Income Tax Exemptions | Credits

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Business Income Tax Exemptions and Credits

North Dakota offers the following income tax exemptions and credits for businesses. 

Jump to Individual Income Tax Credits

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An income tax credit for investing in an agricultural commodity processing facility is certified by the North Dakota Department of Commerce Division of Economic Development and Finance. An agricultural commodity processing facility includes a livestock feeding, handling, milking, or holding operation that uses as part of its operation a by-product produced at a biofuels production facility.

Eligibility: Investment must consist of an exchange of cash or a fee simple interest in North Dakota real property for an equity (ownership) interest in the facility.

The credit is equal to 30% of the investment. No more than $50,000 of credits may be used in any year. An unused credit may be carried forward up to 10 years. A taxpayer is allowed no more than $250,000 of credits for all tax years. If the taxpayer is a passthrough entity, the credit is passed through to its owners based on their respective interests in the entity.

Filing Requirements: Once certified, an agricultural commodity processing facility must report each qualified investment using the Ag Commodity Processing Facility Investment Reporting Form.

Application Process:

Century Code Reference: N.D.C.C. § 57-38.6.

C corporations that have income from business activity that is taxable in both North Dakota and another state(s) is required to apportion its income using an apportionment formula with equally weighted property, payroll, and sales factors.

A multistate C corporation may elect to use an alternative apportionment formula with a single sales factor (2019 and after) – sales 100% (no property or payroll factor).

  • The election is binding for 5 tax years, and then may be renewed.
  • If a new election is not made, the standard equally weighted three-factor apportionment formula must be used for a minimum of 3 tax years.
  • The election is not available to a passthrough entity.

Filing Requirements: A calendar year corporation must file on or before April 15th. A corporation reporting on a fiscal year basis must file on or before the October 15th.

Century Code Reference: N.D.C.C. § 57-38.1-09

This is an income tax credit for qualifying purchase made in 2019 through 2022 calendar years, after which it expires.

A taxpayer is allowed an income tax credit for the purchase or capital lease of new or used automation and robotic equipment that upgrades or advances a manufacturing process, resulting in improved job quality or increased productivity in North Dakota.

Eligibility: To qualify, the business must be certified as a primary sector business and the machinery and equipment must be approved by the North Dakota Department of Commerce Division of Economic Development and Finance.

The credit is equal up to 20% of the purchase cost or the equipment’s fair market value if a capital lease. An unused credit may be carried forward up to 5 tax years. The total credits allowed for all qualifying purchases by all taxpayers is limited to $1 million per calendar year. This amount is prorated among the taxpayers if the qualifying purchases result in credits exceeding $1 million. If the total amount of credits earned for a year is less than $1 million, the unused portion is added to the following year’s $1 million limit.

If the taxpayer is a passthrough entity, the credit is passed through to its owners based on their respective interests in the entity. The credit allowed to a corporation included in a consolidated North Dakota income tax return may be used to reduce the aggregate tax liability of all corporations in the return.

Filing Requirements: Within 1 year after claiming a credit, the business must file a report with the Office of State Tax Commissioner to document satisfaction of the requirement to improve job quality or increase productivity.

Application Process:

Century Code Reference: N.D.C.C. § 57-38-01.36

Tax Credits for Producing or Blending Biodiesel or Green Diesel and for Crushing Soybeans or Canola

A C corporation is allowed an income tax credit for adapting or adding equipment to retrofit a facility or to construct a new facility in North Dakota that either produces or blends biodiesel fuel or green diesel fuel, or crushes soybeans or canola.

The credit is equal to 10% of the direct costs incurred and is allowed in each of 5 tax years, starting with the tax year in which the production, blending, or crushing begins. An unused credit may be carried forward up to 5 tax years. A corporation is allowed no more than $250,000 of credits for all tax years.

Eligibility:

  • A licensed supplier of biodiesel fuel or green diesel fuel having at least a 5% blend is allowed an income tax credit for blending the fuel in North Dakota.
    • The credit is equal to 5 cents for each gallon blended.
    • An unused credit may be carried forward up to 5 tax years.
  • A licensed seller of biodiesel fuel or green diesel fuel having at least a 2% blend is allowed an income tax credit for adapting or adding equipment to the seller’s facility in North Dakota to enable it to sell the biodiesel or green diesel blend.
    • The credit is equal to 10% of the direct costs incurred and is allowed in each of 5 tax years, starting with the tax year in which the facility begins selling the biodiesel fuel or green diesel fuel.
    • An unused credit may be carried forward up to 5 tax years. A seller is allowed no more than $50,000 of credits for all years.
  • For the biodiesel and green diesel supplier and seller credits only: If the supplier or seller is a passthrough entity, the credit is passed through to the entity’s owners based on their respective interests in the entity.

