If you own or run a business in Michigan and you're investing in innovation—this is news you don't want to miss.
Starting January 1, 2025, Michigan is launching a refundable Research and Development (R&D) tax credit that's designed to reward companies doing R&D work right here in the state. Whether you're building new technology, testing prototypes, or improving products, this credit could put serious money back in your pocket.
Michigan Joins National Leaders in R&D Investment
Michigan joins 36 other states that already offer R&D tax credits, positioning the state to be more competitive nationally in attracting and retaining innovative businesses. According to the Michigan Economic Development Corporation (MEDC), this tax credit aligns with the state's goal of becoming a frontrunner in innovation by incentivizing companies to invest in Michigan and attracting employees seeking high-paying jobs in these industries.
As Governor Gretchen Whitmer stated when signing the legislation: “Our brand-new, bipartisan Innovation Fund and R&D Tax Credit will empower Michigan entrepreneurs, lower costs for Michigan businesses, and create good-paying Michigan jobs. I'm proud that we worked across the aisle on these commonsense bills to grow our economy and ensure more people can make it in Michigan.” Michigan Business
Economic Impact of R&D Tax Credits
Research from the National Bureau of Economic Research (NBER) demonstrates that state-level R&D tax credits increase average entrepreneurial activity by around 7 percent, while counties in states with R&D credits experience a rise in new firm formation of more than 20 percent over 10 years. Furthermore, a 2017 study published in the Review of Economics and Statistics found that in the long run, $1 of R&D tax credit leads to about $4 of R&D spending by businesses.
Michigan is strategically positioned to benefit from these economic multipliers. According to the MEDC, Michigan businesses have historically spent $22.4 billion on R&D investments, making it a top 5 state in the nation for R&D spending. The state's engineering design and development industry is forecasted to attract over $143 million in private investments and generate over 700 employment opportunities in 2025 alone. Michigan Business
What's the Credit Worth?
The value of the credit depends on your business size—but the savings can be significant:
Small Businesses (fewer than 250 employees):
You could qualify for 3% up to a base amount then receive 15% credit on R&D expenses that go above the base amount. The max? $250,000 per year.
Large Businesses (250+ employees):
You'll get a 3% credit on your base-level R&D expenses, and 10% on anything over that. The max is $2,000,000 per year.
Partnering with a Michigan research university?
There's better news. A 5% credit is available for R&D expenses conducted with a Michigan research university—subject to existing caps for small ($250K) and large ($2M) businesses.
And here's the best part: the credit is refundable. That means if your credit is bigger than your tax bill, the state cuts you a check for the difference. Yes, really.
Who Qualifies?
According to the Michigan Department of Treasury, businesses must meet specific criteria to be eligible for the R&D tax credit:
“The new 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 research and development expenses relative to a base amount and timely filed a tentative claim.” Michigan Department of Treasury
Qualifying research and development expenses (R&D Expenses) are defined as “qualified research expenses as that term is defined in section 41(b) of the Internal Revenue Code…for research conducted in [Michigan].” Importantly, expenses incurred for research conducted outside of Michigan cannot be used to calculate the credit or to determine eligibility.
Research must meet several criteria to qualify for the credit:
- It must be based in hard sciences like engineering, computer science, chemistry, etc.
- It must be related to the development of a new or improved component
- The project must aim to “resolve technological uncertainty” with a process to eliminate that uncertainty
Your “base amount” is calculated using your average R&D expenses from the past three years, so it's worth starting to gather that information now.
How to Claim It
Applications will go to the Michigan Department of Treasury. Here's what to know:
- For the 2025 tax year, the application deadline is April 1, 2026
- In future years, the deadline will move up to March 15
The State Has Annual Caps
Michigan's new R&D tax credit comes with a statewide annual cap of $100 million, which is split into two pools:
- $75 million reserved for large businesses (250+ employees)
- $25 million reserved for small businesses (fewer than 250 employees)
Here's how the cap and proration work:
- If large business claims exceed $75 million, but small business claims stay under $25 million, only the large businesses will be subject to proration. Small businesses will receive their full credits.
- If both groups exceed their respective caps, each group will be prorated based on their pool—large businesses on the $75 million limit and small businesses on the $25 million limit.
