Revenue Administrative Bulletin 2026-4

This RAB refers to these credits as the “small-employer credit” and “large-employer credit,” respectively.

Claimants may also claim an additional credit amount equal to 5% of the MQREs used in the above calculation that were incurred in collaboration with a Michigan research university pursuant to a written agreement. This additional credit amount is capped at $200,000 annually per claimant.

To qualify for the credit, claimants must file a tentative claim (also referred to in this RAB as the “unadjusted credit amount”) by the statutory deadline, which is April 1, 2026, for credits claimed based on MQREs incurred during the 2025 calendar year. Tentative claims may be adjusted (prorated) if total claims for the year exceed the annual statutory cap of $100 million. Treasury will issue a notice of any required adjustment, which adjustment must be applied as specified in this RAB in determining the final allowed credit amount. Allowed credits are claimed on the claimant’s annual return, as specified in this RAB.

Qualifying Claimants

Eligible claimants may only claim R&D credits for tax years beginning on and after January 1, 2025. However, if a CIT taxpayer has a 52-53-week tax year beginning in the last week of December 2024, that taxpayer may also qualify if otherwise eligible. See MCL 206.611(4). For purposes of the withholding tax credit, the tax year is January 1 to December 31 for all claimants, regardless of whether a claimant reports on a fiscal year basis for income tax purposes.

To qualify for the credit, the claimant must be an authorized business that has timely filed a tentative claim.

CIT Credit

For CIT purposes, an authorized business is (1) a taxpayer, as that term is defined in the CIT (MCL 206.611(5)), that (2) has MQREs in excess of the base amount.

Withholding Credit

For withholding tax purposes, an authorized business is (1) a flow-through entity subject to Michigan income tax withholding but not subject to the MBT or CIT, that (2) has MQREs in excess of the base amount.

Flow-through entity means, “an entity that for the applicable tax year is treated as an S corporation under section 1362(a) of the internal revenue code, a general partnership, a limited partnership, a limited liability partnership, or a limited liability company, that for the applicable tax year is not taxed as a corporation for federal income tax purposes. Flow-through entity does not include any entity disregarded or treated as a corporation under section 699.” MCL 206.701(d). Section 699 of the MITA provides, in relevant part, “A person that is a disregarded entity for federal income tax purposes under the internal revenue code is classified as a disregarded entity for purposes of parts 2 and 3 of this act.” MCL 206.699(a).

In addition, only an employer may claim the withholding credit. The CIT defines employer as, "an employer as defined in section 3401(d) of the internal revenue code. A person required to withhold for federal income tax purposes is prima facie considered an employer.” MCL 206.605(4). This definition is also applied to the withholding credit. Because a withholding credit claimant must be an employer, IRC 3401(d) and its accompanying regulations should be reviewed to determine credit eligibility.

Based on the above definitions, the withholding tax credit is not available to:

• MBT and CIT taxpayers,
• Federally disregarded entities,
• Entities that are not subject to Michigan income tax withholding, and
• Entities that are not employers under federal law.

Example 1: MBT Taxpayer

Big Company, LLC is a flow-through entity subject to Michigan income tax withholding that has MQREs in excess of its base amount and is an employer for federal purposes (determined by applying IRC 3401(d) and its accompanying regulations). Big Company, LLC elected to file and pay the MBT and is therefore not an authorized business for withholding tax purposes. Big Company, LLC is not eligible to claim the Michigan R&D credit.

Example 2: Disregarded Entity

Little Company, LLC is owned by a single member, Parent Partnership, and is a disregarded entity. Little Company is subject to Michigan income tax withholding, has MQREs in excess of its base amount, and is an employer for federal purposes. As a disregarded entity, Little Company does not meet the definition of a flow-through entity and is therefore not an authorized business eligible to claim the Michigan R&D credit. Conversely, Parent Partnership is a flow-through entity, but it is not an employer for federal purposes and has no MQREs of its own. Although Parent Partnership would be able to consider Little Company’s MQREs and base amount as its own, Parent Partnership is not an employer and therefore is not an eligible claimant. Consequently, Parent Partnership is not eligible to claim the Michigan R&D credit.

