Minnesota DOR Issues Changes to Minnesota R&D Tax Credit Carryforwards

Summary

On June 17, 2020, the Minnesota Department of Revenue (DOR) updated guidance for the Minnesota Credit for Increasing Research Activities (Minnesota R&D Credit). The new change will affect C corporations filing a consolidated return and is effective for tax years beginning after December 31, 2012.

This updated guidance presents a new refund opportunity for those affected by the change. The Minnesota DOR will apply this change to all open audits and refund claims in the state.

 

Minnesota R&D Credit Background

Companies with qualified research activity occurring in Minnesota are eligible to receive the Minnesota R&D Credit in addition to the federal R&D tax credit.

The Minnesota R&D Credit is equal to 10% of qualifying expenses up to $2 million, and 2.5% for expenses above that level. Eligible expenses in Minnesota, like wages, supplies, and outside research, are defined the same as they are in Section 41 of the Internal Revenue Code. Additionally, contributions to qualified nonprofit organizations that make grants to start-up, technology businesses may be eligible for the Minnesota R&D Credit.

For tax years beginning after December 31, 2012, the Minnesota R&D Credit is nonrefundable. It may be carried forward for up to 15 years but cannot be carried back. The statute of limitations is 3.5 years.

For tax years beginning after December 31, 2009 and before January 1, 2013, the Minnesota R&D Credit is refundable.

 

Allocation of Minnesota R&D Credit

For C corporations filing a consolidated return, the Minnesota R&D Credit should be allocated in the following order for the year that it is generated:

1. To the earning member up to the amount of their tax liability for the year the credit was generated.
2. If any credit amount remains, to the other members of the consolidated group up to the amount of their tax liability.
3. If any credit amount remains, carried forward for up to 15 years.

 

Changes to Minnesota R&D Credit

Before the updated guidance, Schedule RD stated that the Minnesota R&D Credit carry-forward may only be used by the earning member of a consolidated return. This differs from how the credit was to be allocated in the year it was generated. Under the previous guidance, any consolidated group members other than the earning member were unable to claim the carry-forward credit.

The updated guidance changes this stance.

Any credit carry-forward must now be applied to all other members of a consolidated return in the same manner that is applied in the year of generation, listed above.

All open audits, appeals, and refund claims in Minnesota will be processed in a manner consistent with the updated guidance.

The Minnesota DOR is updating 2018 & 2019 forms and instructions to clarify the changes to the carry-forward credit.