Posted by Robert Hancock on 12.06.24
Michigan House lawmakers took significant steps toward enhancing the state's economic landscape by advancing a comprehensive package of economic development bills to the Senate. This legislative suite is designed to implement a variety of financial incentives, including tax credits, tax exemptions, and grants aimed at supporting businesses throughout the state. Among the key components of the package is a proposed research and development tax credit, which aims to encourage businesses to increase their investment in R&D activities. This initiative would create a state-level tax credit that would be administered by the Michigan Department of Treasury. Currently, while research and development tax credits are available at the federal level, approximately 37 states have established their credits that align with federal criteria. Michigan's proposed credit is set to follow similar qualifying standards, focusing on a company's expansion of its research and development expenditures within the state. Eligibility will primarily depend on the potential for job creation, economic impact, and technological advancements.
The credit is available to any licensed businesses that incurred qualifying research and development expenses during the calendar year. A qualified business includes corporate entities and pass-through entities.
Michigan adopts the federal income tax definition of qualifying research and development expenses but includes only research conducted in Michigan. Research conducted outside Michigan is expressly excluded. Taxpayers should document their research to substantiate the conduct of research in Michigan. The definition leaves the question of whether every activity a taxpayer must engage in to qualify for the credit must be conducted in Michigan or whether the credit is available for expenses of requisite activities conducted in Michigan, even if other requisite activities are conducted outside Michigan. For federal income tax purposes, some requisite activities may be conducted outside the United States but do not disqualify the research project for the credit. This is so even though the expenses for the non-United States cannot be counted for the credit. The same rule might reasonably apply to a research project conducted in part outside Michigan so that the expenses incurred for the conduct of research conducted in Michigan are creditable.
The amount of the credit depends on the number of employees of the authorized business. Authorized businesses with 250 employees or more (“Large Taxpayers”): For qualifying research and development expenses incurred during the calendar year up to the base amount, the credit equals 3% of these expenses. If the qualifying research and development expenses incurred for the calendar year exceed the base amount, the credit equals 10% of the excess. The credit may not exceed $2,000,000 per tax year per taxpayer. Authorized businesses with less than 250 employees (“Small Taxpayers”): For qualifying research and development expenses incurred during the calendar year up to the base amount, the credit equals 3% of these expenses. If the qualifying research and development expenses incurred for the calendar year exceed the base amount, the credit equals 15% of the excess. The credit may not exceed $250,000 per tax year per taxpayer.
The base amount is the average annual qualifying research and development expenses for the three calendar years immediately preceding the tax year for which the credit is claimed. Adjustments are made if the authorized business does not have qualifying research expenses in some or all the three preceding calendar years. Note that for federal income tax purposes, no credit can be claimed for qualifying research and development expenses incurred for the year that equal the base amount, but for Michigan income tax purposes, qualifying research and development expenses incurred for the year equal to the base amount do produce a credit, albeit at a lower percentage.
A taxpayer that does not claim the federal research and development credit because its expenses do not exceed its base amount should NOT assume that it cannot claim Michigan research and development credit. The taxpayer still is eligible for the Michigan credit up to 3% of its base amount.
If a taxpayer conducts qualified research and development for a Michigan research university, then, in addition to the foregoing credits, the taxpayer may claim an additional 5% for the expenses incurred to conduct this collaborative research. An essential requirement is that the taxpayer perform the collaborative research under a written agreement with the research university and make a copy of the agreement available to the Michigan Department of Treasury if requested. This collaborative research credit may not exceed $200,000 per tax year per taxpayer. The availability of the collative research credit is problematic if the research university research university “funds” the research, which is a contentious issue for federal income tax research and development credits.
The Department of Treasury will prorate the credits for all claimants if the amount of the credits for a single tax year exceeds $100 million. The $100 million limit includes credits allowed to “employers” as provided in HB 5101 (MCL §206.717) that are pass-through entities. To be eligible for the credit, a taxpayer must submit a tentative credit claim on a form prescribed by the Department of Treasury by April 1, 2026, for the 2025 calendar year. For calendar years after 2025, a taxpayer must file the tentative credit claim by March 15 the year the credit is claimed. The Department of Treasury will use the total of these tentative credit claims to prorate and decrease the credits of claimants if the total of all the tentative claims exceeds the $100 million limitation. The form will indicate if the taxpayer is a Small or Large Taxpayer, the amount of qualifying research and development expenses, and whether collaborative university research and development expenses are being claimed.
No prorated reduction is required for credits claimed by Small Taxpayers if the total credits claimed by these taxpayers do not exceed $25 million. The credits claimed by Small Taxpayers must be prorated and decreased if the total of the tentative claims filed by these taxpayers exceeds $25 million. Proration for Large Taxpayers: If credits claimed by Small Taxpayers must be prorated and decreased, then the total credits claimed by Large Taxpayers must be prorated and decreased so that the total amount of the credits claimed by Large Taxpayers does not exceed $75 million.
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