Example 3: Entity Not Subject to Michigan Income Tax Withholding

Same facts as above except Parent Partnership, not Little Company, LLC, is considered the employer for federal purposes. In that case, whether Parent Partnership may claim the Michigan R&D credit will turn on whether it is subject to Michigan income tax withholding. If Parent Partnership is subject to Michigan income tax withholding with respect to any person, it will satisfy this requirement. But if Parent Partnership is not subject to Michigan income tax withholding at all (because, for example, Little Company, LLC is subject to Michigan income tax withholding for all persons for whom Parent Partnership is considered the employer under federal law), Parent Partnership is not an authorized business and may not claim the Michigan R&D credit.

Example 4: Entity Not Employer for Federal Purposes

Candy Partnership has MQREs in excess of its base amount and contracts with a professional employer organization (PEO) to pay its employees and withhold income taxes. Along with other facts indicating that the PEO is the employer under the IRC and its accompanying regulations, the PEO controls the payment of wages and files and pays income tax withholding under its own federal employer identification number (FEIN). Candy Partnership is not the employer for federal purposes; therefore, although Candy Partnership is a flow-through entity with MQREs in excess of its base amount, it is not an eligible claimant and is not eligible for the Michigan R&D credit.

Eligibility for the Michigan R&D credit is not based on eligibility to claim the federal credit for increasing research activities under IRC 41. For example, if a partnership that meets the credit’s definition of a flow-through entity is required under federal regulations to allocate its entire federal credit among its partners, the partnership may still be eligible to claim a Michigan R&D credit.

Michigan Qualifying Research and Development Expenses and the Base Amount

The Michigan R&D credit is available starting with MQREs incurred during the 2025 calendar year. The base amount, which is used in determining eligibility and calculating the credit, is generally the average of the preceding 3 calendar years of MQREs.

Qualifying Research and Development Expenses

The term “qualifying research and development expenses” means, “qualified research expenses as that term is defined in section 41(b) of the [IRC]…for research conducted in [Michigan].” Expenses incurred for research conducted outside Michigan cannot be used to calculate the credit or to determine eligibility for the credit. MCL 206.677(8)(c) and MCL 206.717(8)(c). Because qualifying research and development expenses only include MQREs, this RAB refers to those expenses as MQREs.

Claimants may not use statistical sampling to calculate their MQREs; except as discussed in this RAB, actual, precise amounts must be reported for the base amount, the tentative claim (unadjusted credit amount), and the actual credit claim. In addition, unless otherwise noted in this RAB, claimants of the Michigan R&D credit generally may not use other methods or elections available under IRC 41. For example, the aggregation of expenditures and proportionate sharing of the resulting credit under IRC 41(f) are not permitted for purposes of the Michigan R&D credit. Credits are subject to audit, and the claimant’s books and records should support the amounts of MQREs reported.

“Qualified research expenses” as defined under IRC 41(b) may consist of either:

• “In-house research expenses,” which may include wages to an employee for qualified services, amounts paid for supplies used in qualified research, and, subject to federal regulations and other limitations, amounts paid or incurred for the right to use computers in the conduct of qualified research.
• “Contract research expenses,” which may include amounts paid or incurred by the taxpayer to any person (other than the employee of the taxpayer) for qualified research. Percentages under certain circumstances may vary, but generally, contract research expenses qualify at 65% of the amount paid or incurred.

Example 5: Amount of MQREs for Contract Research Expenses

Acme Company hires Anvil Company to perform qualified contract research services for a total cost of $100,000. All the work is conducted in Michigan. Because these are contract research expenses, 65% (or $65,000) qualify as MQREs.

