Great news for innovative businesses in Michigan: The state has reinstated its Research & Development (R&D) Tax Credit, effective for tax years beginning on or after Jan. 1, 2025.
ThisÌýrefundableÌýcredit represents a meaningful opportunity forÌýcorporations and flow-throughÌýentitiesÌýthatÌýengaged inÌýqualifyingÌýR&DÌýactivitiesÌýinÌýMichiganÌýduringÌý2025ÌýtoÌýreduceÌýtheirÌýstate tax liability,Ìýimprove cash flow, and offsetÌýcosts associated with innovation.
Compounded withÌýrecentÌýchanges to federalÌýtaxÌýrulesÌý—Ìýparticularly IRC §174, whichÌýallowsÌýfull, immediate expensing ofÌýdomesticÌýresearch or experimentalÌýcosts incurred afterÌýDec.Ìý31, 2024Ìý—Ìýthis credit will be an important planning tool for manyÌýMichigan businesses.ÌýÌý
How the Michigan R&DÌýCredit WorksÌý
The Michigan R&D credit is anÌýincremental, refundable creditÌýdesignedÌýto reward companies for increasing their research spending. It isÌýbased on Michigan Qualified Research Expenses (MQREs) thatÌýexceedÌýa defined base amount.Ìý
MQREs generally follow the federal definition of qualified research expenses under IRC §41. To qualify, research activities must occur within Michigan. Eligible expenses include:Ìý
- Wages for researchers.
- Supplies used in research.
- Contract-research expenses.
- Certain cloud computing costs.Ìý
TheÌýbase amountÌýis calculated as the average annualÌýMQREsÌýa businessÌýincurred during theÌýthree prior calendar years.ÌýIf a taxpayerÌýhas no priorÌýMQREs,Ìýtheir baseÌýisÌýzero, allowingÌýthem to claim the credit onÌýall current-year expenses.Ìý
Who Is Eligible for the Michigan R&D Credit?Ìý
Eligible taxpayers include C corporations subject to the Michigan Corporate Income Tax (CIT) and flow-through entities that are Michigan employers subject to withholding.Ìý
Flow-through entities include:Ìý
- S corporations
- Partnerships
- Limited Liability Companies (LLCs) taxed as partnershipsÌý
Note:ÌýDisregarded entitiesÌý— i.e., business structures that are legally separate from their owner for liability purposes, such as an LLC —Ìýcannot claim the credit directly.ÌýAdditionally, Michigan Business Tax (MBT) filers are excluded from this program.Ìý
Credit Rates and CapsÌýfor SmallÌý& Large BusinessesÌý
The state hasÌýallocatedÌýa $100 million annual cap for this program,Ìýsplit between large and small businesses. The credit rates and limitsÌývary based on theÌýtotalÌýnumber of employees.Ìý
Small Businesses (Fewer than 250 employees)Ìý
- RateÌýUpÌýtoÌýthe Base Amount: 3% of MQREs
- RateÌýOver the Base Amount:Ìý15% of MQREs
- Annual Cap:ÌýMaximum credit ofÌý$250,000Ìýper taxpayer annuallyÌý
Large Businesses (250 or more employees)Ìý
- RateÌýUp to the Base Amount:Ìý3% of MQREsÌý
- RateÌýOver the Base Amount:Ìý10% of MQREsÌý
- AnnualÌýCap:ÌýMaximum credit ofÌý$2Ìýmillion per taxpayer annuallyÌý
Bonus Credit EligibilityÌýfor University Collaboration
Businesses that collaborate with a Michigan research university under a written agreement mayÌýalsoÌýclaim aÌýbonus credit equal to 5% of qualifying collaborative MQREs, capped at $200,000 annually.Ìý
Important Deadlines and Claim RequirementsÌýfor MQREsÌý
ForÌýMQREsÌýincurred in calendar year 2025, taxpayersÌý— fiscal-year-taxpayers included —Ìýmust submit a tentative credit claim through Michigan Treasury Online (MTO) byÌýApril 1, 2026.ÌýForÌýMQREs incurredÌýafterÌý2025, tentative claimsÌýare due March 15 of the following year.Ìý
Key Compliance Details
- Actual Expenses Only: You must base claims on actual MQREs, not estimates.
