The Michigan Senate recently passed significant legislation introducing a state-level Research and Development (R&D) tax credit, solidifying the state's commitment to fostering innovation and economic growth. With House Bill 5100, Michigan joins 37 other states offering state-specific R&D tax incentives. This legislation provides new opportunities for businesses while adding responsibilities for CPAs assisting clients in claiming these credits.
What’s New
Michigan’s R&D tax credit package, including the recently passed HB 5100-5101, introduces the following provisions:
- State-Level R&D Tax Credit: The credit aligns closely with federal R&D tax credit guidelines and is aimed at incentivizing businesses to increase their research spending within the state.
- Eligibility Based on Business Size and Collaboration:
- 250 or more employees: 10% credit of qualified expenses that exceed the average qualified expenses of the prior 3 years. Credit is capped at $2 million per taxpayer.
- Fewer than 250 employees: 15% credit of qualified expenses that exceed the average qualified expenses of the prior 3 years. Credit is capped at $250,000 per taxpayer.
- Increase of R&D Spending Not Required: If qualified expenses do not exceed the average qualified expenses of the prior 3 years, a credit is still available in the amount of 3% of these expenses.
- Additional Credit: A 5% bonus credit (capped at $200,000) is available for businesses collaborating with Michigan-based research universities.
- Annual Cap: The total credit pool is capped at $100 million annually, with $25 million reserved for small businesses (fewer than 250 employees). In general, if total credit claims exceed the $100 million cap, credit claims will be prorated.
This legislation positions Michigan as a competitive destination for businesses prioritizing innovation and technological development.
Eligibility Requirements
The Michigan R&D tax credit mirrors federal guidelines, focusing on activities aimed at:
- Developing or improving products, processes, or software.
- Overcoming technical uncertainties.
- Employing systematic experimentation.
Eligible expenses include:
- Employee wages for R&D activities.
- Supplies used in research efforts.
- Contract research expenses, up to 65% of third-party payments.
Businesses must demonstrate that their activities occur in Michigan and that their R&D expenditures have increased compared to prior years to qualify.
Steps to Claim the Michigan R&D Tax Credit
- Assess Eligibility
- Identify Activities: Determine whether the business's activities meet federal and state R&D criteria.
- Document Expenditures: Maintain accurate tracking of Qualified Research Expenses (QREs), including wages, supplies, and third-party research contracts.
- Compile Documentation
- Maintain detailed project descriptions outlining objectives, methods, and outcomes.
- Preserve payroll reports, invoices, and financial records tied to R&D activities.
- Clearly document the location of R&D efforts within Michigan.
- Calculate the Credit
- The federal R&D credit calculation methods (regular credit or alternative simplified credit) provide a foundation for computing Michigan's credit. Adjustments for Michigan-specific provisions may be required.
Why This Matters for CPAs and Their Clients
- Enhanced Opportunities for Businesses: Businesses operating in Michigan now have even greater opportunities to boost and expand their R&D efforts, thanks to the federal R&D tax credit and the newly available Michigan state credit. Companies of all sizes engaged in research or development activities—whether in manufacturing, architecture, engineering, or other fields—should seize this chance to benefit from these valuable incentives.
- Benefits for Small Businesses: With $25 million annually reserved for businesses with fewer than 250 employees, the Michigan R&D tax credit is particularly advantageous for SMEs and startups. This funding enables smaller enterprises to innovate, scale operations, and make a substantial economic impact.
How CPAs Can Support Clients
- Identify Opportunities: Evaluate client operations to uncover eligible R&D projects and expenditures.
- Streamline Compliance: Implement robust documentation systems to meet state and federal requirements.
- Maximize Credits: Coordinate filings to ensure clients claim the maximum allowable credits.
- Mitigate Risks: Provide audit support and proactive guidance to address Michigan Department of Treasury requirements.
Considerations for Future Planning
Integration with Federal Credits: Businesses claiming federal R&D credits can utilize their R&D tax consultant to complement these with Michigan's credit, effectively capturing eligible expenses within prescribed caps.
Final Thoughts
The Michigan Senate’s approval of new R&D tax credit legislation marks a significant milestone in bolstering the state’s business environment. For CPAs and their clients, navigating the complexities of this legislation is crucial to fully capitalizing on its potential benefits.
At ABGI USA, we specialize in helping businesses identify eligible R&D activities, maintain thorough documentation, and seamlessly coordinate state and federal filings to maximize tax savings. By partnering with us, you can not only unlock substantial financial advantages but also play a vital role in driving Michigan’s innovation economy forward.
Trust ABGI USA for expert guidance in claiming Michigan’s R&D tax credit and ensuring compliance while optimizing your benefits to make the most of this valuable opportunity.
