Research and development (R&D) plays an important role in driving economic growth and innovation within a state. By investing in R&D, states can foster technological advancements, improve productivity, and create high-quality jobs, which collectively enhance the competitiveness of their economies. Recognizing these benefits, states often seek to encourage R&D activities by implementing various incentives, one of the most effective being tax credits.
Michigan has taken such a step, recently introducing a new research and development (R&D) tax credit, that will apply for eligible expenses on or after January 1, 2025. This credit aims to incentivize businesses to increase their R&D activities within the state.
Who is eligible for the new credit?
The R&D tax credit is available to Corporate Income Tax (CIT) taxpayers and certain flow-through entities. To qualify, businesses must:
- Be subject to Michigan income tax withholding
- Not be subject to the CIT or Michigan Business Tax (MBT)
- Increase their qualifying R&D expenses relative to a base amount
Flow-through entities include S corporations, partnerships, and limited liability companies not taxed as corporations for federal purposes. The credit applies only to R&D expenses within Michigan.
How do I calculate the credit?
The unadjusted credit amount depends on the number of employees and the R&D expenses incurred. Those with fewer than 250 employees add 3% of R&D expenses up to the base amount to 15% above the base amount with a maximum credit of up to $250,000. Businesses with 250 or more employees take 3% of these expenses up to the base amount plus 10% above the base amount for a maximum credit of up to $2,000,000.
Additionally, businesses can claim an extra 5% credit for R&D expenses incurred in collaboration with a Michigan research university, capped at $200,000 annually.
How do I claim the credit?
To claim the R&D credit, businesses must submit the necessary paperwork by the statutory deadline. For expenses incurred in 2025, the deadline is April 1, 2026. For subsequent years, the deadline is March 15 of the following year. Those eligible for the credit cannot assign or transfer it. It can only benefit the claimant directly.
Michigan’s new R&D tax credit offers significant incentives for businesses to enhance their research activities within the state. By understanding the eligibility requirements, calculation methods, and claiming processes, businesses can effectively leverage this credit to reduce their tax liabilities. As Treasury develops further guidance, staying informed will be crucial for maximizing the benefits of this new tax credit.