To meet the IRC 41(b) definition, expenses must be paid or incurred for qualified research, which is defined under IRC 41(d). The following four-part test is used to help identify qualified research under IRC 41(d); the test is summarized here only for general reference, and this RAB content does not replace or supersede the IRC or U.S. Treasury regulations:

1. The expenditures 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 of the taxpayer;
3. The activity must entirely (or almost entirely) involve experimentation focused on improving function, performance, or reliability/quality. In no case can research related to style, taste, cosmetic, or seasonal design factors be treated as conducted for these purposes; and
4. The activity must not include:

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

Qualified Research Expenses Sourcing

Treasury generally adopts a facts and circumstances test in determining whether qualified research expenses are attributable to research conducted in Michigan. Generally, qualified research expenses are attributable to Michigan if the services are physically performed in Michigan or the supplies are used or consumed in Michigan. For contract research expenses, expenses will generally be sourced to where the research is conducted, or the supplies are used or consumed, by the third party. Claimants must maintain detailed records to substantiate the location where qualified research is performed.

Example 6: Sourcing Contract Research Expenditures

Yellow Inc. contracts with Research Inc. for the latter to perform R&D services related to a product Yellow is developing. Research Inc. incurs expenses of $80,000 in performing the services—$50,000 related to R&D services it performs in Michigan and $30,000 related to R&D services it performs outside of Michigan. It charges Yellow Inc. $100,000 under the contract. Yellow Inc. calculates its MQREs by taking 65% of its expense under the contract and multiplying that value by the proportionate share of the contract’s R&D services performed in Michigan to the contract’s R&D services performed everywhere ($50,000 divided by $80,000 = 62.5%). Yellow Inc.’s MQRE calculation is thus 65% multiplied by $100,000 multiplied by 62.5% = $40,625. Yellow Inc. reports $40,625 in MQREs.

Which Entity Claims the Expense?

MQREs are attributable to the entity that ultimately bears the cost of the expenses. Consequently, where a business pays an unrelated business to perform services that result in MQREs, the payor business, not the unrelated payee business, would claim the Michigan R&D credit. For purposes of both the CIT and withholding credit, a disregarded entity’s MQREs are attributed to its parent.

Example 7: Which Party Claims Disregarded Entity’s MQREs?

Blue Corporation is the parent of Green Company, which is a disregarded entity for federal income tax purposes. Like all other income and expenses, Green Company’s MQREs are reported as Blue Corporation’s MQREs for income tax purposes. Therefore, Blue Corporation should include Green Corporation’s MQREs in calculating its base amount and expense year MQREs for its Michigan R&D credit.

MQREs and employees do not flow through to a flow-through entity’s owners. For example, if a C corporation owns an interest in a “flow-through entity” (a defined term that does not include a federally disregarded entity), that C corporation cannot claim the flow-through entity’s MQREs and cannot count the flow-through entity’s employees to determine its employer size. To the extent the flow-through entity qualifies as an authorized business and an employer, it may be able to claim the withholding credit.

Base Amount

To qualify for the Michigan R&D credit, a claimant must have incurred MQREs during the calendar year in excess of the base amount, defined as, “the average annual amount of qualifying research and development expenses incurred during the 3 calendar years immediately preceding the calendar year ending with or within the tax year for which a credit is being claimed,” with certain adjustments for claimants that have fewer than 3 years of expenses during that period. MCL 206.677(8)(b) and MCL 206.717(8)(b). Importantly, both fiscal year and calendar year claimants must compute the base amount using MQREs reported on a calendar year basis.

Calculating the Base Amount

The base amount must reflect all MQREs incurred during the preceding 3 calendar years. Consequently, a claimant will need to determine that amount in order to claim the credit. The credit is subject to audit, and claimants who overclaim the credit due to incorrectly calculating their base amount may have their credit redetermined or disallowed and be assessed penalty and interest.

Example 8: Standard Base Amount Calculation

A claimant had MQREs in calendar years 2022 through 2024 of $20,000, $10,000, and $30,000, respectively. Consequently, its base amount for that period is $20,000 (($20,000 + $10,000 + $30,000) divided by 3). For the claimant to qualify for a Michigan R&D credit based on its calendar year 2025 MQREs, those expenses would have to exceed $20,000.

Where a claimant did not incur MQREs in the preceding 3 calendar years, its base amount would be zero. This is true even if the company was not in business for all 3 of those base years.

