Minnesota R&D Tax Credits

State and Federal Credits Available

Tiered Rates

10% on first $2M excess QREs; 4% above

Partial Refund

19.2% of unused credit for 2025 (25% for 2026–2027)

Carryforward

15 years (no carryback)

Refund Target

$25M annually statewide (rate-adjusted)

The Minnesota Credit for Increasing Research Activities incentivizes innovation by providing a nonrefundable tax credit, now with partial refundability starting in 2025, against corporate franchise or income tax liabilities through the Minnesota Department of Revenue. This credit rewards qualified research expenses (QREs) performed in the state, aligning closely with federal guidelines under IRC § 41 while offering unique tiered rates and carryforward provisions. Businesses in sectors like manufacturing, biotech, and software development can offset taxes or access cash refunds to fuel growth.

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Tiered Rates

10% on first $2M excess QREs; 4% above

Partial Refund

19.2% of unused credit for 2025 (25% for 2026–2027)

Carryforward

15 years (no carryback)

Refund Target

$25M annually statewide (rate-adjusted)

Key Highlights

Applies to in-state qualified research only, with base calculations using Minnesota-sourced gross receipts
Available to C corporations, S corporations, partnerships, and LLCs; pass-through entities allocate via Schedule K-1
Even with zero Minnesota gross receipts, base defaults to 50% of current QREs for credit eligibility
Includes contributions to qualified nonprofits supporting early-stage innovative businesses
No alternative simplified credit (ASC); regular incremental method required

Who Qualifies for the Minnesota R&D Tax Credit?

Eligibility requires performing qualified research activities (QRAs) in Minnesota that meet the four-part federal test under IRC § 41: technological in nature, business component purpose, uncertainty elimination via experimentation, and process improvement. All entity types qualify if QREs are incurred in-state.

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

Examples

Wages

Salaries/benefits for employees performing, supervising, or directly supporting QRAs (e.g., engineers testing prototypes)

Supplies

Materials consumed in experimentation (e.g., chemicals, mockups; excludes general inventory)

Contract Research

Payments to unrelated third parties for QRAs (e.g., university labs)

Computer Rentals

Cloud/server costs used >80% in QRAs (e.g., simulation software)

Nonprofit Contributions

Donations to Minnesota qualified organizations aiding innovative startups

Research must occur in Minnesota; out-of-state expenses don't qualify. Startups benefit from the 50% minimum base rule.

Check Your Eligibility

How to Calculate the Minnesota R&D Tax Credit

Minnesota uses the regular incremental method, mirroring the federal approach but limited to state-sourced QREs and gross receipts. The credit equals 10% of the first $2 million of excess QREs over the base amount, plus 4% on any excess above $2 million. Unused credits carry forward for 15 years or may be partially refunded starting in 2025 (election required).

Regular Method Steps:

Determine Total Minnesota QREs: Include only expenses for qualified research activities conducted in Minnesota (e.g., wages, supplies, 65% of contract research payments).
Compute Base Amount: Fixed-base percentage (historical QREs-to-gross-receipts ratio) × average Minnesota gross receipts for the prior 4 years. Minimum base is 50% of current-year QREs.
Calculate Excess QREs: Current QREs minus base amount.
Apply Tiered Rates: 10% on the first $2 million of excess; 4% on excess over $2 million.
Elect Refund (2025+): If unused credit exceeds tax liability, elect refund at 19.2% for 2025 (file with original return; irrevocable).

Example Calculation

Prior years: Year -1 QREs = $800K, GR = $8M; Year -2 = $600K, GR = $6M; Year -3 =$700K

GR = $7M; Year -4 = $500K, GR =$5M.

Excess =$800,000

Sum QREs = $2.6M; Sum GR = $26M → Fixed-base = $2.6M / $26M =10%.

Average GR = $26M / 4 = $6.5M → Base = 10% × $6.5M =$650K.

