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Minnesota Department of Revenue Taking Closer Look at R&D Substantiation
If you are claiming a research and development tax credit on your Minnesota Department of Revenue (MNDOR) 2015 Form RD tax return, the department has just added a new section that asks for supporting details behind the credit.
Specifically, the department is gathering additional information to determine if a study was performed and if so, the extent of the study. This section must be completed if you are claiming the credit.
“CLA has had discussions with MNDOR to gain further background on the new reporting requirement and get clarification to assist our clients in completing the form,” says Lyle Henning, a technical director with CliftonLarsonAllen. “The Department has indicated that the new section was added as a pre-audit step to help streamline its audit process, to help in the audit selection process, and to narrow initial information document requests.”
“If a credit is being taken without a study we believe the department is more likely to examine the underlying credit. It is possible that returns that check “no,” meaning a study was not conducted, will result in additional inquiries by the department.”
Here are some additional details around the new questions:
Question 1a: Did a CPA, attorney, consultant, or other assist in the calculation or preparation of the credit?
Assisting in the calculation or preparation of the credit means the taxpayer consulted with or asked a question of a CPA, attorney, consultant, or another person not employed by the taxpayer, in determining the amount of qualified research expenses eligible for inclusion in the calculation of the credits allowed under IRC Section 41 or Minnesota Statute 290.068.
Question 1b: Did a CPA, attorney, consultant, or other conduct an R&D tax credit study?
Conducting an R&D tax credit study means a CPA, attorney, consultant, or another person not employed by the taxpayer, engages in, assists with, or leads an R&D tax credit study. An R&D tax credit study includes any analysis of a taxpayer’s data, whether performed on site or remotely, to determine the amount of qualified research expenses eligible for inclusion in the calculation of the credits allowed under IRC Section 41 or Minnesota Statute 290.068. Taxpayer data includes, but is not limited to the following:
- Employee time records
- Documentation of expenses
- Any other information relevant to the calculation of the credit
An R&D tax credit study may or may not result in a written report.
If you answer “yes,” to this question, you must include the name, title, company name, and phone number of the individual who helped with the study and can be contacted if there are questions.
Questions 4 and 5 — Was the claimed research performed at the request of another individual or entity or as part of a joint venture with another individual or entity?
The department of revenue is looking for intercompany R&D arrangements and wants to understand what types of expenses are being claimed for the credit in these situations. This question is meant to help the department be more specific with its information document requests. It is likely that, if the return indicates the research was performed at the request of another, the MNDOR will have additional inquiries.
How we can help
The department of revenue has always highly scrutinized the R&D credit but these new questions provide a roadmap for the state to focus on those taxpayers that the department believes is estimating the credit or not putting much time or effort into developing the underlying basis for the credit. If you have questions about the credit, what documentation is required, or now find a formal study is warranted, please reach out to our research and development tax professionals.