R&D Tax Credits in Michigan

Michigan’s R&D tax credit very closely follows the federal R&D tax credit. If a company qualifies for the federal credit then they will qualify for the Michigan credit, as long as it has incurred R&D expenses within the state of Michigan.

The R&D project must follow the federal guidelines for bring technology-oriented and while not mandatory, Michigan does expect to see a substantial amount of costs related to experimentation.

Qualified Research Expenses

The Internal Revenue Code defines qualified research as those expenses for activities intended to discover information that eliminates uncertainty concerning the development or improvement of a product. A product is defined as a process, technique, formula or invention.

Ineligible expenses include:

  • Acquisition of another’s patent, model or production
  • Advertising
  • Consumer and efficiency surveys
  • Management studies
  • Ordinary testing for quality control
  • Research conducted after commercial production begins
  • Research related to style, taste, cosmetics or seasonal design; and  
  • Routine data collection

Claiming the Michigan R&D Tax Credit

  • The Michigan credit is equal to 1.9% of QREs incurred in Michigan.
  • The credit amount is limited to 75% of a taxpayer’s tax liability.
  • Normal commercial outsourced contract research expenses are subject to a 65% limit.
  • Research expenses incurred through a university are subject to a 75% limit.
  • The credit may be claimed by both C- Corporations and flow-through entities.
  • Current year claims are submitted with the current year return.
  • Amended claims are submitted in accordance with standard amending rules.
  • The documentation requirements for the Michigan credit follow the same guidelines as the Federal return. The taxpayer must be able to put their hands on receipts, key documents, and financial statements if and when required to support expenses claimed.

Case Study

A water technology company in Michigan began claiming R&D credits in 2012. They engaged in a four-year long R&D project from 2012 to 2015.  In 2015, their 4th year of claiming credits, they were eligible for the 14% federal credit.

Summary of credits:

Year Total QREs Credit Total QREs Credit
2015 $512,000 $71,680 $512,000 $9,728
2014 $475,000 $28,500 $475,000 $9,025
2013 $190,000 $11,400 $190,000 $3,610
2012 $250,000 $15,000 $250,000 $4,750
Total $1,427,000 $126,580 $1,427,000 $27,113

Michigan R&D Tax Credit Form

The taxpayer must fill out Part 4 of Form 4570, the Michigan Business Tax Credits  for Compensation, Investment, and Research and Development.