For tax years 2026 and 2027, Minnesota’s enhanced R&D credit refundability provisions may increase the value of the incentive for businesses investing in research activities within the state. Taxpayers with limited Minnesota tax liability may be able to monetize a portion of otherwise unused credits, making it important to evaluate the refund election and related state tax planning considerations.

Minnesota has historically offered an R&D tax credit modeled on the federal research credit, but the benefit was limited to offsetting state tax liability. Minnesota’s omnibus tax legislation House File 9 (HF 9) introduced partial refundability beginning in tax year 2025, allowing eligible taxpayers to receive a cash benefit from a portion of unused current-year credits while leaving the underlying credit calculation and qualification rules largely unchanged.

What’s changed

Minnesota has long offered an R&D tax credit aligned with the federal credit structure, but historically the benefit was limited to reducing tax liability, with unused credits carried forward. HF 9 updates Minnesota’s existing R&D credit, equal to 10% of Minnesota qualifying expenses over the base amount, up to $2 million and 4% above that threshold, by making it partially refundable beginning in tax year 2025.

Under the new law, taxpayers may elect to receive a refund equal to a percentage of their unused current-year R&D credit after reducing their Minnesota tax liability to zero. The election must be made on a timely filed Minnesota return, including extensions. The refundability rate is set at 19.2% for tax year 2025 and increases to 25% for tax years 2026 and 2027. Beginning in 2028, the refundability rate will be determined annually under a formula intended to limit projected statewide refunds to approximately $25 million or less. These changes significantly improve the credit’s cash benefit, particularly for taxpayers not currently in a taxable income position.

The calculation of the credit itself, the 10% (Credit Rate - Base) and 4% (Credit Rate - Excess) tiered structure based on qualifying Minnesota research expenses, remains unchanged, and unused credits not refunded may still be carried forward for up to 15 years. The table below illustrates the credit mechanics and updates after HF 9.

What CohnReznick thinks

These developments reflect a broader state-level shift toward making R&D tax incentives more meaningful, particularly through enhanced refundability and improved near-term cash benefits. For Minnesota taxpayers, partial refundability may increase the practical value of the credit by converting a portion of otherwise unused current-year credits into cash, which can be especially helpful for companies with limited Minnesota tax liability or those investing heavily in research before generating taxable income.

The more technical planning issue is Minnesota’s interaction with federal conformity rules. Minnesota generally follows the federal Section 41 rules for determining qualified research. However, legislation enacted in May 2026 selectively decoupled from federal Section 174A for corporate taxpayers. In general, a corporate taxpayer must add back 80% of the federal deduction for domestic research or experimental expenditures and may recover that amount through ratable subtractions over the following four tax years. Companies generating Minnesota research credits should evaluate the refund election, model the impact of Minnesota conformity adjustments, and incorporate both into their broader federal and state tax planning strategy.