If current QREs = $1M, minimum base = 50% × $1M =$500K, so use $650K (excess = $350K).

If no prior: Base =50% current QREs (e.g., $1M current → base $500K; excess $500K).

Base Calculation for Minnesota R&D Tax Credit

Identify qualified research expenses (QREs) and gross receipts for the prior 4 tax years (Minnesota-sourced only).
Compute fixed-base percentage = (sum of QREs over prior 4 years) / (sum of gross receipts over prior 4 years), capped at 16%.
Compute average gross receipts = (sum of gross receipts over prior 4 years) / 4.
Base amount = fixed-base percentage × average gross receipts; minimum 50% of current-year QREs.
Ensure Minnesota-specific only; exclude non-Minnesota expenses or receipts.

Example Calculation

Assume a Minnesota-based software firm with:

Current QREs: $3 million

Base amount: $1 million (e.g., 10% fixed-base × $10M average prior gross receipts)

Excess QREs: $3M - $1M = $2 million

Credit = 10% × $2M =$200,000

If excess were $3.5 million:

Credit = (10% × $2M) + (4% × $1.5M) = $200,000 + $60,000 =$260,000

For startups with limited history, the fixed-base starts low (phasing based on federal rules, capped at Minnesota data). If no prior gross receipts, base = 50% of current QREs ($1.5M in the example, excess $1.5M → credit = 10% × $1.5M = $150,000).

Gross Receipts Rules for Base

Use Minnesota sales or receipts as defined for apportionment under section 290.191 for the base amount.
Apply Minnesota’s apportionment rules to determine which receipts are Minnesota receipts; do not limit the base to only tangible property sales or automatically exclude services, interest or royalties.
If there are no Minnesota receipts, the base defaults to 50% of current year QREs, consistent with the federal minimum base rule.

Estimate Your Credits

Minnesota-Specific Rules

Partial Refund Provision (High Cash Flow for Non-Profitable Firms)

Starting for tax years after December 31, 2024, elect a refund of 19.2% of unused credits exceeding liability in 2025 (scaling to 25% for 2026–2027). Post-2027, rate is the lesser of 25% or a commissioner-determined rate based on November revenue forecasts to target total refunds at or below $25 million. This boosts liquidity for startups and R&D-heavy firms, with the state projecting tens of millions of dollars in annual refunds once fully phased in. Election is irrevocable and filed with the original return via Schedule RD.

Tiered Rates Favoring Smaller Increments

The 10% rate on the first $2 million of excess QREs provides strong incentives for mid-sized projects (e.g., $200,000 credit on $2M excess), dropping to 4% above, encouraging focused innovation. Recent tax expenditure estimates peg the annual cost of the credit at roughly $40 million.

Statewide Refund Target ($25M Budget)

The state targets about $25 million per year in total refunds, managed by the Department of Revenue adjusting the refundability rate for 2028 and later to keep projected refunds at or below that level. No per-taxpayer cap, but monitor annual guidance for rate changes.

Other Important Rules

Pass-Through Treatment: Credits flow pro-rata to owners via Schedule K-1 for S corporations, partnerships, and LLCs. Unitary groups compute at the combined level for optimized base amounts.
Post-2027 Formula Adjustment: Refund rate post-2027 ties to fiscal impacts, with the commissioner setting it annually by December 15 based on November forecasts; it may be reduced below 25% to target ≤$25 million in total refunds, with no statutory floor.
Audit and Recordkeeping: Retain documentation for at least 3.5 years (general Minnesota statute of limitations for assessments and refunds), but align with federal IRC § 41 requirements and keep records at least as long as statutes of limitation are open, generally 4 to 7 years and potentially longer for carryforwards. Include project timelines, payroll records, and expense substantiation to withstand reviews.
Nonprofit Contributions Qualify: Up to 100% of donations to Minnesota-based qualified organizations (e.g., grants to early-stage tech firms) count as QREs, enhancing credit for philanthropically inclined corporations.
No Carryback; Amended Claims Allowed Only for Open Years: Credits are forward-only; amended returns are allowed within the 3.5-year statute of limitations for open years, but no look-back to closed years.

