Michigan R&D Tax Credit: How to Qualify and Claim

Michigan has implemented a research and development (R&D) tax credit to provide financial relief for companies investing in new or improved products and processes. The credit directly reduces a company’s tax liability and is refundable, meaning any excess amount beyond the liability will be paid back to the taxpayer. This incentive applies to tax years beginning on or after January 1, 2025. It is available to a range of business structures, including corporations and flow-through entities.

Determining Eligibility for the Credit

To qualify for the Michigan R&D tax credit, a business must have incurred “qualified research expenses.” These expenses in the current tax year must exceed the average annual R&D expenses from the previous three years. This requirement incentivizes an increase in research investment over time.

The state’s definition of qualifying research aligns with the federal criteria under Internal Revenue Code Section 41. An activity must meet a four-part test to be considered qualified.

• Permitted Purpose: The research must be for creating a new or improved business component in function, performance, reliability, or quality.
• Technological in Nature: The activity must rely on principles of physical or biological sciences, engineering, or computer science.
• Elimination of Uncertainty: The research must aim to resolve uncertainty about the capability or method for developing or improving a product or process.
• Process of Experimentation: The business must use a systematic evaluation process, such as modeling, simulation, or trial and error.

Calculating the Credit Amount

Qualified Research Expenses (QREs) are the basis for the credit and must be for research physically conducted in Michigan. QREs fall into three main categories: wages for employees performing, supervising, or directly supporting research; costs for supplies used and consumed during the research process; and a portion of payments to third-party contractors conducting research on the company’s behalf.

The credit amount is calculated in tiers based on business size. For businesses with fewer than 250 employees, the credit is 3% of QREs up to a “base amount” plus 15% of QREs exceeding it, capped at $250,000 annually. For businesses with 250 or more employees, the credit is 3% of QREs up to the base amount plus 10% on expenses exceeding it, with a maximum credit of $2 million.

The “base amount” is the average annual QREs from the three years preceding the tax year. For example, a small company with a $120,000 base amount and current year QREs of $200,000 would calculate its credit in two parts. The first part is 3% of the base amount ($3,600). The second is 15% of the expenses exceeding the base ($80,000), which is $12,000, for a total credit of $15,600. An additional 5% credit, capped at $200,000, is available for businesses that collaborate with a Michigan research university.

Required Documentation and Forms

Businesses must maintain records connecting expenses directly to qualified research activities. This includes project accounting that segregates R&D costs from other operational expenses. Payroll data, such as timesheets or work logs, is also needed to verify wages for employees involved in research.

Invoices for supplies must be kept, along with documentation showing they were consumed in the R&D process. For contract research, businesses must retain written agreements with third-party vendors that outline the scope of the research. A copy of the formal agreement is also required when claiming the additional credit for university collaboration.

The Michigan Department of Treasury will provide the specific forms and instructions required to claim the credit. The form will require the taxpayer to input their calculated QREs, the base amount, and the final credit amount. Businesses should use the most current version available on the Treasury’s website.

How to Claim the Credit

The first step in claiming the credit is to submit a tentative claim to the Michigan Department of Treasury. For R&D expenses from the 2025 calendar year, the tentative claim must be submitted by April 1, 2026. For all subsequent years, the deadline is March 15 of the year following the expenses.

After submitting the tentative claim, the finalized claim is made by including the completed form with the business’s annual Michigan tax return. This applies to both Corporate Income Tax (CIT) returns and the relevant filings for flow-through entities.

The state has an annual cap of $100 million for total R&D credits, divided into a $75 million pool for large taxpayers and a $25 million pool for small taxpayers. If total claims in a pool exceed the cap, the credits will be distributed on a prorated basis among all eligible taxpayers in that pool.