- However, if both groups go over and small business claims exceed 25% of the total amount claimed, then all applicants will receive a prorated share of the full $100 million cap, regardless of business size.
Key takeaway: While the credit is generous, it's first-come, first-served. It is extremely important to apply before the deadline to be considered.
Tip for startup businesses
Section 206.677(8)(b) of Michigan's new R&D credit says that if this is your first year with qualified research expenses (QREs) in the state, your base amount is automatically set to zero.
What does that mean for you? You can go straight to claiming 15% (if you're a small business) or 10% (if you're a large business) of your qualifying R&D expenses—no prior-year calculations needed.
It's a solid incentive for startups jumping into innovation in Michigan!
Michigan Universities as R&D Partners
Michigan's world-class universities are key collaborators in the state's R&D ecosystem. The University of Michigan reported a record $2.04 billion in research expenditures in fiscal year 2024, while Michigan State University reported $932 million for the same period. These institutions are poised to be important partners for businesses looking to maximize their R&D tax credit through the 5% additional credit for university collaborations.
Santa J. Ono, President of the University of Michigan, emphasized the importance of this initiative: “U-M is proudly a leader in research and innovation, but we can do so much more. Through this support, we will foster new collaborations between researchers and businesses, accelerating discovery and innovation, and driving economic growth and job creation like never before.” Michigan Business
The Innovation Fund Connection
The R&D tax credit is part of a larger economic development initiative that includes the newly established Michigan Innovation Fund, which allocates $60 million to fuel innovation across the state. According to Representative Alabas Farhat, “With this bill becoming law, we're creating a cycle of opportunity that will generate good paying jobs and elevate Michiganders. We are creating stronger entrepreneurs and building up a foundation for local businesses.”
This coordinated approach of tax incentives and direct funding demonstrates Michigan's commitment to building a robust innovation ecosystem. The Innovation Fund will help early-stage businesses while the R&D tax credit incentivizes ongoing research and development activities at established companies.
Why This Matters for Michigan Businesses
This new credit is a game-changer for companies investing in research and innovation. It reduces the cost of doing high-impact work and makes it easier to reinvest in growth, people, and products.
Dr. Stephen Rapundalo, President and CEO of MichBio, explained the significance: “The enactment of a new Michigan R&D tax credit is a tremendous victory for the state's life sciences and other high-tech industries that will spur company formation and economic growth. This reestablishment, especially with its dedicated fund for early-stage ventures and an added premium for research university collaborations, is a huge step towards raising Michigan's overall level of competitiveness in the life sciences and helping to incentivize development of the next generation of medical breakthroughs and products while creating high-wage jobs.” Michigan Business
Mike Johnston, Executive Vice President for Government Affairs and Workforce Development at the Michigan Manufacturers Association, added: “Innovation is the key to growth for manufacturing, the state's largest and most critical sector. The creation of a research and development credit increases our competitiveness and will attract new jobs and investment opportunities to Michigan.” Michigan Business
It's also a strong signal: Michigan is serious about supporting innovation and entrepreneurship.
Don't Miss Out—Get a Head Start
This credit is generous, but it's also competitive. To make sure you don't miss your chance, it's smart to start preparing now.
Here are steps you can take to prepare:
- Begin tracking your qualified research expenses for 2025
- Gather documentation of your R&D spending for 2022-2024 to establish your base amount
- Explore potential partnerships with Michigan research universities
- Consult with a tax professional familiar with R&D tax credits
How Engineered Tax Services Can Help:
Navigating the complexities of R&D tax credits can be challenging, but you don't have to do it alone. At Engineered Tax Services (ETS), we specialize in helping businesses like yours maximize their tax savings through expert identification and documentation of qualifying R&D activities. Our team of tax attorneys, engineers, and scientists has performed millions of these tax services over the past decades, generating billions of dollars in U.S. stimulus that has impacted millions of jobs in our country. Engineered Tax Services
By partnering with Engineered Tax Services, you gain access to:
Expertise: Our deep understanding of both federal and state R&D tax credit programs ensures you receive the maximum benefit.
Comprehensive Services: From initial assessment to detailed documentation and submission, we handle every aspect of the process.
Proven Track Record: With a history of successful claims across various industries, we have the experience to support your unique needs.
Want to find out if you qualify? Head over to our R&D page and get your Free Analysis.
