Big R&D Tax Credit News for Minnesota Companies: Federal Credit Extended AND Minnesota Taxpayers Don’t Need Tax Liability to Get Cash Back!
As they have done consistently since 1981, Congress passed legislation as part of the American Taxpayer Relief Act of 2012 extending the federal Research & Development tax credit. The new law extends the incentive retroactively back to January, 1st of 2012 and through December 31, 2013. This is the fifteenth extension of the credit since its inception. The new federal legislation also includes minor modifications around the rules for acquisitions and controlled groups.
This is a double win for Minnesota taxpayers. The State of Minnesota also has an R&D Tax Credit for qualifying expenditures taking place within the state (the definition of R&D for the MN State Credit is the same as for federal). What many companies do not realize about the MN State R&D Tax Credit is that it is refundable! This means that even if you can’t use the credits, whether it’s because of no corporate tax liability or due to Alternative Minimum Tax (AMT) limitations commonly experienced by shareholders of S corps, you can request a refund from the state. This is immediate cash that can be very beneficial, especially for early-stage companies where much/most everything taking place is R&D and/or for companies that are investing back into their business in order to compete more effectively.
Minnesota companies make two big mistakes when considering (or not considering) the R&D Tax Credit for tax planning.
- Because they don’t realize how broad the definition of Research and Development (“R&D”) is for tax purposes, Minnesota-based manufacturing and technology companies of all types often mistakenly assume that they do not qualify for the federal or Minnesota State R&D Tax Credits.
- The other big mistake that many companies make is that they assume they cannot immediately benefit because they don’t have a current tax liability or because shareholders are limited by the Alternative Minimum Tax (AMT).
This is not true for Minnesota Companies!
No matter the age of your company, this is great news that can potentially enhance the bottom line for all manner of manufacturing and technology related companies because the tax credit is a dollar-for-dollar reduction of a company’s/shareholder’s tax liability. What qualifies as research and development (R&D) is much broader than commonly realized. Activities and costs associated with developing or improving a product and/or process can potentially generate R&D tax credits. Manufacturers of all kinds including those that design and develop their own products, as well as those (i.e. “job shops/contract manufacturers”) that make parts for their OEM customers, are often unknowingly engaged in research and development. Metal stampers and fabricators, precision machinists, mold builders and plastic injection molders, and tool and die-makers are examples of industries that are regularly eligible for the tax credit, but often don’t pursue the credit because they don’t understand that many of their day-to-day activities DO qualify as R&D. Significant R&D also routinely takes place in software development, medical device and other technology companies, and these organizations may also benefit from the tax incentive.