Filing Requirements: Claim when filing North Dakota corporation income tax, attach a schedule or worksheet showing the computation.

Application Process:

Century Code Reference: N.D.C.C. §§ 57-38-01.22, 57-38-01.23, and 57-38-30.6.

The below criteria were extended through 2023. Unless acted upon by the 2023 North Dakota Legislature, the law will revert to its pre-2019 state and will only be allowed to a C corporation.

This is an income tax credit for employing an individual with a developmental disability or severe mental illness.

Eligibility: No more than 100 individuals may be certified for purposes of the credit. An employee of a subcontractor is considered an employee of the contractor to the extent of any wages paid under the contract.

For each eligible individual hired, the credit is equal to 25% of the wages paid to the eligible individual, up to a maximum credit of $1,500 per year. This credit is allowed in each year the eligible individual is employed.

The total credit amount a taxpayer may claim in a tax year may not exceed 50% of the taxpayer’s tax liability before credits.

In the case of a passthrough entity, such as a partnership or S corporation, the credit is calculated at the passthrough entity level and passed through to its owners in proportion to their ownership interests. The 50% tax liability limitation does not apply at the passthrough entity level but is applicable to each owner other than another passthrough entity.

Filing Requirements: Claim the credit on the applicable form (tax years 2019 through 2022) as follows:

Application Process: An employer must apply for and obtain certification from the North Dakota Department of Human Services, Vocational Rehabilitation Division, that the individual has a severe disability, is eligible for the agency’s services, and requires customized employment to become employed. (Note: For the 2021 and 2022 tax years, either customized employment or supported employment will qualify.) If these conditions are met, a certification letter will be issued to the employer.

Century Code Reference: N.D.C.C. § 57-38-01.16

An eligible employer is allowed an income tax credit for continuing to pay part or all of the wages of an eligible employee while the employee is on active duty in the U.S. armed forces.

Wages for this credit mean the sum of:

  • Gross wages before reduction by payroll taxes, elective contributions to a defined contribution plan, and any other payroll deduction, plus
  • Employer’s contributions to the employee’s defined contribution plan.

A defined contribution plan means a 401(k), 403(b), profit-sharing, stock bonus, money purchase, or any other plan meeting the definition of a defined contribution plan under Internal Revenue Code Section 414.

Eligibility: An eligible employee is an individual who is:

  • A legal resident of North Dakota,
  • A member of the National Guard or a reserve component of any branch of the U.S. armed forces, and
  • Mobilized for federal active duty under Title 10 of the United States Code during the employer’s tax year.

To be eligible for the credit, an employer must:

  • Continue to pay part or all of the eligible employee’s wages during the period of mobilization, and
  • The federal active-duty wages received by the eligible employee are less than the wages that the employer would have paid if the eligible employee had not been mobilized.

Filing Requirements: To claim the credit, complete Schedule ME - Credit For Wages Paid to Mobilized Employee and include it with the applicable return. See Individual Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-01.31

This is an income tax credit for employing an individual under an internship program located in North Dakota.

The credit is equal to 10% of the compensation paid to the intern. The credit is allowed for up to 5 interns employed at the same time. An employer is allowed no more than $3,000 of credits for all tax years. If the employer is a passthrough entity, the credit is passed through to its owners based on their respective interests in the entity.

Eligibility: An intern must be enrolled in a college or vocational technical education program majoring in a field related to the work to be performed and must be supervised and evaluated by the employer. The internship must qualify for academic credit.

Filing Requirements: Claim when filing North Dakota income tax, attach a schedule listing the names of employees, their social security number and wages paid.

Application Process:

Century Code Reference: N.D.C.C. § 57-38-01.24

A primary sector business may qualify for an income tax exemption for up to 5 years.

Eligibility: Must be a primary sector business that is new or expanding its North Dakota operations. Primary sector is a business that adds value to product, process, or service that produces new wealth in North Dakota. Primary sector certification must be gained from the North Dakota Department of Commerce Division of Economic Development and Finance.

