New Law Creates Michigan State-level Research & Development Credit

Michigan has created a state-level R&D tax credit incentive on qualified research expenditures (QRE) incurred on or after January 1, 2025, by a taxpayer or an employer that is an authorized business in Michigan in the calendar year. An "authorized business" includes corporations, insurance companies, financial institutions, unitary business groups (i.e., taxpayers), and FTEs subject to withholding requirements under MCL Section 703(2) (i.e., employers) that have increased their qualifying R&D expenses.

There is a total of $100 million per year available, and credits will be prorated if the value of all Michigan claims exceeds $100 million. The Michigan definition of QRE follows the federal tax code and must comply with Internal Revenue Code Section 41 - Credit for Increasing Research Activities. The credit only applies to QRE activities conducted within the state of Michigan.

Tentative claims must be submitted to the Michigan Department of Treasury with annual returns by April 1, 2026, for the 2025 tax year and by March 15 for all subsequent years. The credit is not transferable, but if the credit amount exceeds the taxpayer's tax liability for the filed year, the portion that exceeds the liability is refunded.

More favorable than federal R&D credit

Under the new legislation, Michigan taxpayers can claim a credit of 3 percent of QRE incurred during the claim year until the base amount threshold (average QRE of three preceding taxable years) is reached. This is a beneficial difference from the computation of the federal R&D benefit, where no credits can be claimed for QRE less than the base amount. 

For QRE exceeding the base amount, the Michigan credit computation is based on the number of taxpayer employees. Large Taxpayers (defined as 250 or more employees) can claim credits corresponding to 10 percent of QRE in excess of the base amount, and Small Taxpayers (defined as fewer than 250 employees) can claim credits equaling 15 percent of excess QRE. 

Additional credits are available for those incurring QRE in collaboration with a Michigan research university pursuant to a formal written agreement. Additional credits of 5 percent of research university QRE are available up to a limit of $200,000. 

Other limitations and stipulations

On an annual basis, credits for Large Taxpayers may not exceed $2 million and credits for Small Taxpayers may not exceed $250,000. 

Credits claimed by Small Taxpayers must be prorated and decreased if the total credits claimed by this group exceeds $25 million. Additionally, if credits claimed by Small Taxpayers exceed the $25 million threshold, then the total credits claimed by Large Taxpayers must be prorated and decreased not to exceed a limit of $75 million. 

If the total tentative credit claims of Small Taxpayers exceed 25 percent of the total of all claims, then separate prorations for Small Taxpayers and Large Taxpayers do not apply and all taxpayer claims are prorated together so the total of claimed credits does not exceed the annual aggregate limit of $100 million.