviews alone is generally not sufficient.

If you did not qualify for the Minnesota credit before June 2025, you do not qualify now. Refundability improves the economics for companies that already qualify. It does not create qualification.

What Minnesota Companies Should Do Before Filing

1. Confirm whether a 2025 Minnesota credit exists at all. No credit means no election to make.
2. Identify who has to elect. If you are an S corporation or partnership, the answer is your owners, individually.
3. Check your extended due date for every return in the chain, entity and owner.
4. Model both paths. Compare the cash today at 19.2% against the same dollars carried forward, given what you actually expect your Minnesota liability to look like over the next few years.
5. Make it a decision, not a default. The election is irrevocable, and silence is a decision to carry the credit forward.

Official Sources

• Minnesota Department of Revenue: Credit for Increasing Research Activities
• Minnesota Statutes section 290.068
• Minnesota Schedule RD and Instructions, 2025
• IRC section 41, Cornell Law School LII

Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or financial advice. Each taxpayer's situation is unique. Entity type, ownership structure, Minnesota tax liability, and filing dates all affect outcomes. Confirm your extended due date and your election with a qualified tax professional before you file.