Governor Gretchen Whitmer recently bolstered her commitment to businesses with the enactment of Public Acts 186 and 187, which establish a Michigan research and development (R&D) tax credit. This new legislation incentivizes innovation, growth and investments within the state, allowing for an additional credit for R&D expenses incurred in conjunction with a qualified research university.
Michigan joins 36 other states that have enacted their own version of an R&D credit. For tax years beginning on or after January 1, 2025, Michigan taxpayers and employers who conduct R&D activities within the state have the opportunity for potentially large tax savings.
Calculate the Base Amount. The R&D credit calculation begins with calculating the “base amount” for the tax year in which you are claiming the credit. Calculate the “base amount” by averaging the qualifying R&D costs for the three tax years that immediately precede the year for which you are claiming the credit.
For authorized businesses with first time qualified R&D expenses, the first-year base amount would be calculated at zero. If there are less than three proceeding tax years with qualified R&D expenses, the base amount should be calculated by averaging the applicable number of years with qualifying expenses.
Determine Your Category. After you have your calculated base amount, you can identify into which of two categories your falls:
If your business has 250 or more employees, the R&D credit equals 3% of qualifying R&D expenses up to the base amount, and 10% of the qualifying R&D expenses that exceed the base amount. The credit is capped at $2 million per tax year.
If your business has fewer than 250 employees, the R&D credit equals 3% of your qualifying R&D expenses up to the base amount, and 15% of the qualifying R&D expenses that exceed the base amount. The credit is capped at $250,000 per tax year.
R&D credits are non-transferable and cannot be assigned. In the event the amount of the credit exceeds the tax liability of the year, the excess must be refunded.
| Number of Employees | Percent of Qualified Expenses Below Annual Base Amount | Percent of Qualified Expenses Exceeding Annual Base Amount | Maximum Amount of Credit Per Tax Year |
|---|---|---|---|
| 250 or more employees |
3% of qualifying research and development expenses |
10% of qualifying research and development expenses |
$2 million |
| Fewer than 250 employees |
3% of qualifying research and development expenses |
15% of qualifying research and development expenses |
$250,000 |
To be eligible for the tax credit, you must first submit a tentative claim to the Michigan Department of Treasury:
The tentative claim should include:
For each calendar year, the total amount of Michigan R&D tax credits for all taxpayers and employers cannot exceed $100 million. Because of this limitation, you may not receive a tax credit equal to the amount you submit for, hence the tentative claim request. If the total tentative claims for a calendar year exceed $100 million, the Michigan Department of Treasury will calculate a prorated amount of credits per claimant and notify them of adjustments via the department’s website. The prorated amount is also limited by the total tentative claims submitted for each of the authorized business categories.
If the total amount of tentative claims by authorized businesses with fewer than 250 employees:
Authorized businesses with 250 employees or more will receive a:
Public Acts 186 and 187 also allow for an additional credit of 5% of qualified R&D expenses that result from a collaboration with a qualified Michigan university. Authorized or eligible businesses may request a credit of up to $200,000 per year by providing a written agreement between you and the research university. A research university is defined as a public university described in Section 4, 5, or 6 of Article VIII of the State Constitution of 1963 or an independent nonprofit college or university in the state.
A few of the qualifying universities include University of Michigan, Michigan State University, Wayne State University and Eastern Michigan University.
This new legislation offers potentially large tax savings to taxpayers and employers with qualifying R&D expenses in Michigan. With the accelerated timeframe due to the tentative claim process, it’s important to be proactive in tracking your qualified R&D expenses going into the new year. Talk with your tax adviser to determine the full potential impact of the new Michigan R&D tax credit.
Contact Danielle Stahr, Jeff McMichael or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.