Reviving Michigan’s R&D Tax Credit
Ever since Michigan moved from the Michigan Business Tax regime to the current Corporate Income Tax regime twelve years ago, Michigan taxpayers have not been afforded a state tax credit for their research and development expenditures. However, this may change in the coming weeks, as HB 5100 passed the Democrat-led Michigan House on October 31st and has moved to the state Senate for consideration. Governor Whitmer has expressed her support for a state R&D credit and is expected to sign the legislation.
HB 5100 is summarized below:
- For tax years beginning on or after January 1, 2024, a nonrefundable tax credit is available to Michigan taxpayers performing qualified research within Michigan.
- For taxpayers with 250 or more employees, the credit is equal to 10% of its qualified research expenditures (QRE) exceeding the base amount up to a $2,000,000 cap.
- For taxpayers with less than 250 employees, the credit is equal to 15% of its QRE exceeding the base amount up to a $250,000 cap.
- An additional 5% of the QRE exceeding a base amount up to a $200,000 cap is available for taxpayers collaborating with a research university within the state.
- 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.
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.
- A portion of 3rd party research conducted in Michigan.
Michigan’s proposed Research and Development (R&D) credit will be a boost to taxpayers, particularly small businesses and start-ups. The immediate cash savings from the credit allow taxpayers to invest in their businesses, hire employees, launch new products, encourage capital expenditures to build out a lab or expand a production facility. These tax savings are in addition to any federal R&D credit for which Michigan taxpayers are already eligible.
What Opportunity Does the Michigan R&D Tax Credit Create?
The federal R&D credit already offers Michigan taxpayers roughly 10% of its QRE in the form of a tax credit. Should the Governor sign this legislation, Michigan taxpayers could potentially receive a combined federal and state credit up to 25% of its total QRE. This could make Michigan a more attractive state in which to start a business. For those businesses already operating in the state, this credit could provide huge tax savings for activities they are already conducting.
About the Author
Michael Maroney – Director Midwest
Michael Maroney is a Director with KBKG at our Chicago, IL office. He advises clients on tax matters related to federal and state R&D tax credits. He has advised numerous Fortune 1000 clients across a variety of industries. He has successfully defended his client’s R&D claims before the IRS and state taxing authorities. He has been an instructor on these topics for numerous CPA and industry associations and has authored articles related to federal and state R&D tax credits. » Full Bio