For the first time in over a decade, Michigan businesses can claim a state-level R&D tax credit. The credit became available for qualifying expenses incurred on or after January 1, 2025, and can be combined with the existing federal R&D credit under IRC Section 41 — creating a meaningful combined benefit for businesses conducting research in the state. (Treasury maintains a dedicated page on the R&D credit with additional resources.)
If you already filed your tentative claim for 2025 expenses by the April 1, 2026 deadline, you're in the right position. If you missed it, there's unfortunately no way to go back and claim it — Treasury does not accept late submissions. But the credit is ongoing, and the next deadline is March 15, 2027 for 2026 expenses. That means now is the time to start planning.
In late March, the Michigan Department of Treasury released Revenue Administrative Bulletin (RAB) 2026-4, which provides detailed guidance on how the credit works, who qualifies, and how to calculate it correctly. It's the most comprehensive explanation we've seen from Treasury so far, and it clarifies several areas that were previously ambiguous. Here's what business owners need to know.
The credit is available to two types of businesses: C corporations subject to Michigan's Corporate Income Tax (CIT), and flow-through entities (S corporations, partnerships, and LLCs) that are subject to Michigan income tax withholding and are considered employers under federal law.
That second group comes with some important fine print. The new RAB makes clear that the withholding credit is not available to federally disregarded entities, entities not subject to Michigan income tax withholding, businesses that elected to pay Michigan Business Tax (MBT), or entities that don't qualify as employers under IRC Section 3401(d). If your company uses a professional employer organization (PEO), this last point is especially worth examining — depending on how your PEO relationship is structured, the PEO, not your company, may be the legal employer for federal purposes. If that's the case, your company may not be eligible for the credit. (For more on how flow-through entities are treated in Michigan, see our guide to Michigan's Flow-Through Entity Tax.)
Michigan adopts the same four-part test used for the federal R&D credit. Your research activities must be technological in nature, aimed at developing or improving a product or process, involve a process of experimentation, and be conducted for a qualifying purpose. Critically, the work must take place within Michigan.
Eligible expenses include wages for employees conducting or supervising qualifying research, supplies consumed in the process, and a portion of contract research expenses (generally 65% of amounts paid to third parties performing research in the state). Businesses already claiming the federal credit will find that much of their existing documentation applies directly, with additional work needed to isolate Michigan-specific activity.
One important note from the RAB: eligibility for Michigan's credit does not depend on eligibility for the federal credit. Even if your federal credit must be allocated to partners at the entity level, the partnership itself may still qualify for the Michigan credit.
Key Takeaway: If your business claims the federal R&D credit, you have a strong foundation for the Michigan claim. But the new guidance makes it clear that entity structure matters — particularly for flow-through entities and businesses using PEOs.
The credit structure differs based on your employee count, and the new RAB provides important clarity on how employees are counted.
Small businesses (fewer than 250 employees) receive a 3% credit on qualifying Michigan research expenses up to the base amount and 15% on expenses above that threshold, with an annual maximum of $250,000 per taxpayer.
Large businesses (250 or more employees) receive the same 3% credit up to the base amount and 10% on expenses above it, with an annual maximum of $2 million per taxpayer.
The employee count uses a point-in-time test: if at any point during the calendar-year expense period your business had 250 or more employees, you're classified as a large employer for the entire year. The RAB clarifies that this count uses the IRC Section 3401(c) definition of "employee," and that employees of a disregarded entity generally cannot be counted toward the parent company's total unless those employees are considered employees of the parent under federal law. (If you're sorting out employer obligations in Michigan more broadly, our overview of Michigan employer payroll tax requirements covers the fundamentals.)
An additional 5% credit, capped at $200,000 per year, is available for research conducted under a written agreement with an eligible Michigan research university.
The credit is fully refundable — any amount exceeding your Michigan tax liability is returned as a cash refund.
Key Takeaway: Small businesses benefit from a higher above-base rate. First-time Michigan claimants with no prior in-state R&D expenses start with a base amount of zero, meaning the higher rate applies to all qualifying expenses from the outset.
The base amount — the average of your qualifying Michigan research expenses over the prior three calendar years — determines how much of your current spending qualifies at the higher credit rate. Getting it right matters, and the RAB devotes significant attention to this calculation.
A few scenarios worth understanding:
If your business had no Michigan R&D expenses in any of the three prior years, your base amount is zero. That's straightforward and beneficial — all of your current qualifying expenses earn the higher rate.
If you had expenses in some but not all of the three prior years, you only include the years where you actually had expenses. For example, if you had qualifying Michigan expenses in 2022 and 2024 but not 2023, you would add the expenses from those two years and divide by two, not three.
Fiscal-year filers take note: the base amount must be calculated on a calendar-year basis regardless of your tax year. If your prior expenses were tracked by fiscal year, Treasury has provided a conversion method that allows you to prorate fiscal-year expenses into calendar-year equivalents for base years prior to 2025. This conversion is only available for credits claimed on 2025 through 2027 expenses. Starting with 2028, all base amounts must use actual calendar-year figures.
The RAB also addresses what happens when a business undergoes a reorganization, acquisition, or disposition. In general, if the resulting entity is considered the same taxpayer under federal law, it uses the former entity's base years. If the reorganization creates a new taxpayer, the base amount starts fresh. For acquisitions and dispositions, the guidance follows the framework in IRC Section 41(f), with adjustments made on a calendar-year basis.
For unitary business groups (UBGs) filing under the CIT, all calculations — employees, expenses, base amounts, and credit caps — are made at the group level. When a member joins or leaves a UBG, the base amount may need to be adjusted using proration methods similar to those in IRC 41(f). If the designated member changes, the resulting UBG is treated as a new taxpayer with a base amount of zero.