Partial Refund Provision (High Cash Flow for Non-Profitable Firms)

Tiered Rates Favoring Smaller Increments

Statewide Refund Target ($25M Budget)

Other Important Rules

Pass-Through Treatment: Credits flow pro-rata to owners via Schedule K-1 for S corporations, partnerships, and LLCs. Unitary groups compute at the combined level for optimized base amounts.
Post-2027 Formula Adjustment: Refund rate post-2027 ties to fiscal impacts, with the commissioner setting it annually by December 15 based on November forecasts; it may be reduced below 25% to target ≤$25 million in total refunds, with no statutory floor.
Audit and Recordkeeping: Retain documentation for at least 3.5 years (general Minnesota statute of limitations for assessments and refunds), but align with federal IRC § 41 requirements and keep records at least as long as statutes of limitation are open, generally 4 to 7 years and potentially longer for carryforwards. Include project timelines, payroll records, and expense substantiation to withstand reviews.
Nonprofit Contributions Qualify: Up to 100% of donations to Minnesota-based qualified organizations (e.g., grants to early-stage tech firms) count as QREs, enhancing credit for philanthropically inclined corporations.
No Carryback; Amended Claims Allowed Only for Open Years: Credits are forward-only; amended returns are allowed within the 3.5-year statute of limitations for open years, but no look-back to closed years.

Speak to an Expert

Frequent Asked Questions

The Minnesota Credit for Increasing Research Activities (Minn. Stat. § 290.068) provides a tiered credit: 10% on the first $2 million of excess QREs over the base, and 4% above $2 million. It's nonrefundable but partially refundable at 19.2% for 2025, with 15-year carryforward.

Activities must align with federal IRC § 41: technological development or improvement of products/processes via qualified experimentation, conducted in Minnesota. Examples include software prototyping, biotech formulations, or manufacturing efficiencies. Strike Tax reviews projects for compliance.

Savings depend on QREs and base; for $3 million QREs with $1 million base (excess $2 million), expect $200,000 credit, plus potential 19.2% refund on unused portions (~$38,400 cash in 2025). Stack with federal credits for up to 20–30% total ROI. Use our calculator for personalized estimates.

Yes, partially: 19.2% of unused credits refunded in 2025 (scaling to 25% in 2026–2027), subject to statewide target managed via rate adjustments. Ideal for cash-strapped startups; elect on original Schedule RD filing. Non-electing portions carry forward 15 years.

Compute on Schedule RD and attach to your Minnesota corporate tax return (generally prepared alongside federal Form 6765). For refunds, include election details. No separate application; timely filing is key. Strike Tax handles documentation and amendments.

Yes, businesses can stack state and federal credits for the same QREs, with Minnesota layered on top of federal, subject to standard federal limitations like IRC § 280C. Strike Tax optimizes dual claims for maximum savings.

House File 9 (signed June 2025) introduces partial refundability: 19.2% rate for unused credits, scaling to 25% through 2027, and a $25M statewide target for later years. No changes to rates or base method; enhances cash flow without altering core eligibility.

Yes, with a favorable 50% minimum base if no prior gross receipts, e.g., $1M QREs yields $100,000 credit at 10%. Pair with federal payroll offsets (up to $500K/year for 5 years if under $5M receipts). Strike Tax specializes in early-stage claims.

Retain 3.5+ years of records: time logs (65/25/10 rule for wages), invoices, project narratives, and prototypes. Align with federal Form 6765 Section G (for claims >$10K). Strike Tax provides audit-proof templates.

You can still claim: base = 50% current QREs, ensuring credits for in-state research. This supports remote innovators with Minnesota ties. Consult Strike Tax for base optimization.

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