Earlier this month, Gov. Whitmer officially signed into law the reinstatement of the Michigan R&D Tax Credit and enhancements to the Michigan Pass-Through Entity (PTE) tax election. The R&D Tax Credit provides significant tax incentives for qualified R&D activity conducted in the State of Michigan. The PTE legislation streamlines the election process for pass-through entities — i.e., those filing as S-corps and partnerships for federal income tax purposes.
The R&D Tax Credit 2025: What You Need to Know
The new legislation makes Michigan’s R&D tax credit effective for tax years beginning on or after Jan.1, 2025. Designed to encourage innovation and stimulate economic growth, the credit provides a tax incentive for businesses engaging in qualified research activities in the State of Michigan. It offers a valuable opportunity for Michigan businesses to reduce their tax liability while investing in R&D initiatives.
Under the terms of this program:
- Businesses with 250 or more employees can claim a credit based on a percentage of their qualified research expenditures (QREs), capped at $2 million per taxpayer annually.
- Businesses with fewer than 250 employees can claim a credit based on a percentage of their QREs, capped at $250,000 per taxpayer annually.
- Businesses collaborating with Michigan-based research universities may be eligible for an additional bonus credit, capped at $200,000 annually.
The program has an overall annual cap of $100 million, with $25 million reserved for small businesses. If the total credit claims exceed the allocated funds, the Michigan Department of Treasury will prorate credits proportionally among qualifying taxpayers.
Next Steps
The reinstated Michigan R&D Tax Credit positions the state as a competitive hub for innovation, offering significant tax incentives for businesses. When combined with the federal R&D Tax Credit, this state-level incentive becomes a powerful tool for reducing overall tax liability. Our team of specialists is ready to assist you in navigating the process. Please contact us to explore how this credit can benefit your business and support your strategic objectives.
Michigan Pass-through Entity Tax Law Changes: What You Need to Know
In the waning hours of the lame duck session, the Michigan legislature pushed through House Bill 5022, making significant changes to the Pass-through Entity Tax election, credit computation, and penalty provisions for tax years beginning on and after Jan. 1, 2024. Signed by the governor on Jan. 17, 2025, the bill is effective immediately.
How to Make the Election
- The election must be made on or before the last day of the ninth month after the end of the tax year. This is a major change. Elections for tax years beginning prior to Jan. 1, 2024, however, must be made by the 15th day of the third month of the tax year for which the election is made.
Member, Shareholder, Partner MI-1040 Credit
- For tax years that begin before Jan. 1, 2024, the credit is equal to the member’s share of the taxes that are imposed on the pass-through entity and paid by the 15th day of the third month after the end of the tax year.
- For tax years that begin on and after Jan. 1, 2024, the credit is equal to the member’s share of the tax imposed on the pass-through entity for the tax year and paid on or before the date for the filing of the pass-through entity annual return for the tax year, including any extension.
Interest and Penalties
- Interest and penalty will not be assessed if the taxpayer submitted four equal installments, the sum of which equals at least one of the following:
- 90% of the taxpayer’s current year’s tax liability, or
- 100% of the taxpayer’s previous year’s tax liability.
- Interest and penalty will not be assessed for any quarterly estimated payment due prior to the taxpayer making the election to pay the tax due for that tax year, unless the Department of Treasury determines that the deficiency is due to the taxpayer’s intentional disregard of the law.
Disclosures
- For tax years beginning on and after Jan. 1, 2024, electing pass-through entities are required to disclose information on member’s share of FTE tax paid on or before the due date for the electing entity’s annual return, with extension. The bill allows the Department of Treasury to require reasonable proof to claim the credit.
- The same disclosure is required for entities not making the FTE election, but which receive credits from lower-tier electing entities.