Bill would offer Minnesota companies different way of earning research tax credit

There’s currently much talk at the Capitol about the interaction between our state and federal governments. But there’s at least one area where Minnesota’s been moving closer to Washington D.C. in recent years: Its tax code.

Every year, some sort of “conformity” bill shows up in the House Taxes Committee, aiming to pull policies and rates of taxation into closer alignment so taxpayers have fewer items on their federal tax returns that aren’t allowed at the state level. But one area where Minnesota doesn’t exactly line up with the feds is how it calculates the research and development tax credit for businesses.

While Minnesota’s credit is very similar to the one found on federal tax forms, the Internal Revenue Service allows an alternative simplified credit for which businesses can use a different form of calculation for the credit.

The state’s research and development credit would look a lot more like the federal version under HF173. Sponsored by Rep. Kristin Robbins (R-Maple Grove), it would allow taxpayers to use an alternative simplified credit under the state’s credit for increasing research activities.

On Tuesday, the House Taxes Committee laid the bill over for possible omnibus bill inclusion.

“It makes it much easier for companies to take advantage of the R&D tax credit,” Robbins said. “And it incentivizes companies to do their research here, rather than in other states that have the alternative simplification.”

Under the bill, the base amount for earning the credit would equal 50% of average Minnesota research and development expenditures during the past three years.

Minnesota’s current research and development tax credit is equal to 10% of qualifying expenses up to $2 million, and 4% for expenses above that level. Qualifying expenses are the same as for the federal research and development credit but must be for research done in Minnesota.

Examples of qualifying expenses would be research and development-related wages, supplies and research contracted outside a business. Contributions to qualified nonprofit organizations that make grants to early-stage technology businesses in Minnesota also may qualify.

The Revenue Department estimates the proposed changes would reduce the state’s General Fund by $110.8 million in the next biennium, and would reduce current tax liability for about 300 corporate taxpayers based on tax year 2022 data.

Rep. Aisha Gomez (DFL-Mpls) raised objections to the bill rooted in a 2017 Office of the Legislative Auditor report.

“That evaluation said that this tax does not pay for itself,” Gomez said. “This tax has an ill-defined purpose. Since 2017, they’ve been asking somebody, anybody: ‘Tell us what this is supposed to do, so we can figure out if it does what it’s supposed to do.’ But that basic concern remains unaddressed.”

“The tax cut doesn’t pay for itself because nobody can use it,” Robbins replied. “A lot of startups would take advantage of it if it were simpler. The big corporations can do their R&D anywhere. … We are incentivizing them to do it in other states because we make it so hard to do it here.”