A project is not eligible for an exemption if any of the following apply:

  • A tax exemption was received under tax increment financing
  • It is out of compliance for any tax obligation
  • The exemption fosters unfair competition or endangers existing business

Filing Requirements: Claim when filing North Dakota corporation income tax, attach a schedule showing the computation of exempt income for each corporation.

Application Process:

  • Application for New or Expanding Business Income Tax Exemption (Project Operator's Application for Income Tax Exemption)
  • Primary Sector Certification – North Dakota Department of Commerce Division of Economic Development and Finance
  • The application must be filed no later than 1 year after the commencement of operations within the new business or expansion.
  • The business must provide notice to competitors as prescribed by the State Board of Equalization.
  • At a public meeting, the State Board of Equalization considers the application and any testimony, and grants or denies the exemption.

Century Code Reference: N.D.C.C. § 40-57.1

A program is available that assists a new or expanding primary sector business with training new employees. The cost of the training under the program is paid for in whole or in part with the income tax withheld from the new employees.

Under the North Dakota New Jobs Training Program, your business may be able to obtains funds in the form of a loan, a reimbursement grant, or under a self-financing option. State income tax withholding from the new positions created are matched for up to 10 years, until the maximum reimbursement is reached, or until the loan is repaid, whichever comes first.

For more information about this program, contact Job Service North Dakota.

For more information about primary sector designation, contact the North Dakota Department of Commerce Division of Economic Development and Finance.

Century Code Reference: N.D.C.C. ch. 52-02.1

There are 3 income tax credit available to taxpayers for making a charitable contribution to a nonprofit private school in North Dakota, learn more at: 

Nonprofit Private School Contribution Credit

There is an income tax credit for conducting research in North Dakota, learn more at:

Research Expense Credit

An income tax credit is allowed to a C corporation for making a contribution to the Rural Leadership North Dakota Program conducted by the NDSU Extension Service.

Eligibility: The credit is equal to 50% of the total contributions made during the tax year. Contributions may be designated for a specific individual. The credit is only allowed in the tax year of the contribution; an unused credit may not be carried over to any other tax year.

Filing Requirements: To claim the credit complete Schedule TC or Schedule CR, Part III, of Form 40, the North Dakota corporation income tax return, and enclose a copy of a receipt for each qualifying contribution or cancelled check (front and back). See Corporate Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-01.34

This is an income tax credit for investing in a qualified primary sector business as certified by the North Dakota Department of Commerce Division of Economic Development and Finance.

Because of changes in the law, the applicable rate, limitations, and other features of the tax credit have changed over the years. For a summary of the applicable rates, limitations, and other features on a year-by-year basis, see Seed Capital Investment Tax Credit Program – Rates, limitations, and other features of the tax credit by tax year.

Eligibility: A taxpayer holding a controlling interest in, or deriving over 50% of annual gross income from, a qualified business is not eligible for the credit. A qualified investment means an exchange of cash for an equity (ownership) interest in the qualified business. The credit is equal to 45% of the investment. No more than $112,500 of credits may be used in any tax year. An unused credit may be carried forward up to 4 tax years. If the taxpayer is a passthrough entity or an angel fund, the credit is passed through to the entity’s owners or the fund’s members based on their respective interests in the entity.

Only the first $500,000 of eligible investments in a qualified business are eligible for the tax credit. The total amount of tax credits allowed for investments made in all qualified businesses in any calendar year is limited to $3.5 million.

Filing Requirements: A certified business must report each qualified investment it receives within 30 days by completing and submitting the Qualified Seed Capital Business Investment Reporting Form.

Application Process:

Century Code Reference: N.D.C.C. § 57-38.5

This is an income tax credit for employing extraordinary recruitment methods to recruit and hire employees for hard-to-fill positions in North Dakota.

The credit is equal to 5% of the compensation paid during the first 12 consecutive months to an employee hired to fill a hard-to-fill employment position and is allowed in the first tax year following the tax year in which the employee completes the 12 consecutive month employment period. An unused credit may be carried forward up to 4 tax years. If a taxpayer is a passthrough entity, the credit is passed through to its owners based on their respective interests in the entity.

