Michigan has taken a bold step forward to support businesses investing in research and development (R&D). With the passage of Public Acts 186 and 187 of 2024, the state has introduced a new R&D tax credit, effective for tax years beginning on or after January 1, 2025. This incentive is designed to encourage innovation by providing financial relief to businesses engaged in R&D activities within Michigan.
Who Qualifies?
The R&D tax credit is available to two main categories of businesses:
- Corporate Income Tax (CIT) taxpayers: Companies subject to Michigan’s CIT can claim the credit for qualifying R&D expenditures.
- Flow-through entities: Businesses structured as partnerships, LLCs, or S corporations that are subject to Michigan income tax withholding (but not the CIT or Michigan Business Tax) may also qualify.
To be eligible, businesses must demonstrate that their R&D expenses in a given tax year exceed their average annual R&D expenses over the previous three years.
What Expenses Qualify?
Michigan’s R&D credit is based on “qualified research expenses” as defined in Section 41(b) of the Internal Revenue Code. However, only expenses incurred for research conducted within Michigan count toward the credit.
How the Credit is Calculated
The amount of the R&D tax credit varies depending on the size of the business:
- Businesses with fewer than 250 employees:
- 3% of R&D expenses up to the base amount
- 15% of R&D expenses above the base amount
- Maximum credit of $250,000 per taxpayer
- Businesses with 250 or more employees:
- 3% of R&D expenses up to the base amount
- 10% of R&D expenses above the base amount
- Maximum credit of $2 million per taxpayer
Note: The base amount is defined as the average annual amount of qualifying research and development expenses incurred during the three calendar years immediately preceding the tax year for which the credit is being claimed. If a business has fewer than three years of R&D expenses, adjustments are made accordingly.
Additionally, businesses collaborating with a Michigan research university can claim an extra 5% credit on the portion of their expenses tied to that partnership, capped at $200,000 annually.
Claiming the Credit
To claim the R&D tax credit, businesses must first file a tentative claim with the Michigan Department of Treasury. The deadlines are:
- April 1, 2026 for R&D expenses incurred in 2025
- March 15 of the following year for expenses incurred in subsequent years
The total amount of R&D tax credits issued statewide is capped at $100 million per year. If claims exceed this cap, the credit will be prorated among eligible claimants.
Important Considerations
- The credit is refundable, meaning businesses can receive a cash refund if the credit exceeds their tax liability.
- Businesses cannot transfer or assign the credit to another entity.
- The Michigan Department of Treasury will issue detailed guidance and forms for applying, with updates available at Michigan.gov/taxes.
- This guidance may change as the tax credit is rolled out, so businesses should stay updated on any modifications issued by the Michigan Department of Treasury.
Why This Matters
Michigan’s new R&D tax credit is a game-changer for businesses looking to invest in innovation. Whether you are a startup developing cutting-edge technology or an established company enhancing your products, this incentive can help offset costs and fuel growth. By encouraging more businesses to conduct R&D in Michigan, the state is reinforcing its reputation as a hub for technological advancement and industry leadership.
For more information on incentives available to Michigan businesses, explore our related posts on the Business Development Program and the Industrial Facilities Exemption.
To learn more about the R&D industry in the Ann Arbor region, visit this page.
