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.

  • There are two methods for calculating the North Dakota R&D credit:
    • Regular Method: the amount of the credit is equal to 25% of the first $100,000 of QRE for the taxable year in excess of the base amount and equal to 8% of all QREs for the taxable year more than $100,000 in excess of the base amount.
    • Alternative Simplified Method: The credit is 17.5% of the first $100,000 of excess QRE plus 5.6% of the excess QRE over $100,000.
  • Qualified Research Expenses (QREs) have the same meaning as in IRC § 41, except that such expenses must be for research conducted within North Dakota . For taxpayers who earned a credit in North Dakota before January 1, 2007, the maximum credit allowed in any year is $2 million and any credit over this amount is not allowed in any year.
  • 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.

FEDERAL
NORTH DAKOTA
Year
Total QREs
Credit
Total QREs
Credit
Year 3
$1,842,800
$137,252
$1,842,800
$172,852
Year 2
2,087,706
96,160
2,087,706
194,894
Year 1
1,842,800
157,314
1,842,800
148,583
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.

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