Minnesota Research and Development Tax Credit: Do you Qualify?

The Minnesota research and development tax credit rewards companies for doing what they already do—improving products, refining processes, and pushing boundaries. This state-level incentive puts real money back into your business, and thanks to recent changes, you can now get cash refunds even if you don’t owe Minnesota taxes.

Key Takeaways

• Minnesota offers a 10% credit on the first $2 million in qualified research expenses above your base amount, then 4% on amounts exceeding that threshold
• Starting in 2025, unused credits became partially refundable—meaning startups and loss-making companies can receive cash payments of 19.2% to 25% of excess credits
• All research activities must be conducted within Minnesota borders to qualify for the state credit
• Credits carry forward for 15 years if you can’t use them immediately
• The federal R&D credit and Minnesota’s version can be claimed simultaneously, potentially doubling your tax savings

Why Minnesota Companies Are Sitting on Unclaimed Money

Walk through any manufacturing floor in Rochester. Stop by a software startup in Minneapolis. Visit a food processing plant in Mankato. Chances are, someone’s solving a problem right now that qualifies for R&D tax credits.

The thing is, most business owners hear “research and development” and immediately think of people in lab coats. They don’t picture their production manager tweaking a machine to reduce waste. They don’t see their software team debugging code as qualifying research. And they certainly don’t realize that reformulating a recipe to extend shelf life counts.

That’s leaving money on the table.

Minnesota’s R&D credit returned millions to companies last year. Medtech firms in the Twin Cities claimed it. Ag equipment manufacturers in Greater Minnesota used it. Even small fabrication shops with five employees qualified. The credit doesn’t care if you’re Medtronic or a three-person machine shop in Duluth. It cares whether you’re trying to make something better.

What Changed in 2025 (And Why It Matters to You)

On June 14, 2025, Governor Tim Walz signed House File 9 into law. This wasn’t just paperwork. It fundamentally changed how Minnesota R&D credits work.

Before this, if you didn’t owe Minnesota corporate taxes, your R&D credit just sat there. Carried forward, yes. But useless to startups burning cash or companies in temporary losses.

Now? You can get cash back.

The Refundability Schedule

Here’s how the partial refund works. Say you generate $100,000 in R&D credits but only owe $60,000 in Minnesota taxes. You’ll use $60,000 to zero out your tax bill. The remaining $40,000 used to just carry forward. Now you can elect to receive a percentage of that $40,000 as a refund check.

The refund rate depends on your tax year:

Tax years starting between January 1, 2025 and December 31, 2025 get 19.2% refunded. So that $40,000 excess becomes a $7,680 check. For tax years beginning between January 1, 2026 and December 31, 2027, the rate jumps to 25%—turning that same $40,000 into a $10,000 refund.

After 2027, Minnesota caps total statewide refunds at $25 million annually. The Minnesota Comptroller will publish each year’s rate by December 27. The rate won’t exceed 25%, but it could drop if claims surge.

This change puts Minnesota in the same league as states that have been luring innovators for years. It’s not just about tax reduction anymore. It’s about cash flow.

Tax Year Beginning	Refund Rate on Excess Credits	What $40K Excess Becomes
Jan 1, 2025 – Dec 31, 2025	19.2%	$7,680 cash refund
Jan 1, 2026 – Dec 31, 2027	25%	$10,000 cash refund
Jan 1, 2028 and beyond	Up to 25% (projected rate published annually)	Depends on statewide cap

Who Qualifies for Minnesota’s R&D Credit

Any business paying Minnesota corporate franchise tax or income tax can claim this credit. That includes C corporations, S corporations, partnerships, and LLCs. Pass-through entities can allocate credits to their partners or shareholders.

The real question isn’t your business structure. It’s what you’re doing with your time and money.

The Four-Part Test (Don’t Let It Scare You)

Minnesota follows the federal framework from IRC Section 41. Your activity needs to pass four tests. I’ve seen CEOs glaze over when accountants explain this, so here’s the simple version.