- Strict Deadlines:ÌýThe Treasury will not accept claims after the statutory deadline.
- Adjustments:ÌýÌýTreasury will publish a notice on its website notifying taxpayers whether adjustments are made to the tentative claims.Ìý
How toÌýClaim the Credit onÌýYourÌýReturnÌý
- C corporationsÌýclaim theÌýfinalizedÌýcredit on their CIT return for the tax years beginning in 2025.
- Flow-through entitiesÌýclaim theÌýfinalizedÌýcredit onÌýtheir annual withholding tax return (Form 5081)Ìýand may begin to reduce periodic withholding payments as soon as TreasuryÌýissues a notice with the finalized credit.Ìý
Important: The credit is refundable, but it cannot be sold, transferred, or passed through to owners.Ìý
Michigan’s R&D CreditÌý&ÌýIRCÌý§174Ìý
The reinstatement of the Michigan R&D credit is particularlyÌýtimelyÌýgiven Michigan’sÌýdecoupling from recent federal §174 changes.Ìý(ClickÌýhereÌýto learn more about where Michigan tax rules break from federal taxÌýrules.)ÌýWhile federal law now allows immediate expensing of R&D, Michigan continues to require five-year amortization of R&D costs for state purposes. As a result, many taxpayers will report higher Michigan taxable income beginning in 2025.Ìý
The refundable Michigan R&D creditÌýwill lessen the impact caused byÌýthis unfavorable timing difference.ÌýAs such, we recommendÌýthat eligible companiesÌýtreat this credit as a central component ofÌýtheirÌýstate tax planning strategy.Ìý
Planning ConsiderationsÌýÌý
- Strict deadlines applyÌý—Ìýlate applications are not allowed.
- Proration riskÌýexists if statewide claims exceed the annual cap.
- Entity structure matters, particularly for disregarded entities.
- Base-year calculationsÌýcan significantlyÌýimpactÌýcredit amounts.
- Coordination withÌýpayroll teamsÌýis essential for flow-through entities reducing withholding.Ìý
Frequently Asked QuestionsÌý
Q: Is the Michigan R&D tax credit refundable?
A: Yes, the Michigan R&D tax credit is refundable. This meansÌýthatÌýif the credit amount exceeds your tax liability, the state may refund the difference to your business, improving cash flow.
Ìý
Q: Can disregarded entities claim the Michigan R&D credit?
A: No, disregarded entities are not eligible to claim the credit directly. Only C corporations subject to Michigan CIT and flow-through entities subject to withholding qualify.
Ìý
Q: What happens if the statewide cap is reached?
A: The program has a $100 million annual cap. If the total valid claims from all businesses exceed this amount, the Department of Treasury will prorate the credits among approved applicants.
Ìý
Q: How do flow-through entities receive the benefit?
A: Flow-through entities claim the finalized credit on their annual withholding tax return (Form 5081). Once the Treasury issues a notice with the finalized credit amount, the entity may reduce its periodic withholding payments.Ìý
Your TakeawayÌý
The reinstated Michigan R&DÌýcredit provides a meaningful incentive for innovation and a valuable planning opportunity across industriesÌý— software, technology, and manufacturing, especially. Given its complexity, early identification ofÌýyour eligibility, proactive documentation of MQREs, andÌýtimelyÌýfiling of the tentative application will be criticalÌýfor businesses hoping to take advantage of this opportunity.Ìý
ÐÜèÊÓƵ’s R&D tax team is well-positioned toÌýassistÌýyour organization with eligibility analysis, as well as credit calculations and compliance efforts to help you fully realize the benefits of this new credit.ÌýTo connect withÌýone of our R&D specialists, clickÌýhere.