Great news for innovative businesses in Michigan: The state has reinstated its Research & Development (R&D) Tax Credit, effective for tax years beginning on or after Jan. 1, 2025.
This refundable credit represents a meaningful opportunity for corporations and flow-through entities that engaged in qualifying R&D activities in Michigan during 2025 to reduce their state tax liability, improve cash flow, and offset costs associated with innovation.
Compounded with recent changes to federal tax rules — particularly IRC §174, which allows full, immediate expensing of domestic research or experimental costs incurred after Dec. 31, 2024 — this credit will be an important planning tool for many Michigan businesses.
How the Michigan R&D Credit Works
The Michigan R&D credit is an incremental, refundable credit designed to reward companies for increasing their research spending. It is based on Michigan Qualified Research Expenses (MQREs) that exceed a defined base amount.
MQREs generally follow the federal definition of qualified research expenses under IRC §41. To qualify, research activities must occur within Michigan. Eligible expenses include:
- Wages for researchers.
- Supplies used in research.
- Contract-research expenses.
- Certain cloud computing costs.
The base amount is calculated as the average annual MQREs a business incurred during the three prior calendar years. If a taxpayer has no prior MQREs, their base is zero, allowing them to claim the credit on all current-year expenses.
Who Is Eligible for the Michigan R&D Credit?
Eligible taxpayers include C corporations subject to the Michigan Corporate Income Tax (CIT) and flow-through entities that are Michigan employers subject to withholding.
Flow-through entities include:
- S corporations
- Partnerships
- Limited Liability Companies (LLCs) taxed as partnerships
Note: Disregarded entities — i.e., business structures that are legally separate from their owner for liability purposes, such as an LLC — cannot claim the credit directly. Additionally, Michigan Business Tax (MBT) filers are excluded from this program.
Credit Rates and Caps for Small & Large Businesses
The state has allocated a $100 million annual cap for this program, split between large and small businesses. The credit rates and limits vary based on the total number of employees.
Small Businesses (Fewer than 250 employees)
- Rate Up to the Base Amount: 3% of MQREs
- Rate Over the Base Amount: 15% of MQREs
- Annual Cap: Maximum credit of $250,000 per taxpayer annually
Large Businesses (250 or more employees)
- Rate Up to the Base Amount: 3% of MQREs
- Rate Over the Base Amount: 10% of MQREs
- Annual Cap: Maximum credit of $2 million per taxpayer annually
Bonus Credit Eligibility for University Collaboration
Businesses that collaborate with a Michigan research university under a written agreement may also claim a bonus credit equal to 5% of qualifying collaborative MQREs, capped at $200,000 annually.
Important Deadlines and Claim Requirements for MQREs
For MQREs incurred in calendar year 2025, taxpayers — fiscal-year-taxpayers included — must submit a tentative credit claim through Michigan Treasury Online (MTO) by April 1, 2026. For MQREs incurred after 2025, tentative claims are due March 15 of the following year.
Key Compliance Details
- Actual Expenses Only: You must base claims on actual MQREs, not estimates.
- Strict Deadlines: The Treasury will not accept claims after the statutory deadline.
- Adjustments: Treasury will publish a notice on its website notifying taxpayers whether adjustments are made to the tentative claims.
How to Claim the Credit on Your Return
- C corporations claim the finalized credit on their CIT return for the tax years beginning in 2025.
- Flow-through entities claim the finalized credit on their annual withholding tax return (Form 5081) and may begin to reduce periodic withholding payments as soon as Treasury issues a notice with the finalized credit.
Important: The credit is refundable, but it cannot be sold, transferred, or passed through to owners.
Michigan’s R&D Credit & IRC §174
The reinstatement of the Michigan R&D credit is particularly timely given Michigan’s decoupling from recent federal §174 changes. (Click here to learn more about where Michigan tax rules break from federal tax rules.) While federal law now allows immediate expensing of R&D, Michigan continues to require five-year amortization of R&D costs for state purposes. As a result, many taxpayers will report higher Michigan taxable income beginning in 2025.
The refundable Michigan R&D credit will lessen the impact caused by this unfavorable timing difference. As such, we recommend that eligible companies treat this credit as a central component of their state tax planning strategy.
Planning Considerations
- Strict deadlines apply — late applications are not allowed.
- Proration risk exists if statewide claims exceed the annual cap.
- Entity structure matters, particularly for disregarded entities.
- Base-year calculations can significantly impact credit amounts.
- Coordination with payroll teams is essential for flow-through entities reducing withholding.
Frequently Asked Questions
Q: Is the Michigan R&D tax credit refundable?
A: Yes, the Michigan R&D tax credit is refundable. This means that if the credit amount exceeds your tax liability, the state may refund the difference to your business, improving cash flow.
Q: Can disregarded entities claim the Michigan R&D credit?
A: No, disregarded entities are not eligible to claim the credit directly. Only C corporations subject to Michigan CIT and flow-through entities subject to withholding qualify.
Q: What happens if the statewide cap is reached?
A: The program has a $100 million annual cap. If the total valid claims from all businesses exceed this amount, the Department of Treasury will prorate the credits among approved applicants.
Q: How do flow-through entities receive the benefit?
A: Flow-through entities claim the finalized credit on their annual withholding tax return (Form 5081). Once the Treasury issues a notice with the finalized credit amount, the entity may reduce its periodic withholding payments.
Your Takeaway
The reinstated Michigan R&D credit provides a meaningful incentive for innovation and a valuable planning opportunity across industries — software, technology, and manufacturing, especially. Given its complexity, early identification of your eligibility, proactive documentation of MQREs, and timely filing of the tentative application will be critical for businesses hoping to take advantage of this opportunity.
Rehmann’s R&D tax team is well-positioned to assist your organization with eligibility analysis, as well as credit calculations and compliance efforts to help you fully realize the benefits of this new credit. To connect with one of our R&D specialists, click here.