Posted by Jeffrey Feingold on 04.17.24
Michigan has taken a significant step towards fostering innovation and supporting businesses with the recent enactment of R&D tax credits. This move marks the revival of R&D credits in the state, which had expired over a decade ago. The introduction of these tax credits aims to encourage research and development activities, spur economic growth, and make Michigan a more attractive destination for businesses, both existing and new.
Legislative Changes:
On March 19, 2024, Michigan's Senate passed House Bill 5100, which had previously been approved by the Democrat-led Michigan House on October 31, 2023. The bill, an amendment to the "Income Tax Act of 1967," specifically adds section 677, outlining the provisions of the state's R&D tax credit program.
Key Provisions of the R&D Tax Credit:
The R&D tax credit program in Michigan offers several incentives for eligible taxpayers:
1. Nonrefundable Tax Credit:
For tax years beginning on or after January 1, 2024, Michigan taxpayers engaged in qualified research within the state can claim a nonrefundable tax credit. The credit is calculated based on qualified research expenditures (QRE) exceeding a specified base amount.
2. Credit Percentage and Caps:
The credit percentage and caps differ based on the number of employees a taxpayer has:
• Taxpayers with 250 or more employees can claim a credit equal to 10% of their QRE, up to a cap of $2,000,000.
• Taxpayers with less than 250 employees can claim a credit equal to 15% of their QRE, up to a cap of $250,000.
3. Collaborative Research:
Taxpayers collaborating with a research university within Michigan are eligible for an additional credit of 5% of QRE exceeding the base amount, up to a cap of $200,000.
4. Base Amount Calculation:
The base amount is determined by the average annual QRE for the three years preceding the credit year.
5. Annual Cap and Refundability:
Michigan's R&D credit program has an annual cap of $100 million, with $25 million reserved for small businesses. If the annual caps are not reached, the credit becomes refundable. A taxpayer can claim a refund if their nonrefundable credits have been fully utilized in the credit year.
6. Eligible Expenditures:
The qualified expenses that can be claimed for the R&D tax credit include wages paid to employees involved in research activities conducted in Michigan, wages of employees directly supporting or supervising research, supplies used in research activities, and a portion of third-party research conducted in the state.
Economic Impact and Benefits:
The introduction of R&D tax credits in Michigan brings forth several advantages:
1. Increased Cash Flow:
The R&D tax credits provide immediate cash savings for businesses, allowing them to invest in their operations, hire additional employees, launch new products, and expand facilities. This injection of funds supports growth and innovation within the state.
2. Combining Federal and State Credits:
Michigan taxpayers can potentially benefit from combining the state R&D tax credits with the existing federal R&D credit, doubling the incentives received. This combined credit represents roughly 20% of total QRE, making Michigan more appealing for businesses looking to establish themselves in the state.
3. Support for Small Businesses and Start-ups:
The R&D tax credits are particularly advantageous for small businesses and start-ups. These incentives can significantly reduce their tax burdens, enabling them to allocate more resources towards research and development activities and fostering their growth potential.
The reintroduction of R&D tax credits in Michigan sends a strong message of support for innovation, research, and economic growth within the state. With these incentives, Michigan aims to attract businesses, drive technological advancements, and create a favorable environment for both existing companies and new ventures. This step will contribute to job creation, increased investments, and the overall competitiveness of Michigan in the global economy.
Find Out if Your Activities Qualify
The R&D tax credit can be a lucrative incentive for innovative businesses in Michigan. Given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving state tax credit opportunities.
Request a free assessment to determine qualifying R&D tax credit eligibility.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.
