Minnesota has long supported its bioscience, manufacturing, and technology sectors with a research credit tied closely to the federal model, but a recent change makes it meaningfully more valuable for companies that haven’t been able to use the full credit against tax liability in the past.
How the Credit Works
The Minnesota Credit for Increasing Research Activities reduces income or franchise tax for businesses that paid or incurred qualified research expenses while conducting qualified research within Minnesota. The credit is based on the federal research credit under IRC Section 41, with several state specific differences. All qualifying research must actually take place in Minnesota, the state does not allow the federal alternative simplified method, and Innovation Grant expenditures don’t count as qualified expenses. Businesses claim the credit on Schedule RD.
Credit Amount
The credit equals 10% of qualified research expenses up to a computed base amount of 2 million dollars, and 4 percent on qualified research expenses above that level.
A New Refundable Option
For tax years beginning after December 31, 2024, a portion of the credit is refundable, a significant shift for companies that don’t owe enough tax to absorb the full credit. The refundable portion is calculated only after tax liability has been reduced to zero using all other credits and the current year R&D credit, then the remaining amount is multiplied by the year’s refundability rate. That rate is 19.2% for 2025 and rises to 25% for 2026 and 2027, with the Commissioner of Revenue authorized to adjust it in future years, though it cannot exceed 25%. Claiming the refundable portion requires an irrevocable election on a timely filed original return, including extensions.
Carryforward
Unused credit can be carried forward for up to 15 years, though it cannot be carried back to prior years. Notably, businesses with qualified research expenses but zero gross receipts can still claim the credit, and credits can be allocated among combined group members after the earning member applies its own current year credit first.
Who’s Claiming It
Minnesota’s innovation economy is especially strong in a few key sectors. Common claimants include:
- Bioscience and medical devices, an area where Minnesota has ranked first nationally in medical device patents per capita
- Manufacturing
- Clean energy
- Software development
- Agriculture technology
What This Means for Your Business
The new refundability rules make it worth revisiting Minnesota’s credit even for companies that assumed it wasn’t valuable to them in low tax liability years. Because the refundable election is irrevocable and must be made on a timely filed return, planning ahead of the filing deadline matters more than ever.
CSSI continues to help businesses identify and defend tax savings through detailed, engineering based studies. If you’d like to know whether your Minnesota operations qualify, request a free analysis to get started.
FAQ: Minnesota R&D Tax Credit
How is Minnesota’s R&D credit calculated?
10% of qualified research expenses up to a base amount of 2 million dollars, and 4% on expenses above that threshold.
Does Minnesota allow the federal alternative simplified method?
No. Minnesota does not permit this method, so businesses need to calculate the credit under Minnesota’s specific rules.
What’s new about refundability?
For tax years beginning after 2024, a portion of the credit is refundable once tax liability is reduced to zero by other credits. The refundability rate is 25% for 2026.
Do I need to do anything special to get the refundable portion?
Yes. You must make an irrevocable election on a timely filed original return, including extensions, for that tax year.
Can a business with qualified expenses but no revenue still claim the credit?
Yes. Taxpayers with qualified research expenses but zero gross receipts can still claim the Minnesota R&D credit.
Can unused credit be carried forward?
Yes, for up to 15 years, though it cannot be carried back.
Which industries typically claim this credit in Minnesota?
Bioscience and medical devices, manufacturing, clean energy, software development, and agriculture technology are especially active claimants.
How do I know if my business qualifies?
The best way to find out is through a professional analysis of your research activities and expenses. CSSI offers a free analysis to help determine eligibility and estimate potential savings.