Eligibility: An employer must pay an annual salary that is at least 125% of North Dakota’s average wage and must have employed all the following recruitment methods for at least 6 months to fill a position for which the credit is claimed:

  • Contracted with a professional recruiter for a fee.
  • Advertised in a professional trade journal, magazine, or other publication directed at a particular trade or profession.
  • Provided employment information on a website for a fee.
  • Paid a signing bonus, moving expenses, or atypical fringe benefits.

In addition, if an employer claims the credit, the employee hired in the hard-to-fill position is allowed a deduction for the signing bonus, moving expenses, or atypical fringe benefits paid by the employer that are included in the employee’s federal taxable income.

Filing Requirements: Claim when filing North Dakota corporation income tax, attach a schedule listing the names of employees, their social security numbers, wages paid, and employment start date. See Corporate Income Tax for forms.

Application Process:

Century Code Reference: N.D.C.C. §§ 57-38-01.25, 57-38-30.3(2)

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Individual Income Tax Credits

North Dakota offers the following income tax exemptions and credits to individuals.

Jump to Business Income Tax Credits

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Learn more about the angel investment credits in North Dakota, also includes information on Angel Fund Investment Credit - Pre-July 2017. 

Angel Investor Investment Credit

A resident individual is subject to North Dakota income tax on all of the individual’s income, even if it was earned or has its source outside North Dakota. Even though an individual is a North Dakota resident, the individual may be subject to income tax in another state (and, in some cases, a local jurisdiction within that state) on income received for working or operating a business in the other state, or on income derived from income-producing tangible property located in the other state.

Eligibility: If a North Dakota resident individual pays income tax to both North Dakota and another state (including any of its local jurisdictions) on the same income, the individual may claim an income tax credit on the North Dakota income tax return to reduce the amount of tax owed to North Dakota.

If an individual is a resident of North Dakota for only part of the tax year, the credit is allowed with respect to income earned or received while a North Dakota resident.

A state means any of the other 49 U.S. states, the District of Columbia, and a U.S. territory. A local jurisdiction means a city, township, county, etc., within a state.

The credit is only allowed for the payment of income tax that the individual owes to another state and any of its local jurisdictions, as calculated and reported on the income tax return filed with the other state and/or local jurisdiction. The credit is not allowed for income tax paid to a foreign country or its local jurisdictions, nor is it allowed for any tax that is not an income tax (e.g., property or sales taxes).

Reciprocity with Minnesota and Montana

This credit is not allowed for income tax paid to Minnesota or Montana on income that is exempt from North Dakota income tax under the reciprocity agreements with those states.

Extended Time to File Claim for Refund

 In some cases, a North Dakota resident individual will be assessed income tax by another state or one of its local jurisdictions after the individual has already filed the North Dakota income tax return. If this occurs, the individual may file an amended North Dakota return to claim this credit and any resulting refund. Generally, the amended return must be filed within 3 years from the due date (without extension) of the original North Dakota return or the date the individual filed the original North Dakota return, whichever period expires last. However, if the other state or local jurisdiction assesses the income tax after the general 3-year time period has expired, an amended North Dakota return may still be filed if it is filed within 1 year from the date the income tax was paid to the other state or local jurisdiction.

Filing Requirements: To claim the credit, complete Schedule ND-1CR and include it with your North Dakota income tax return, Form ND-1 - see Individual Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-30.3

This is an income tax credit for taxpayers making a charitable contribution to a qualified endowment fund. The credit is equal to 40% of the contribution, up to a maximum credit of $10,000.

An adjustment must be made to increase the entity’s North Dakota taxable income by the amount that the contribution reduced the entity’s federal taxable income. If the credit exceeds the entity’s tax in the tax year in which the contribution is made, the excess credit may be carried over and used on subsequent tax years’ returns for up to 3 years.

If business is a passthrough entity, the credit is passed through to its owners and the adjustment to North Dakota taxable income and the carryover provision apply at the owner level.

Eligibility:

  • Endowment Fund – a permanent, irrevocable fund that is held by a qualified nonprofit organization (or by a bank or trust company on behalf of the qualified nonprofit organization) is:
    • Comprised of cash, securities, mutual funds, or other investment assets
    • Established for a specific religious, educational, or other charitable purpose
    • Only allowed to disburse the income from, or the increase in value of, the assets contributed to the fund
  • Nonprofit Organization – a tax-exempt charitable organization under federal income tax law that meets either of the following sets of criteria:
    • North Dakota incorporated or established and maintains a physical location in North Dakota.
    • Minnesota, Montana, or South Dakota incorporated or established and maintains a physical location outside North Dakota that is within 5 miles of a North Dakota city with a population of 5,000 or more that does not have a hospital; and supports or benefits a hospital, nursing home, medical center, or any combination of these.

