Are R&D Tax Credits Available in North Dakota?

Yes. The North Dakota state Research and Development (R&D) Tax Credit is very similar to the federal version including the definition of qualifying research. Below are some of the differences between the federal and North Dakota Tax Credits.

The applicable percentage is 25% for the first $100,000 of excess expenses in a tax year. For excess expenses over $100,000 in a year, the applicable percentage for tax years 2007 through 2016 is:

  • 7 ½% for 2007, 11% for 2008, 14 ½% for 2009 and 18% for 2010 through 2016, if qualified research in North Dakota began before 2007; or
  • 8% if qualified research in North Dakota first begins after 2010
  • For tax years after 2016, the applicable percentage for excess expenses over $100,000 in a year is 8% for all taxpayers, regardless of when research firsts begins.
  • For taxpayers who began qualified research in North Dakota before January 1, 2007, the maximum credit allowed in any year is $2 million
  • An unused credit may be carried back three tax years and carried forward up to fifteen tax years.
  • Subject to certain conditions, a taxpayer may sell, transfer, or assign up to $100,000 of its unused tax credit to another taxpayer if the taxpayer selling the credit is certified by the Department of Commerce Division of Economic Development and Finance to be a primary sector business with annual gross revenues of less than $750,000 that conducts qualified research in North Dakota for the first time after December 31, 2006.

North Dakota R&D Tax Credit Case Study
A Fargo Company manufactures farming equipment. It had never before claimed the R&D Tax Credit for the development activities of its software programmers. This project involved a three-year study with a two year look back.

The Company qualified for the federal R&D Tax Credit of $390,726 and an additional $516,329 in North Dakota state R&D Tax Credit.

Total QREs
Total QREs
Year 3
Year 2
Year 1
Total $5,503,651 $390,726 $5,503,651 $516,329

You can read more about this North Dakota tax credit case study here.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

Technological in Nature
Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

Permitted Purpose
Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

Eliminate Uncertainty
Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.