Michigan taxpayers might be able to claim the Research and Development (R&D) tax credit, reducing their income tax. HB 5100 passed the Michigan House on October 31st, 2023 and now moves to the Michigan Senate for further consideration.Â
The R&D tax credit incentivizes research and development activity in Michigan. It can help taxpayers who paid for qualified research activities increase cash flow and receive a state dollar-for-dollar income tax reduction, potentially resulting in significant cost savings. This would apply to many industries across the state of Michigan, including (but not limited to) manufacturing, software, engineering, and financial services.
HB 5100 Summary
Michigan Gov Whitmer has indicated her support for a Michigan R&D tax credit. It’s expected she will sign the legislation. HB 5100 would take effect for tax years beginning on or after January 1, 2024:
- The tax credit would be for up to $100 million across the state of Michigan
- $25 million (of the $100 million) is for small businesses
- A nonrefundable tax credit is available to Michigan taxpayers performing qualified research activities in Michigan
- The R&D tax credit is equal to 10% of its qualified research expenses (QREs) for taxpayers with 250 employees or more, exceeding the base amount up to a $2,000,000 limit. For those with less than 250 employees, the R&D tax credit is equal to 15% of its QREs exceeding the base amount up to a $250,000 cap
- Taxpayers collaborating with an in-state research university can receive an extra 5% of their QREs that exceed the base amount, up to a maximum cap of $200,000
- The base amount is defined as the average annual QREs for the three years last three years leading up to the tax credit
Qualifying Expenditures
R&D Tax Credit qualifying expenditures can include salary, supply costs, computer rentals or leases, and contractor costs. Specifically, this includes the following:
- Creating improved products products, processes, formulas, software, and techniques
- Automating or improving internal manufacturing processes
- Designing tools, jigs, fixtures, and molds
- Integrating new equipment
- Development of data centers, big data, and data mining tools
- Integration of APIs and other technologies
- Development of financial or pricing models
- Hiring outside consultants to perform any of the listed activities
- Manufacturing new or improved products
- List ItemDeveloping prototypes, first articles, models
- Evaluation of alternative materials
- Development of firmware
- Network hardware and software development and optimization
- Developing simulators
- Development of risk management systems
Four-Part Test
Documentation is extremely important to defending any R&D tax credit claims. For an expenditure to qualify in Michigan, it must meet the criteria outlined in IRC §41:
Permitted Purpose:
This means the purpose of the research activity was to improve the performance, reliability, functionality, or quality of a product (or software).Â
Technological Uncertainty:
There is uncertainty relating to how the product (or software) should be developed or designed.
Process of Experimentation:
There is a trial and error period to attempt to eliminate the above-mentioned uncertainty.Â
Technological in Nature:
The activity must be determined by principles of one or more of the following: Engineering, physical sciences, biological sciences, or computer science.Â
The legislation for the new R&D tax credit would provide Michigan taxpayers and businesses with economic development incentives and significant cost savings.Â
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