First: You must be trying to create or improve a product, process, software, or formula. “Improve” is broader than you think. Faster production counts. Lower defect rates count. Better user interfaces count.

Second: The improvement must involve technology. Hard sciences—physics, chemistry, biology, computer science, engineering. If you’re using these principles to solve problems, you’re in.

Third: There’s uncertainty about how to achieve your goal or whether it’s even possible. You’re not just following a manual. You’re figuring something out.

Fourth: You’re testing alternatives. Trial and error. Prototypes. Simulations. Modeling. You’re experimenting to find what works.

A Minneapolis medical device company spent six months redesigning a catheter tip. They tested 43 prototypes. Each failed in different ways. They documented every iteration. That’s qualified research.

A St. Cloud software firm rebuilt their payment processing system to handle cryptocurrency transactions. No manual existed. They built, tested, failed, rebuilt. All qualified.

A food manufacturer in Bloomington developed a new packaging method to keep baked goods fresh longer without preservatives. Dozens of material tests. Temperature trials. That qualified too.

Industries That Win Big in Minnesota

Medical technology dominates R&D claims here, and for good reason. Minnesota is Medical Alley—the number one health technology cluster in the world. Over 800 healthcare companies call this state home. When Medtronic develops a new pacemaker feature, that’s R&D. When a startup in Eden Prairie tests a diagnostic device, that’s R&D.

Manufacturing remains huge. Minnesota has deep manufacturing roots. Companies improving production efficiency, reducing waste, automating processes—they’re all generating qualified research expenses. That CNC machining shop in Mankato that figured out how to cut parts 30% faster? Qualified.

Agriculture and food processing are Minnesota strengths. We’re talking $106 billion in annual economic impact. When companies like General Mills, Land O’Lakes, or Hormel develop new products or improve processes, R&D credits help fund that work. Same goes for the hundreds of smaller processors across Greater Minnesota.

Software development thrives in the Twin Cities. Over 27,000 software developers work here. Custom applications, SaaS platforms, mobile apps, AI integration—it all qualifies if you’re solving technical challenges.

Even architecture and engineering firms qualify. When you’re designing custom solutions rather than applying standard templates, that’s often qualified research.

Calculating Your Minnesota R&D Credit

Minnesota uses a modified version of the federal regular research credit method. You can’t use the Alternative Simplified Credit (ASC) that’s available federally. You’re stuck with the regular method, which requires calculating a base amount.

Here’s the formula. Take your qualified research expenses for the year. These include wages for employees doing research, supplies used in research, certain computer rental costs, and 65% of amounts paid to contractors for research.

Subtract your base amount. This is calculated using your fixed-base percentage (your historical R&D spending as a percentage of gross receipts) multiplied by your average Minnesota gross receipts over the prior four years. New companies or those without sufficient history use a statutory percentage.

The result is your excess qualified research expenses.

Your credit equals:
10% of the first $2 million in excess QREs, plus
4% of any excess QREs above $2 million

Real example: A manufacturing company in Winona spent $3.5 million on qualified research in 2024. Their base amount calculated to $1 million. That gives them $2.5 million in excess QREs.

Credit calculation:
First $2 million × 10% = $200,000
Remaining $500,000 × 4% = $20,000
Total credit = $220,000

If they owed $150,000 in Minnesota corporate taxes, they’d use $150,000 to zero out their tax liability. The remaining $70,000 could be refunded at 19.2% ($13,440 cash) for 2025 tax years, with the rest carrying forward.

Most Minnesota companies underestimate their qualified research expenses by 30-50%. Wages aren’t just for engineers in labs. They include production supervisors overseeing process improvements, quality control staff testing new methods, and IT personnel developing internal systems.

Critical Differences Between Federal and Minnesota R&D Credits

You need to claim both—they’re separate credits with separate rules. The federal credit reduces your federal taxes. The Minnesota credit reduces your state taxes. But they’re not identical twins.