Filing Requirements: To claim the credit, complete Schedule ND-1QEC and Schedule ND-1TC and include them with the North Dakota individual income tax return, Form ND-1. See Individual Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-01.21

If an individual has a qualifying family member for whom the individual paid qualified care expenses, the individual may be eligible for an income tax credit equal to a percentage of the qualified care expense payments. The credit percentage ranges from 20% to 30% and is dependent on the amount of the individual’s federal taxable income. The amount of the credit is reduced by the amount of the individual’s federal taxable income in excess of $50,000 ($70,000 if married filing jointly). The maximum credit allowed is $2,000 per qualifying family member, not to exceed $4,000.

Eligibility: A qualified family member is a person who is related to the individual by blood or marriage, is at least 65 years old or disabled as defined by the Social Security Administration, and has a federal taxable income of no more than $20,000 ($35,000 if married).

Qualified care expenses mean adult day care, home health agency services, personal care attendant services, homemaker services, respite care, companionship services, and, to the extent they do not reduce your federal taxable income, medical expenses otherwise deductible for federal income tax purposes. For an expense to qualify, the qualifying service must be provided by an organization or person unrelated to the individual or the qualifying family member, and the expense must not be compensated for by insurance or a federal or state assistance program.

Filing Requirements: To claim the credit, complete Schedule ND-1FC and Schedule ND-1TC and include them with the North Dakota individual income tax return, Form ND-1. See Individual Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-01.20

Married individuals may be eligible for an income tax credit if all the following apply:

  • They file a joint North Dakota income tax return.
  • Both have qualified income.
  • Their joint North Dakota taxable income and the qualified income of the spouse having the lower qualified income exceed certain threshold amounts.

Eligibility:  Qualified income means the sum of the following, to the extent included in North Dakota taxable income:

  • Wages, salaries, tips, bonuses, and any other compensation that is reportable as taxable wages on Form W-2.
  • Net self-employment income subject to the federal self-employment tax reduced by the amount of the self-employment tax deduction, as reported on Form 1040 – Schedule SE.
  • Taxable portion of social security benefits and distributions from IRAs, pensions, and annuities. Do not include any social security benefits or U.S. Railroad Retirement Board benefits that are deducted from North Dakota taxable income. 

Filing Requirements: Due to indexing of certain amounts for inflation each year, the formula for calculating the credit and the maximum credit allowed will generally change each year. For details on the eligibility criteria and the calculation of the credit, see the Marriage Penalty Credit Worksheet in the instructions to Form ND-1 for the applicable tax year. See Individual Income Tax for forms.

Century Code Reference: N.D.C.C. § 57-38-01.28

There are 3 income tax credit available to taxpayers for making a charitable contribution to a nonprofit private school in North Dakota, learn more at: 

Nonprofit Private School Contribution Credit

 

This is an income tax credit for premiums paid on a partnership plan long-term care insurance policy that covers the individual, the individual’s spouse, or both.

A partnership plan policy is a special type of long-term care insurance policy that meets specific consumer protection and federal income tax law requirements, is recognized by North Dakota for Medicaid benefit purposes, and provides the proper inflation protection based on the insured individual’s age at time of purchase.

An insurance company is required to provide the insured individual with a statement certifying the policy as a partnership plan policy at time of issuance (which may be part of the policy document). There are long-term care insurance policies that ARE NOT partnership plan policies for which the premiums are not eligible for this credit. Therefore, it is important to check the policy or contact the insurance company to confirm that it is a partnership plan policy.

Eligibility: To qualify, a covered individual must be a North Dakota resident at the time the premiums are paid. The credit is equal to the premiums paid during the tax year, up to a maximum credit of $250 per qualified individual.

Filing Requirements: To claim the credit, complete Schedule ND-1TC and include it with the North Dakota individual income tax return, Form ND-1. See Individual Income Tax for forms.

Century Code Reference: Reference: N.D.C.C. § 57-38-29.3

There is an income tax credit for charitable contributions in the form of a planned gift, learn more at: 

Planned Gift Tax Credit