Ever since Michigan moved from the Michigan Business Tax regime to the current Corporate Income Tax regime twelve years ago, Michigan taxpayers have not been afforded a state tax credit for their research and development expenditures. However, this may change in the coming weeks, as HB 5100 passed the Democrat-led Michigan House on October 31st and has moved to the state Senate for consideration. Governor Whitmer has expressed her support for a state R&D credit and is expected to sign the legislation.
HB 5100 is summarized below:
· For tax years beginning on or after January 1, 2024, a nonrefundable tax credit is available to Michigan taxpayers performing qualified research within Michigan.
· For taxpayers with 250 or more employees, the credit is equal to 10% of its qualified research expenditures (QRE) exceeding the base amount up to a $2,000,000 cap.
· For taxpayers with less than 250 employees, the credit is equal to 15% of its QRE exceeding the base amount up to a $250,000 cap.
· An additional 5% of the QRE exceeding a base amount up to a $200,000 cap is available for taxpayers collaborating with a research university within the state.
· The base amount is the average annual QRE for the three years preceding the credit year.
· The annual cap for Michigan’s R&D credit program is $100 million, $25 million of which is set aside for small businesses.
The QRE eligible for this credit must relate to the activities meeting the requirements of IRC §41 (To be eligible for R&D Tax Credits, research activities must meet the criteria in the IRS Four-Part Test). The tax credits are available for expenditures including:
· Wages paid to an employee performing research activities conducted at a facility in Michigan.
· Wages paid to any employees directly supporting or directly supervising an employee performing research activities conducted at a facility in Michigan.
· Supplies used or consumed while performing research activities at a facility in Michigan.
· A portion of 3rd party research conducted in Michigan.
KBKG Insight:
Michigan’s proposed Research and Development (R&D) credit will be a boost to taxpayers, particularly small businesses, and start-ups. The immediate cash savings from the credit allow taxpayers to invest in their businesses, hire employees, launch new products, encourage capital expenditures to build out a lab or expand a production facility. These tax savings are in addition to any federal R&D credit for which Michigan taxpayers are already eligible.
What Opportunity Does the Michigan R&D Tax Credit Create?
The federal R&D credit already offers Michigan taxpayers roughly 10% of its QRE in the form of a tax credit. Should the Governor sign this legislation, Michigan taxpayers could potentially receive a combined federal and state credit up to 25% of its total QRE. This could make Michigan a more attractive state in which to start a business. For those businesses already operating in the state, this credit could provide huge tax savings for activities they are already conducting.