Aspect	Federal Credit	Minnesota Credit
Geography	Research anywhere in the U.S.	Only research conducted IN Minnesota
Credit Rate	Up to 20% (regular method) or 14%/6% (ASC method)	10% on first $2M excess, 4% above
Calculation Method	Regular or Alternative Simplified	Regular method only
Refundability	Qualified small businesses can offset payroll taxes	Partially refundable (19.2%-25%)
Carryforward	20 years	15 years
Base Calculation	Based on U.S. gross receipts	Based on Minnesota gross receipts (per Section 290.191)

The geography restriction is the biggest trap. If you operate in multiple states, you can’t just take your federal QREs and claim them in Minnesota. You need to isolate the work done within Minnesota’s borders. That engineer who works remotely from Wisconsin? Their wages don’t count for Minnesota’s credit. That contract research you paid to a lab in California? Not eligible for the Minnesota credit.

Companies with multi-state operations need to track where work actually happens. Time studies help. Project documentation showing which facilities conducted which research matters. This isn’t optional—Minnesota Department of Revenue will ask for this during an audit.

Key Expenses That Generate Credits

Four categories of expenses qualify. Each has specific rules, and missing any category means leaving money unclaimed.

Wages and Salaries

This is usually your biggest bucket. Wages paid to employees who directly conduct research, directly supervise research, or directly support research activities all count. “Directly” is the key word.

A biotech researcher developing a new compound? Direct. Their lab manager overseeing the project? Direct. The QA technician testing samples? Direct. The administrative assistant scheduling meetings? Not direct.

You can’t include wages you claimed for the Work Opportunity Tax Credit. That’s double-dipping, and the IRS (and Minnesota) won’t allow it.

Supply Costs

Materials consumed or used up during research qualify. Raw materials for prototypes. Chemicals for testing. Components for experimental assemblies. Once they’re used, they count.

Equipment doesn’t qualify—that’s a capital expense. But the materials that equipment consumes during research do qualify.

Computer Costs

If you rent computer time for research, those costs qualify. Most companies own their computers, so this category is less common than it used to be. Cloud computing costs for research purposes can potentially qualify, but documentation needs to be tight.

Contract Research Expenses

When you pay an outside contractor to conduct research on your behalf, 65% of those costs qualify. Why only 65%? The IRS assumes the contractor has their own overhead and profit margin built in.

The research must still meet all four parts of the test. You can’t just hand money to a consultant and call it R&D. They need to be conducting actual qualifying research activities.

Payments to qualified research organizations—universities, certain non-profits—get special treatment. If it’s basic research, 75% qualifies instead of 65%.

Five Things Minnesota R&D Credit Applicants Often Miss

1. Production process improvements. That’s not just making product. When you’re figuring out how to make it better, faster, or cheaper, that’s often qualified research.
2. Failed projects. Research that didn’t work still counts. You still spent the money trying to eliminate uncertainty.
3. Internal software development. Custom software for internal use qualifies if it meets the four-part test. Modifying off-the-shelf software usually doesn’t.
4. Multiple tax years. You can amend returns for the past three years (sometimes more) to claim credits you missed.
5. Carrybacks within corporate groups. If you’re part of a unitary business group filing a combined return, credits can be shared among group members.

How Recent Federal Changes Amplify State Benefits

The One Big Beautiful Bill Act passed in July 2025 restored immediate expensing for domestic research under Section 174. Before this, companies had to capitalize and amortize R&D expenses over five years (15 for foreign research). That created a cash flow nightmare.

Now you can deduct domestic R&D expenses immediately again. This applies to tax years beginning after December 31, 2024.

Why does this matter for Minnesota’s credit? Because improving your federal tax position creates more cash to reinvest. And that federal R&D deduction doesn’t reduce your Minnesota credit—you’re still calculating QREs the same way.

You’re getting the federal deduction, the federal credit, and the Minnesota credit. Three separate benefits from the same research spending. This is the time to be documenting everything.