Where a claimant had MQREs in some, but not all, of the preceding 3 calendar years, its base amount would be calculated using only those years in which it had MQREs, and it would not include any calendar year in which it did not incur MQREs in the denominator of its base amount calculation.

Example 9: Base Amount for 1 or 2 Years Without MQREs

In the 3 calendar years preceding the expense year for which a Michigan R&D credit is being claimed, the claimant, Company X, incurred MQREs in years 1 and 3 but not in year 2. In calculating its base amount, Company X would add its MQREs for years 1 and 3 and divide by 2, not 3, in determining its base amount.

Where the preceding 3 calendar years include a partial calendar year, that year should be treated as a full calendar year, as long as MQREs were incurred in that partial calendar year.

Example 10: Base Amount with a Partial Year

The claimant, Company Y, was only in existence for 2.5 calendar years during the 3 calendar years preceding the expense year for which a Michigan R&D credit is being claimed, and it incurred MQREs in each of those calendar years. Company Y would calculate its base amount by adding its MQREs over that 2.5-year period and dividing by 3, not 2.5.

Fiscal Year Conversion for Base Amount

As noted, the base amount must be calculated using MQREs reported on a calendar year basis. If a claimant’s MQREs incurred prior to calendar year 2025 were documented by fiscal year, the claimant may convert those fiscal year MQREs to calendar year MQREs when calculating its base amount. This conversion option is only available in calculating the base amount for Michigan R&D credits claimed based on calendar year 2025 through 2027 MQREs and only for base amount years prior to 2025. Beginning with base amount years after 2024, all claimants must track and calculate their MQREs on a calendar year basis.

To make such a conversion, a claimant will apply the following formula:

A filer claiming a credit based on calendar year 2025 MQREs will calculate its base amount using a prorated portion of its MQREs for its fiscal year ending (FYE) in 2022, all of its MQREs for its FYEs in 2023 and 2024, and a prorated portion of its MQREs for its FYE in 2025. Proration is based on the number of months in the claimant’s fiscal year that were in the relevant calendar year (e.g., the number of months in its FYE in 2022 that were in calendar year 2022 and the number of months in its FYE in 2025 that were in calendar year 2024). These fiscal year MQREs will be used to construct calendar year MQREs for the claimant’s base years, as illustrated in the example below. After making the conversion, the claimant would not include in its base amount calculation any constructed calendar years where no MQREs were incurred, just as a claimant that documented its MQREs by calendar year would not include in its base amount calculation calendar years in which it did not incur MQREs.

When claiming a credit based on calendar year 2026 MQREs, a claimant will calculate its base amount using a prorated portion of its MQREs for its FYE in 2023, all of its MQREs for its FYE in 2024, a prorated portion of its MQREs for its FYE in 2025, and its calendar year 2025 MQREs. Again, proration would be based on the number of months in its fiscal year that were in the relevant calendar year.

When claiming a credit based on calendar year 2027 MQREs, a claimant will calculate its base amount using a prorated portion of its MQREs for its FYE in 2024, a prorated portion of its MQREs for its FYE in 2025, and its calendar year 2025 and 2026 MQREs.

Finally, when claiming a credit based on MQREs incurred in 2028 and later, a claimant will calculate its base amount like any other claimant, using its prior 3 calendar years.

Example 11: Base Amount for Filer Using the Conversion Method

A filer has a fiscal year of October 1–September 30. The company claims Michigan R&D credits for each expense year 2025 through 2028. The base amounts for each credit are computed as follows:

Base amount calculation for expense year 2025

Constructed calendar year 2022 expenses

• 75% of FYE 2022 MQREs are applied to base year 2022 (9 months took place in calendar year 2022)
• 25% of FYE 2023 MQREs are applied to base year 2022 (3 months took place in calendar year 2022)

Constructed calendar year 2023 expenses

• 75% of FYE 2023 MQREs are applied to base year 2023 (9 months took place in calendar year 2023)
• 25% of FYE 2024 MQREs are applied to base year 2023 (3 months took place in calendar year 2023)

