Michigan Qualified R&D Expenses (MQREs)

• Michigan uses the federal definition of qualified research expenses under Internal Revenue Code (IRC) 41(b). Michigan does not use other federal methods, tests, or sections in administering the Research and Development (R&D) Tax Credit.
• Michigan Qualified R&D Expenses (MQREs) must meet the federal definition and be conducted within Michigan.
• MQREs are incurred by calendar year, from January through December.
• MQREs incurred in collaboration with a Michigan research university are eligible for an additional credit.
• Unlike federal rules, Treasury does not allow statistical sampling to report MQREs. All MQREs reported to Treasury must reflect final, accurate values.

To meet the requirements for MQREs, expenses must be paid or incurred for qualified research, which is defined under IRC 41 . The following four-part test, based on that section, is used to help identify qualified research. It is summarized here for general reference only and does not replace official guidance:

1. The activity must be treated as domestic research or experimental expenditures under IRC 174A.
2. The activity must be intended to discover information that is technological in nature and helps develop or improve a business product, process, or system.
3. The activity must entirely (or almost entirely) involve experimentation focused on improving function, performance, or reliability/quality.
4. The activity must not include:
• Research done after a product is commercially produced,
• Adapting or copying existing business products, processes, or systems,
• Surveys, studies, or similar data collection,
• Research in social sciences,
• Research funded by a grant, contract, or other outside source.

Note: Special rules apply to computer software. Refer to IRC 41 for more information.

Note: Eligible businesses should review IRC 41 to understand what research qualifies. The Instructions for Form 6765 may also be helpful. A business does not need to qualify for or claim the federal credit to be eligible for the Michigan R&D Tax Credit.

MQREs must be incurred for research conducted in Michigan. The examples below assume the payments are for qualified research and show possible qualifying expenses. These are provided for general reference only and are not official guidance. MQREs may include:

• Wages paid or incurred to employees who conduct, supervise, or directly support qualified research. Wages must meet the federal definition under IRC 3401(a). If most of an employee’s time is spent on research, their full wages may qualify.
• Supplies that are tangible personal property and used in research other than land, buildings, or other depreciable assets.
• Paid access to computers or systems used exclusively for qualified research and not monetized or made available for shared access.
• Contract research expenses, which may qualify as expenses at different percentages depending on the type of researching entity and the nature of the research.

Note: Eligible businesses should review IRC 41(b) to understand what expenses qualify. The Instructions for Form 6765 may also be helpful. A business does not need to qualify for or claim the federal credit to be eligible for the Michigan R&D Tax Credit.