Filing Requirements and Documentation

Minnesota requires Schedule RD (Credit for Increasing Research Activities) attached to your corporate or pass-through return. You also need to attach a copy of federal Form 6765.

Schedule RD asks for detailed information. Your qualified research expenses broken down by category. Your base amount calculation. Whether you used a paid preparer or consultant to calculate the credit.

That last question isn’t random. Minnesota Department of Revenue wants to know if you worked with an R&D tax credit specialist. If you did, they’ll ask for that person’s information—name, firm, contact details. During an audit, they may want to speak with your consultant directly.

What Minnesota Wants to See During an Audit

Documentation wins audits. Memories and vague descriptions lose them.

Project-level documentation showing what you tried to accomplish, the technical uncertainty you faced, and the testing process you used. Contemporary documentation beats recreating things years later.

Time tracking for employees. You don’t need minute-by-minute logs, but you need reasonable estimates of time spent on qualified activities versus non-qualified work. Interviews with employees can support this.

Nexus evidence proving the work happened in Minnesota. Where were employees located? Which facilities conducted which tests? If contractors were involved, where did they perform the work?

Financial records tying expenses to specific projects. Payroll records showing which employees worked on which projects. Supply purchases linked to research activities. Contractor invoices with detailed scopes of work.

The Minnesota Department of Revenue follows IRS guidance but applies Minnesota-specific rules. They’re looking for the same level of substantiation the IRS expects, plus proof that activities occurred within state borders.

Startups and Early-Stage Companies

The refundability change is a game-changer for you. Before 2025, if you weren’t profitable, Minnesota R&D credits just accumulated. Nice for the future, but they didn’t help you make payroll next month.

Now you can elect to receive cash refunds on unused credits. A Minneapolis software startup in its second year might generate $80,000 in R&D credits but owe zero Minnesota taxes. Previously, that $80,000 would carry forward until profitability. Now they can receive $15,360 (19.2% of $80,000) as a cash refund in 2025, or $20,000 (25%) in 2026.

That’s real money. Money that can extend your runway. Money that reduces your next fundraising need.

Combine this with the federal payroll tax credit available to qualified small businesses (QSBs), and you’re potentially getting cash back from both state and federal levels.

To qualify as a QSB federally, you need gross receipts under $5 million and can’t be more than five years old. You can offset up to $250,000 per year in employer payroll taxes with federal R&D credits. That’s separate from and in addition to Minnesota’s partial refund.

Launch Minnesota, the state’s flagship initiative for startups, actively promotes these credits. They’ve seen firsthand how R&D tax credits help early-stage companies survive that valley of death between initial funding and revenue.

Pass-Through Entity Considerations

S corporations and partnerships generate R&D credits at the entity level, then pass them through to shareholders or partners. The entity completes Schedule RD. Individual recipients report their share on their personal Minnesota returns using Schedule M1C.

For the refundability election, things get specific. S corps and partnerships make the election themselves. But the actual refund goes to the partners or shareholders based on their proportionate share.

If you’re a partner in a partnership that generates $100,000 in unused Minnesota R&D credits and you own 40%, your share is $40,000. If the partnership elects refundability at 25%, you’d receive $10,000 as a refund.

Unitary business groups filing combined returns have additional complexity. Credits can be allocated among group members. A subsidiary generating credits but having no tax liability can transfer those credits to a profitable sister company within the same unitary group.

This requires careful planning and documentation. You need to track which entity generated which credits, how credits were allocated, and ensure everything reconciles across all returns.

What Minnesota Companies Often Overlook

Process improvements dominate overlooked opportunities. A manufacturer in Brainerd spent eight months redesigning their assembly line to reduce defects. They tested new tooling, adjusted specifications, ran statistical analyses. All qualified. They never claimed it because they thought R&D meant inventing something new.

Improving existing products qualifies just as much as creating new ones. That food company reformulating a recipe? That’s R&D. That equipment manufacturer increasing equipment lifespan? R&D. That software company optimizing database queries for better performance? R&D.

