KBKG Tax Insight: Michigan R&D Tax Credit Now Available

On January 13, 2025, Michigan Governor Gretchen Whitmer signed HBs 5099-5102 and 4368 to establish the Innovation Fund and the R&D tax credit. With the passage of HBs 5100 and 5101, Michigan will again offer a state-level R&D tax credit. The Michigan research credit offers separate funding for small businesses, as well as an additional credit amount for R&D efforts done through contracts with a Michigan university. These efforts will bolster economic growth and strengthen technology ties for both the private sector and educational institutions.

The provisions of the bills are as follows:

• • For tax years beginning on or after January 1, 2025, the Michigan research credit is available for taxpayers who perform qualified research in Michigan.
  • For large businesses with 250 or more employees, the credit is equal to 10% of its qualified research expenditures (QREs) exceeding the base amount. This credit may not exceed $2 million per year.
  • For small businesses with less than 250 employees, the credit is equal to 15% of its QREs exceeding the base amount. This credit may not exceed $250,000 per year.
  • An additional credit of 5% of the QRE exceeding a base amount is available for taxpayers collaborating with a research university within the state. This credit may not exceed $200,000.
  • The base amount is the average annual QRE for the three years preceding the credit year.
  • The annual cap for Michigan’s R&D credit program is $100 million, $25 million of which is set aside for small businesses. If the aggregate credit for all taxpayers exceeds the annual cap, the credit will be allocated on a prorated basis.
  • The credit is refundable if the state’s R&D credit program annual caps are not reached and only if a taxpayer’s nonrefundable credits have been fully utilized in the credit year.

The QRE eligible for this credit must relate to the activities meeting the requirements of IRC §41 (To be eligible for R&D Tax Credits, research activities must meet the criteria in the IRS Four-Part Test). The tax credits are available for expenditures including:

• • Wages paid to an employee performing research activities conducted at a facility in Michigan.
  • Wages paid to any employees directly supporting or directly supervising an employee performing research activities conducted at a facility in Michigan.
  • Supplies used or consumed while performing research activities at a facility in Michigan.
  • Cloud hosting costs related to software development and testing in Michigan.
  • A portion of 3rd-party research conducted in Michigan.