On June 14, 2025, Minnesota Governor Tim Walz signed H.F. 9 into law, modifying the state’s R&D Tax Credit to make a portion refundable for the first time.
The R&D Tax Credit, officially known as the Credit for Increasing Research Activities, reduces Minnesota income or franchise tax for companies engaged in qualified research and development (“R&D”) activities performed in the state. For taxable years beginning after December 31, 2016, the Minnesota R&D credit equals:
- 10% of excess qualifying expenses over a base amount, up $2 million, and
- 4% of excess qualifying expenses above $2 million.
Qualifying expenses mirror those under the federal R&D credit, defined in Section 41 of the Internal Revenue Code, as modified in Minnesota Statutes 290.068, but only for research performed in Minnesota. Examples of qualifying expenses include R&D related wages, supplies and research contracted outside your business.
What’s Changing
Previously, any credit exceeding the current-year tax liability could be carried forward for up to 15 years. Under the revised statute, taxpayers may instead elect to receive a partial refund of unused credits.
Effective Date: Changes apply to tax years beginning after December 31, 2024
Refund Calculation: The refundable amount equals the excess of the credit amount multiplied by the refundability rate (Refundable Amount = Unused Credit x Applicable Refundability Rate).
Refundability Rates:
- 19.2% for tax years beginning after December 31, 2024, and before January 1, 2026
- 25% for tax years beginning after December 31, 2025, and before January 1, 2028
- For tax years beginning after December 31, 2027, the refund rate will be the lesser of 25% or a projected rate published annually by December 27, designed to cap total refunds at $25 million per year.
Election Required: Taxpayers must make the election on their timely filed return (extensions included). Once chosen, the election is irrevocable for that year.
Carryforwards Remain: Any unused, non-refunded credit continues to carry forward for up to 15 years.
Key Takeaway
The partial refund feature offers an immediate cash benefit for companies with little or no current Minnesota tax liability. With the election binding for each filing year, careful planning is needed to determine whether a refund or carryforward provides greater long-term value.
