Michigan Department of Treasury issues guidance on new research and development credit

In brief

What happened?

The Michigan Department of Treasury on April 2 issued a notice regarding the state’s new research and development (R&D) credit. For tax years beginning on or after January 1, 2025, Michigan provides a new tax credit for corporate income tax (CIT) taxpayers and certain flow-through entities for qualifying R&D expenses. The credit is available starting with R&D expenses incurred during the 2025 calendar year. The first statutory filing deadline is April 1, 2026 for the calendar tax year 2025 (this deadline is accelerated to March 15 for subsequent calendar years).  

Why is it relevant?

The notice describes the new credit and sets forth the process for claiming it, which differs depending on whether the claimant is a CIT taxpayer or a flow-through entity.   

Action to consider

The Michigan Department of Treasury is developing forms, instructions, guidance, and procedures for administration of this credit. A new Revenue Administration Bulletin (RAB) covering the R&D credit is being developed for publication. Claimants should be on the lookout for future guidance and be prepared to gather the information necessary to claim the new R&D credit. 

The new R&D credit is available for eligible taxpayers that have (1) increased their qualifying R&D expenses relative to a base amount and (2) timely filed a tentative claim. Eligible taxpayers include (1) CIT taxpayers and (2) flow-through entities that are employers subject to Michigan income tax withholding, but not subject to the CIT or the Michigan Business Tax (MBT). 

Flow-through entities 

Flow-through entities eligible for the R&D credit include S corporations, general partnerships, limited partnerships, limited liability partnerships, and limited liability companies that, for the applicable tax year, are not taxed as a corporation for federal income tax purposes. Eligible flow-through entities do not include entities that are disregarded or treated as a corporation for income tax purposes.   

Qualifying R&D expenses 

Qualifying R&D expenses include qualified research expenses, as defined in Section 41 of the Internal Revenue Code (IRC), for research conducted in Michigan. Expenses incurred for research conducted outside of Michigan do not qualify for the credit.  

Claimants looking to qualify for the credit must have incurred during the calendar year R&D expenses exceeding the base amount. The base amount is the average annual amount of qualifying R&D expenses incurred during the three calendar years immediately preceding the calendar year ending with or within the tax year for which a credit is being claimed. Certain adjustments apply to claimants that have fewer than three years of R&D expenses during that period.  

Both calendar-year and fiscal-year claimants must compute the base amount using R&D expenses reported on a calendar-year basis. The notice states that the Michigan Department of Treasury will develop and publish in future guidance an optional method for fiscal-year taxpayers to convert their fiscal-year R&D expenses into calendar-year expenses for base amount years prior to 2025.  

Unitary business groups  

Where a corporation that has incurred R&D expenses is a member of a unitary business group (UBG), the UBG claims the credit and eligibility is determined based on the UBG’s R&D expenses and base amount. Accordingly, all calculations (e.g., number of employees, total expenses, base amount, maximum credit amount, and any applicable proration) are made at the UBG level. 

Unadjusted credit amount 

Qualifying claimants calculate their unadjusted credit amount based on their R&D expenses incurred during the calendar year ending with or within the tax year.  

• For claimants with fewer than 250 employees, the unadjusted credit amount is 3% of R&D expenses up to the base amount, plus 15% of R&D expenses above the base amount. The credit is limited to $250,000 per taxpayer.  
• For claimants with 250 or more employees, the unadjusted credit amount is 3% of R&D expenses up to the base amount, plus 10% of R&D expenses above the base amount. The credit is limited to $2 million per taxpayer. 

The CIT defines “employee” as a person from whom an employer is required to withhold for federal income tax purposes.   

Additional credit amount 

Taxpayers may claim an additional credit amount equal to 5% of R&D expenses incurred pursuant to a written agreement with a collaborating Michigan research university. This additional credit amount is capped at $200,000 per taxpayer.  

Tentative claim requirement   

Eligible claimants must submit a tentative claim identifying the unadjusted credit amount and including certain information required for the proper administration of the credit. The notice states that the Michigan Department of Treasury will prescribe the form and manner of this submission. 

For R&D expenses incurred during the 2025 calendar year, all claimants with tax years beginning in 2025, including both calendar-year and fiscal-year CIT taxpayers, and flow-through entities filing withholding returns, must submit their tentative claims no later than April 1, 2026. 

For R&D expenses incurred in calendar years after 2025, all claimants must submit their claims for the calendar year no later than March 15 of the following year. That is, for R&D expenses incurred in calendar year 2026, all claimants with tax years beginning in 2026, including fiscal-year CIT taxpayers, must submit their tentative claims using actual, not estimated, expenses by March 15, 2027. Tentative claims will not be accepted by the Michigan Department of Treasury after the statutory deadline. 

Allocated credit 

The total amount of all R&D credits that may be claimed by all claimants for a calendar year is limited to $100 million. If tentative claims exceed this amount, statutory proration provisions will apply to reduce the allowed credit for all or certain claimants. The notice states that the Michigan Department of the Treasury will issue tentative claim adjustment notices informing claimants of the amounts of any adjustments to the tentative claims required for the calendar year. After the tentative claim adjustment notices are issued, claimants may claim the credit, adjusted as necessary, on their annual returns.  

Claiming the credit 

A CIT taxpayer must claim the R&D credit with is annual return for the tax year for which the credit is claimed, while a flow-through entity filing a withholding tax return must claim the credit with its annual return for the tax year in which its tentative claim is filed. A flow-through entity claiming a credit on its annual withholding return may reduce its periodic withholding payments accordingly for that tax year once the Michigan Department of Treasury issues its tentative claim adjustment notice. The R&D credit is refundable and must be claimed after all nonrefundable credits.  

Prohibition on assignment or transfer 

A claimant may not assign or transfer any portion of the credit. Assignments or transfers by agreement or operation of law are prohibited.