Michigan Enacts R&D Tax Credit

This month, Michigan governor Gretchen Whitmer signed into law a research and development (R&D) tax credit effective for tax years beginning on or after January 1, 2025. 

The credit—Michigan’s first standalone R&D tax credit in recent history—can reduce the state tax liability for large businesses by up to $2 million per year and for small businesses by up to $250,000 per year. The state caps aggregate R&D tax credits at $100 million per year, so each taxpayer’s R&D credit amount may be prorated if claimed credits exceed that amount. 

According to the signed bill, employers with at least 250 employees qualify as large businesses; all others are considered small businesses.  

The credit computation is two-pronged: 

• The credit is equal to 3% of qualifying R&D expenses up to a base amount.  

• For large businesses, R&D expenses that exceed the base amount qualify for a 10% credit. That rate is 15% for small businesses. As stated, the total credit amount can’t exceed $2 million for large businesses and $250,000 for small businesses. 

The base amount is, generally, the average annual qualifying R&D expenses incurred during the three calendar years preceding the claim year. Some more details: 

• If the business has no prior qualifying R&D expenses in the past three years, the base amount is zero. 

• If the business has qualifying R&D expenses only in one or two of the last three years, the base amount is the average qualifying R&D expense amount for years in which the business had qualifying R&D expenses. 

The state shares its definition of qualifying R&D expenses with the federal R&D credit, but the credit applies only to research conducted in Michigan. 

The credit is refundable. To receive the credit for R&D expenses incurred in 2025, taxpayers must submit a tentative claim by April 1, 2026. When claiming the Michigan R&D tax credit for post-2025 tax years, the tentative claim is due by the following March 15. 

A Comparison of R&D Tax Credits in Neighboring States 

Many of Michigan’s nearby states offer R&D tax credits to incentivize hiring and innovation within their borders. Let’s see how Michigan’s R&D credit stacks up against its Midwest neighbors. 

R&D Tax Credits in Wisconsin 

The Badger State offers a general R&D credit of up to 5.75% of a business’s R&D qualified expenses that exceed 50% of qualified R&D expenses from the past three years. If the company had no qualified R&D expenses in the past three years, the rate is 2.875% for all qualified R&D expenses incurred during the year. The rates are doubled for R&D expenses related to internal combustion engines, energy-efficient lighting, building automation and control, and batteries for hybrid vehicles. 

Up to 25% of the Wisconsin R&D credit is refundable. Any excess credit that can’t be used in the current year may be carried forward for up to 15 years. 

R&D Tax Credits in Indiana 

The Indiana R&D credit amount is the company’s qualified R&D expenses, minus a base amount, multiplied by 15% (for base amounts up to $1 million) or 10% (for base amounts over $1 million). Indiana’s R&D credit base amount is the same as the federal R&D credit base amount.  

Alternatively, corporations can elect for the credit amount to be 10% of qualified R&D expenses that exceed 50% of qualified R&D expenses from the past three years. If the company had no qualified R&D expenses during that period, the credit amount is 5% of qualified R&D expenses incurred during the year. 

The Indiana R&D credit isn’t refundable, but excess amounts be carried forward for up to 10 years. 

R&D Tax Credits in Illinois 

The Land of Lincoln’s R&D credit reduces taxpayers’ income tax liability by 6.5% of qualified R&D expenses that exceed their average R&D expenses over the past three years. 

The Illinois R&D credit isn’t refundable, but excess credit can be carried forward for up to five years. 

Smith + Howard: R&D Tax Credit Specialists 

R&D tax credits provide a dollar-for-dollar reduction in your company’s tax liability for additional research activities. If you are innovating in Michigan, you now have the opportunity to reduce not only your federal income tax bill but also your state income bill. 

Smith + Howard specializes in maximizing businesses’ R&D credits on the federal and state level. If you’re looking to expand your R&D activities and want to understand the tax opportunities available, contact an advisor.