Software development for internal use is another big miss. Custom software that automates your processes, improves efficiency, or solves technical challenges can generate substantial credits. You’re not selling the software, but you’re still conducting qualified research to build it.

Quality control activities sometimes qualify. If your QC team is testing new methods, validating new processes, or determining optimal parameters through experimentation, that can be qualified research. Routine QC doesn’t qualify, but developing new QC procedures does.

Working With Professionals

Can you claim Minnesota R&D credits yourself? Technically, yes. Should you? That depends on your situation.

Small claims—under $25,000—with straightforward activities and clear documentation might be DIY-friendly if you’re comfortable with tax forms. But anything more complex benefits from professional help.

R&D tax credit specialists do this all day, every day. They know which activities qualify and which don’t. They’ve documented thousands of studies. They know what Minnesota Department of Revenue looks for in an audit. They understand how to maximize your credit while staying compliant.

A good R&D consultant will interview your technical staff, review your projects, examine your expenses, and build contemporaneous documentation. They’ll identify qualifying activities you didn’t realize qualified.

According to Jim Wilkinson, a tax consultant with 25 years of experience in business credits and incentives, “Companies often underestimate their R&D activities because they’re focused on staying competitive rather than documenting innovation. What feels like normal business operations to them is actually qualified research under the tax code.”

The cost of hiring a specialist typically represents 15-30% of the first year’s credit. Many work on contingency—no credit found, no fee charged. That aligns incentives.

Your regular CPA might not have deep R&D credit expertise. That’s fine—R&D specialists work alongside your existing accounting team. They do the technical study and calculations. Your CPA files the return with their report attached.

When choosing an R&D credit firm, look for technical background. You want former engineers, scientists, or industry professionals who understand your business. Ask about their audit defense record. Find out if they’ll represent you if Minnesota questions your claim.

Avoid firms that guarantee specific credit amounts upfront. That’s a red flag. The credit depends on your actual facts and circumstances. Anyone promising you a specific number before reviewing your operations is guessing.

Case Study Snapshots

A 45-employee medical device company in Plymouth spent three years developing a new surgical instrument. They generated $430,000 in Minnesota R&D credits over that period. With the new partial refundability, they received $86,000 in cash refunds despite minimal tax liability due to high growth spending.

A food processing company in Worthington implemented automated quality control systems. The custom software development and process optimization generated $67,000 in state credits. They hadn’t realized internal software development qualified until an R&D specialist reviewed their operations.

Take Control of Your Innovation Investment

You’re already spending money to improve your business. The Minnesota R&D credit ensures some of that money comes back to you. With the new partial refundability, even unprofitable years can generate cash refunds.

Start by identifying your qualifying activities. Look at projects from the past three years—you can amend those returns. Document your current research systematically. Track employee time, keep project records, maintain expense details.

Don’t leave this money on the table. Minnesota makes it available. The federal government provides additional benefits. Together, they can significantly reduce your tax burden and improve your cash flow.

The companies thriving in Minnesota’s innovation economy aren’t just good at research—they’re good at documenting it. That documentation turns into credits, which turns into cash, which funds more research. Make that cycle work for your business.

Minnesota Research and Development Tax Credit FAQs

R&D Tax Credits by State

Citations

• Minnesota Department of Revenue. (2025). Credit for Increasing Research Activities (R&D Credit).
• Minnesota Department of Employment and Economic Development. (2025). Research and Development (R&D) Tax Credit.
• Minnesota House of Representatives. (2025). Bill would offer Minnesota companies different way of earning research tax credit. Session Daily.
• Minnesota Department of Revenue. (2025). Minnesota R&D Credit Differences to Federal Credit.
• Withum. (2025). Mid-Year State R&D Tax Credit Roundup: California, Texas and Minnesota Updates.
• Minnesota Department of Employment and Economic Development. (2025). Life Sciences.
• Minnesota Department of Employment and Economic Development. (2025). Food Production & Agriculture.