Maximize Savings with Michigan R&D Tax Credit: A Comprehensive Guide

Are you ready to get financially compensated for your work pushing your industry forward? Claiming a research and development tax credit is a great way to get deductions from your overall tax liability in your state while pushing your field forward in scientific advancements or improvements in processes.

For Michigan businesses, the research and development tax credit can assist you in claiming your qualified research expenditures against your overall tax liability. This not only saves you money but also provides the opportunity for more investment in research and development in the future through your savings.

This article will cover the complicated history of the Michigan tax credit program, basic eligibility, and how to calculate the credit before you claim it.

What are Michigan R&D Tax Credits?

Michigan’s research and development tax credit is designed to assist businesses in pursuing research projects that benefit the industry. The credit provides financial relief by allowing businesses to claim research expenses to offset some of their overall tax liability.

This reduction in liability can lead to significant cost savings over time. By investing in research and development, businesses can innovate and improve their product offerings, increasing their market share and profitability.

Michigan’s research and development tax credit system has undergone several changes over time. Before the most recent legislative changes, the credit was set at 1.9% of your overall qualified research expenses. However, this credit would go on to expire, negatively affecting businesses that wanted to look into research long-term.

House Bill 5100, passed in late October 2023, and Senate legislation, passed in mid-March 2024, established a new framework for the Michigan tax credit program that we know today.

Aligning with federal credit eligibility, this new credit program makes it easier for businesses to benefit from state and federal research initiatives. Claiming federal and state credits can lead to huge tax savings over time, making Michigan research among businesses more competitive.

The newest research and development credit program version has a total annual cap of $100 million for all the credit allocated, with $25 million specifically set aside for small businesses. Small businesses are defined as those with fewer than 250 employees.

Does Michigan have an R&D credit?

Yes! The legislative act that establishes the tax credit program was passed on March 19th, 2024, and was actually an amendment of previous legislation, 1967 PA 281. This is known as the Income Tax Act of 1967, and the new legislation adds a separate section that specifies some new, important changes. These include base amounts, information about refundability, and specifications for taxpayers.

Eligibility Criteria for Michigan R&D Tax Credits

For preliminary eligibility for the Michigan Research and Development credit program, businesses must meet the four-part test for qualifying activities. You also must have garnered research expenses in the state of Michigan to calculate the base amount of the credit.

Eligible Michigan state credit entities include corporations, partnerships, and sole proprietorships. Large and small businesses can both qualify, and small businesses have a certain amount specifically allocated to help them pursue research and development initiatives.

Four-Part Test for Qualifying Activities

To claim qualified research expenditures for your tax credit program, there is a four-part test that it has to pass:

Technological in Nature

The research activity that you’re claiming must be technological. This means that it had to rely on principles of hard sciences such as engineering, physics, biology, or chemistry. This ensures that the work contributes to innovation in the field writ large instead of being done to increase profitability for your business specifically.

Permitted Purpose

A research activity must be used to create new or improved software, processes, or products that the field can use. This means market research, data collection, or quality control would not qualify for the permitted purpose.

Eliminate Uncertainty

Eliminating uncertainty speaks for itself, specifically that there must be a problem that the research is aiming to solve. This can be about any scientific aspect of your specialty, but there can’t already be a more optimal solution to the problem that you’re trying to solve.

Experimentation

The research activities that you’re trying to claim must involve a process of experimentation. This can include modeling, simulations, or systematic trial and error. Make sure to document and record your attempts so that you have proof that you meet this requirement.

Calculating the Michigan R&D Tax Credit

When calculating your tax credits for research and development, it’s important to understand some key concepts that the amendment to the Income Tax Act lays out. These include base amounts, additional incentives, and credit rates.

A base amount for the credit is found by averaging annual qualified research expenses for the three preceding years. This base amount changes if you haven’t had any active qualified research expenses in the past three years.

A credit rate is the overall amount that you deduct from your tax liability. Your credit rate will differ based on the size of the business. For businesses with more than 250 employees, the credit rate is 10%, capped at $2 million per year. For businesses with less than 250 employees, it is capped at $250,000 per year, but the credit rate is 15%.

Up to your calculated base amount, an additional 3% is available on expenses. There is also an extra 5% credit for collaboration with a Michigan research university, making the possibility of partnerships more profitable for businesses.

Carryforward & Refundability of the Michigan R&D Tax Credit

Michigan does not have a carryforward provision, which is essential to remember if you have unused research tax credits. Businesses have to use the credit in the year it was earned, meaning that you should aim to claim as much as you can to keep from losing these credits.

However, the credit is refundable if that year’s program caps are not reached, which can provide immediate cash savings to businesses that need them. However, refunds require heavy investment in long-term research and development.

Michigan Qualifying Research Expenditures 

There are three categories that you can claim an expense under:

Wages

Wages, or hourly pay, given to employees directly contributing to the research can be claimed against your tax liability in Michigan. However, you can only claim compensation that is related to research efforts, meaning that employee wages that are normative operations for the company would not be claimed. This section includes researchers, supervisors, managers, and more.

Supplies

Supplies used during research processes, such as materials and equipment, can also be claimed. Make sure to label which supplies you’re using for your research, as any supplies claimed must be directly related to the research and development activity.

Contracted Research

Research activities contracted to other qualified firms can also be written against your tax liability. This is particularly true if you partner with a research university, giving you an extra 5% credit. Make sure to document the nature of your collaboration and ensure that you get all the documentation needed from the firm you’re working with to claim it on your credit.

How do you claim the Michigan R&D tax credits?

Claiming your tax credits can be daunting, which is why getting a certified public accountant is always advised before you officially file.

They can help you properly document everything, claim it correctly, and assist in finding more tax credits and dedication for which you qualify. Some of the documentation you’ll be submitting includes:

• Form 4570: One of the first documents you’ll need to fill out is from the Michigan Department of Treasury Form 4570, which is used for investment, compensation, and research/development. This is a tentative credit claim so that it will be reviewed.
• Federal Form 6765: This is the federal credit that you get for participating in research and development, so it is necessary to claim it alongside your state credit for its full functionality.

Next Steps

The Michigan Research Tax Credit program can be valuable for businesses seeking to increase their research activities. Getting a CPA from TaxCredits will ensure you have all the tools you need to get the most out of your credit claim.

Whether you are claiming a benefit from partnerships with a research university or don’t know where to start with your base calculation, our experts can help you get the substantial tax savings you’re looking for. Contact us today to schedule your consultation!

FAQs

What is the new law for the Michigan R&D tax credit?

The new law, an amendment to the original 1967 credit program, offers higher credit rates and additional incentives for university collaborations. The credit rates vary depending on business size, but many were relieved to see the amendment pass as it also brought the credit program out of expiration.

Does Michigan have a property tax credit?

Yes! The Homestead Property tax credit is available to homeowners and renters, with eligibility based on their income and the amount of property taxes claimed. This property tax credit can reduce your tax liability similarly to the research credit system.

What is the Michigan Farm tax credit?

The Michigan Farm tax credit is available to farmers with expenses related to improving, maintaining, and working their farmland. This credit is part of a group of agricultural tax credit systems that are becoming increasingly popular in Michigan.