By Joshua Forsman
Michigan has taken a significant step toward fostering innovation and economic resilience with the introduction of a state-level Research and Development (R&D) tax credit. This groundbreaking legislation positions Michigan alongside 37 other states with similar incentives, aiming to attract businesses and spark technological advancement within the region.
This new tax credit, outlined in House Bill 5100-5101, provides businesses with opportunities to enhance their research efforts while offering CPAs an added layer of responsibility to guide clients through the process of claiming these benefits.
What Michigan’s R&D Tax Credit Offers
The Michigan R&D tax credit is designed to align closely with federal guidelines, encouraging businesses to expand their innovation efforts within the state. Key features of the program include:
- Tiered Credit Percentages Based on Company Size:
- Businesses with 250+ employees: A 10% credit on qualified research expenses (QREs) exceeding the prior three years’ average, capped at $2 million per taxpayer.
- Small businesses (<250 employees): A 15% credit under similar conditions, capped at $250,000 per taxpayer.
- Base-Level Credit for Consistent Research Efforts:
- Even without exceeding prior spending averages, businesses can claim a 3% credit on all eligible R&D expenses.
- Collaboration Incentives:
- A 5% bonus credit, capped at $200,000, is available for businesses partnering with Michigan-based research universities.
- Annual Credit Pool:
- Total credits are capped at $100 million annually, with $25 million reserved for small businesses. If claims surpass the cap, credits are prorated.
These provisions make Michigan a compelling destination for businesses prioritizing research, innovation, and economic growth.
Who Qualifies?
The state credit mirrors federal R&D guidelines, targeting activities aimed at solving technical challenges and driving improvements in products, processes, or software. Qualifying expenses include:
- Employee wages for R&D activities.
- Supplies directly used in research.
- Contract research expenses, limited to 65% of third-party payments.
To qualify, businesses must demonstrate that their activities occur within Michigan and meet the criteria for advancing technological innovation.
Steps to Claim Michigan’s R&D Credit
- Evaluate Eligibility:
- Identify R&D projects and confirm they align with federal and state guidelines.
- Maintain Comprehensive Records:
- Document research objectives, methodologies, and outcomes.
- Retain financial records, payroll reports, and invoices for QREs.
- Calculate the Credit:
- Use federal calculation methods as a foundation, adjusting for Michigan-specific criteria.
- File Accurately:
- Ensure all documentation is submitted according to Michigan Treasury Department requirements.
Implications for Small Businesses and Startups
Small businesses stand to gain the most from Michigan’s R&D tax credit. With $25 million set aside annually for companies with fewer than 250 employees, startups and small enterprises can tap into these funds to scale operations, innovate, and remain competitive in a fast-evolving marketplace.
How EPSA USA Supports Businesses
Navigating the complexities of state and federal R&D tax credits can be challenging. EPSA USA specializes in helping businesses:
- Identify Eligible Activities: Pinpoint research efforts that qualify under federal and Michigan guidelines.
- Optimize Documentation: Develop systems to ensure compliance and maximize credit claims.
- Coordinate State and Federal Credits: Integrate claims to fully capitalize on opportunities at both levels.
- Mitigate Risks: Provide audit support and proactive guidance to ensure smooth filing processes.
Looking Ahead
Michigan’s state R&D tax credit is a game-changer, offering businesses an additional layer of financial support to drive innovation. For CPAs and financial advisors, this development presents an opportunity to guide clients in maximizing their benefits while contributing to Michigan’s vibrant economic landscape.
At EPSA USA, we’re committed to empowering businesses to unlock the full potential of tax incentives like Michigan’s R&D credit. Whether you’re a startup or an established enterprise, our expertise ensures you can innovate with confidence while optimizing your tax savings.
Ready to make the most of Michigan’s R&D tax credit? Connect with EPSA USA today and discover how we can help you transform opportunities into growth.
For expert guidance on navigating the R&D tax credit updates, reach out to EPSA USA today to learn how we can support your project from energy modeling to certification updates