Michigan Issues Guidance on New Research and Development Credit

By Peter G. Pupke

The Michigan Department of Treasury has published a notice providing guidance on the new tax credit for Corporate Income Tax (CIT) taxpayers and certain flow-through entities for qualifying research and development expenses (“R&D Expenses”). The Department’s notice describes the new credit and the process for claiming it, which differs depending on whether the claimant is a CIT taxpayer or a flow-through entity. In both cases, the credit is available starting with R&D Expenses incurred during the 2025 calendar year, and the first statutory filing deadline is April 1, 2026. (Notice Regarding New Research and Development Credit, Mich. Dept. Treas., 04/02/2025.)

Eligibility.

The new research and development (R&D) credit is available to CIT taxpayers, and flow-through entities that are employers subject to Michigan income tax withholding but not subject to the CIT or the Michigan Business Tax (MBT), that have increased their qualifying R&D Expenses relative to a base amount and timely filed a tentative claim (both described herein).

A flow-through entity means, an entity that for the applicable tax year is treated as an S corporation under IRC § 1362(a), a general partnership, a limited partnership, a limited liability partnership, or a limited liability company, that for the applicable tax year is not taxed as a corporation for federal income tax purposes. Flow-through entity does not include any entity disregarded or treated as a corporation under Mich. Comp. Laws Ann. § 206.699.

Qualifying R&D Expenses means, qualified research expenses as that term is defined in IRC § 41(b) for research conducted in Michigan. Expenses incurred for research conducted outside of Michigan cannot be used to calculate the credit or to determine eligibility for the credit. The new credit only looks to IRC § 41 (the federal research credit) for the definition of “qualified research expenses.” Claimants should not apply any other IRC provisions, federal regulations, or federal concepts, other than those that may be applicable under the Michigan Income Tax Act, in determining their state credit.

To qualify for the credit, a claimant must have incurred during the calendar-year R&D Expenses in excess of the base amount, defined as, 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, with certain adjustments for claimants that have fewer than three years of expenses during that period. Importantly, both fiscal-year and calendar-year claimants must compute the base amount using R&D Expenses reported on a calendar-year basis.

The Department will develop an optional method for fiscal-year filers to convert their fiscal-year R&D Expenses into calendar-year expenses for base amount years prior to 2025.

Unitary Business Groups (UBGs): Under the CIT, where a UBG exists, it is the taxpayer. Consequently, where a corporation with R&D Expenses is a member of a unitary business group, the UBG, not the corporation, would claim the credit, and eligibility would be determined based on a calculation of the UBG’s R&D Expenses and base amount.

Unadjusted credit amount.

For a qualifying claimant, whether a fiscal-year or calendar-year filer, the unadjusted credit amount is calculated each year based on R&D Expenses incurred during the calendar year (specifically, the calendar year ending with or within the tax year). The credit is computed as follows:

• For a claimant with fewer than 250 employees: the credit is 3% of R&D Expenses up to the base amount, plus 15% of R&D Expenses above the base amount, and the credit is limited to $250,000 per taxpayer.
• For a claimant with 250 or more employees: the credit is 3% of R&D Expenses up to the base amount, plus 10% of R&D Expenses above the base amount, and the credit is limited to $2 million per taxpayer.

The Department is developing guidance for counting the number of employees for the unadjusted credit calculation. An employee is defined in the CIT as an employee as defined in IRC § 3401(c). A person from whom an employer is required to withhold for federal income tax purposes is prima facie considered an employee. This definition will be applied to both the CIT credit and the withholding credit.

For a CIT taxpayer that is a UBG, the taxpayer would make all calculations (e.g., number of employees, total expenses, base amount, maximum credit amount, and any applicable proration) at the UBG level.

Additional credit amount: Claimants may claim an additional credit amount equal to 5% of the R&D Expenses used in the above calculation that were incurred in collaboration with a Michigan research university pursuant to a written agreement. This additional credit amount is capped at $200,000 annually per taxpayer. A research university is defined as a public university described in Section 4, 5, or 6 of Article VIII of the State Constitution or an independent nonprofit college or university in Michigan.

Tentative claim requirement.

As noted previously, to be eligible for the R&D credit, a claimant must first timely submit, in a form and manner prescribed by the Department, a tentative claim identifying the unadjusted credit amount and including certain information required for the proper administration of the credit.

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 tax 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 tentative claims for the calendar year no later than March 15 of the following year (e.g., 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 by March 15, 2027.)

A tentative claim must be filed timely to claim the R&D credit, and tentative claims will not be accepted by the Department after the statutory deadline. Tentative claims should be made using actual—not estimated—expenses, as those claims will be used in any required proration calculation (see herein).

Adjusted credit.

The total amount of all 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 Department will publish a notice on its website notifying claimants whether adjustments are required to the tentative claims for the calendar year and the amount of any such adjustments. Once the Department has published this notice, taxpayers will be eligible to claim the credit, adjusted as necessary, on their annual returns filed after the end of the taxpayer’s tax year.

The Department’s published notice will be a general notice that announces whether proration is required for each type of claimant and will not contain taxpayer-specific information; however, Mich. Comp. Laws Ann. § 206.718 does require certain taxpayer-specific information to be reported to the governor and the legislature, including each claimant’s name and allowed credit amount. It is anticipated that the Department’s notice will be published before the annual return deadline for calendar-year filers (e.g., April 30).

Claiming the credit.

A CIT taxpayer must claim the credit with its 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 was filed. A flow-through entity that will claim a credit on its annual withholding return may reduce its periodic withholding payments accordingly for that tax year once the Department issues its tentative claim adjustment notice (described previously). If a liability exists on its annual withholding return, the entity will be subject to penalty and interest for deficiencies in any of the periodic payments that were underpaid.

The credit is refundable and must be claimed after all nonrefundable credits. A member of a flow-through entity that submits a claim for a credit is not allowed to claim any portion of that credit.

Credit cannot be assigned or transferred.

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

Implementation.

The Department is developing forms, instructions, guidance, and procedures for administration of this new credit. A new Revenue Administrative Bulletin covering the R&D credit is being developed for publication.