Key Takeaway: The base amount calculation is more nuanced than it first appears, especially for fiscal-year filers, businesses that have undergone structural changes, and members of unitary groups. Getting this wrong directly affects your credit amount and could trigger an audit adjustment.
Total statewide credits are capped at $100 million per year, split into a $75 million pool for large employers and a $25 million pool for small employers. If claims within a pool exceed its limit, Treasury will prorate credits among claimants.
The RAB lays out three possible proration scenarios. If small-employer claims stay at or below $25 million, only large-employer claims get prorated. If small-employer claims exceed $25 million but remain at or below 25% of total claims, each group is prorated separately against its own pool. And if small-employer claims exceed both $25 million and 25% of total claims, all credits are prorated collectively against the full $100 million.
One detail that's easy to miss: if proration applies and you later discover your tentative claim was too low, you cannot apply the proration rate to the higher corrected amount — your credit is capped at the prorated version of what you originally filed. If your claim was too high, you must prorate the corrected lower amount.
Treasury has indicated it will publish a proration notice on its website after the filing deadline closes. This notice will announce whether adjustments are required and at what rate. It's expected to be published before the April 30 annual return deadline for calendar-year CIT filers.
Key Takeaway: File an accurate tentative claim. Overestimating costs you if proration applies; underestimating costs you even more.
For many Michigan businesses, this credit isn't just a bonus — it's a partial offset for an unexpected state-level tax cost.
Federal law currently permits immediate expensing of domestic R&D costs. Michigan has decoupled from that treatment and continues to require five-year amortization of R&D expenses for state purposes. The result: businesses conducting R&D in Michigan may report significantly higher taxable income on their state return than on their federal return. We regularly see this catch manufacturers and technology companies off guard.
The Michigan R&D credit is designed, in part, to ease that impact. It should be treated as a core planning tool, not an afterthought. For a broader look at how credits and deductions can work together in a comprehensive tax strategy, see our guide to year-end tax planning.
Key Takeaway: Michigan's decoupling from federal R&D expense treatment can create a higher-than-expected state tax burden. The R&D credit helps offset that difference.
The new RAB, combined with what we've seen in practice, highlights several areas where businesses commonly trip up:
Using estimates instead of actual expenses. Treasury requires tentative claims to reflect actual figures. Statistical sampling is explicitly not permitted. If proration is triggered, your estimates could distort the calculation for all claimants.
Failing to separate Michigan from non-Michigan activity. Only research conducted within Michigan qualifies. For contract research, the RAB provides a specific sourcing formula: you take the qualifying percentage of the contract amount (generally 65%) and multiply it by the proportion of the contractor's R&D services performed in Michigan versus everywhere. Carrying over a federal calculation without adjustment is a common and avoidable error.
Missing the tentative claim step. The credit requires a two-step process: a tentative application through Michigan Treasury Online (MTO), followed by reporting the finalized credit on your tax return after Treasury publishes its proration notice. Skipping the first step means forfeiting the credit entirely.
Getting the base amount wrong. For businesses with prior Michigan R&D activity, the base amount uses a three-year average — but with important rules about which years to include in the denominator, how to handle partial years, and how to convert fiscal-year data to calendar-year data. An error here directly affects how much of your expense qualifies at the higher rate.
Overlooking entity structure issues. The RAB makes clear that disregarded entities, businesses using PEOs, and entities that aren't employers under federal law may not be eligible. These issues should be addressed well before the filing deadline.
Key Takeaway: Most errors are procedural, not technical. Starting early and understanding the two-step process — along with the entity-level eligibility rules — goes a long way toward avoiding them.
Applications must be submitted through Michigan Treasury Online (MTO). There is no paper alternative. The tentative claim requires your business size classification, actual qualifying Michigan research expenses, base amount information, and any university collaboration expenses if applicable. The RAB specifies that the tentative claim must also include the type of tax/taxpayer, a breakdown of prior-year MQREs, employee counts, and — for UBGs — member-level detail.
For 2025 expenses, the deadline was April 1, 2026. For 2026 and subsequent years, the window opens January 1 and closes March 15 of the following year. Once Treasury publishes its proration notice, you claim the finalized credit on your annual return. C corporations report it on their CIT return; flow-through entities report it on their annual withholding tax return. Flow-through entities can begin reducing their periodic withholding payments once Treasury issues its proration notice.
Fiscal-year taxpayers should be aware that if your short tax year ends before the tentative claim window opens, you may need to file an extension to ensure you can submit your tentative claim and receive Treasury's proration notice before filing your return.
At Revonary, we work with businesses navigating complex state and federal tax incentives, including multi-state R&D credit strategies and Michigan-specific compliance requirements. Our tax and consulting teams understand how Michigan's credit interacts with the federal Section 41 credit and the state's decoupled Section 174 treatment, and how to build a claim that maximizes your benefit while reducing the risk of error.
We can help you assess whether your activities and entity structure qualify, calculate your base amount and credit correctly, ensure your expense documentation is properly allocated to Michigan activity, and manage the two-step application and filing process from start to finish.
If you missed the April 1, 2026 deadline for 2025 expenses, we can help you get set up for 2026. The March 15, 2027 deadline will be here sooner than you think, and proper tracking needs to start now. Contact Revonary today to discuss your eligibility and get a plan in place.
This article is intended for informational purposes only and does not constitute legal or tax advice. Tax rules are subject to change and individual circumstances vary. Please consult a qualified tax professional to discuss your specific situation.