Constructed calendar year 2024 expenses

• 75% of FYE 2024 MQREs are applied to base year 2024 (9 months took place in calendar year 2024)
• 25% of FYE 2025 MQREs are applied to base year 2024 (3 months took place in calendar year 2024)

Base amount = (Constructed calendar year expenses for 2022-2024) divided by (number of base years with expenses greater than 0)

Base amount calculation for expense year 2026

Constructed calendar year 2023 expenses

• 75% of FYE 2023 MQREs are applied to base year 2023 (9 months took place in calendar year 2023)
• 25% of FYE 2024 MQREs are applied to base year 2023 (3 months took place in calendar year 2023)

Constructed calendar year 2024 expenses

• 75% of FYE 2024 MQREs are applied to base year 2024 (9 months took place in calendar year 2024)
• 25% of FYE 2025 MQREs are applied to base year 2024 (3 months took place in calendar year 2024)

Actual calendar year 2025 expenses

• 100% of MQREs from calendar year 2025 are applied to base year 2025

Base amount = (Constructed calendar year expenses for 2023-2024 and actual calendar year 2025 expenses) divided by (number of base years with expenses greater than 0)

Base amount calculation for expense year 2027

Constructed calendar year 2024 expenses

• 75% of FYE 2024 MQREs are applied to base year 2024 (9 months took place in calendar year 2024)
• 25% of FYE 2025 MQREs are applied to base year 2024 (3 months took place in calendar year 2024)

Actual calendar year 2025 expenses

• 100% of MQREs from calendar year 2025 are applied to base year 2025

Actual calendar year 2026 expenses

• 100% of MQREs from calendar year 2026 are applied to base year 2026

Base amount = (Constructed calendar year expenses for 2024 and actual calendar year 2025-2026 expenses) divided by (number of base years with expenses greater than 0)

Base amount calculation for expense year 2028

Actual calendar year 2025 expenses

• 100% of MQREs from calendar year 2025 are applied to base year 2025

Actual calendar year 2026 expenses

• 100% of MQREs from calendar year 2026 are applied to base year 2026

Actual calendar year 2027 expenses

• 100% of MQREs from calendar year 2027 are applied to base year 2027

Base amount = (Actual calendar year 2025-2027 expenses) divided by (number of base years with expenses greater than 0)

Base Amount for Certain Federal Reorganizations Affecting Entity Type

Where the claimant has undergone a federal reorganization, it calculates its base amount using the applicable base years of the former entity only if the claimant and the former entity are considered the same taxpayer under federal law. That result follows from the implicit statutory requirement that the authorized business claiming the Michigan R&D credit be the same authorized business whose base amount is used in calculating that credit. Where a reorganization results in a new taxpayer under federal law, that taxpayer is a different authorized business from the former entity and must calculate its base amount independent of the former business.

Example 12: Base Amount for Same Surviving Taxpayer

In accordance with federal law, Company L (seller) uses a valid “Type F reorganization” under IRC 368(a)(1)(F) to become Company M (buyer). Because this reorganization is merely a change in the identity, form, or place of organization of one corporation, and Company L and Company M are effectively considered to be the same taxpayer under the IRC and its regulations, Company M will calculate its base amount using Company L’s applicable base years. For example, if the reorganization took place in 2024, and if Company M were claiming a credit for 2025, it would calculate its base amount using the MQREs incurred by itself and Company L in base years 2022-2024.

Base Amount Following Acquisitions and Dispositions

To the extent applicable, claimants should generally use the approach set forth in IRC 41(f) for calculating their base amount following an acquisition or disposition. For transactions to which IRC 41(f) applies, that section generally requires the claimant to add or subtract the prorated base year MQREs of an acquired or disposed of business in calculating the claimant’s base amount for a credit claimed for the year of the acquisition or disposition. Because the Michigan R&D credit is calculated on a calendar year basis, the proration calculations in IRC 41(f) should be made on a calendar year, not tax year, basis. If the MQREs of the acquired or disposed of business were determined on a fiscal year basis, they will have to be redetermined on a calendar year basis using either actual calendar year numbers or the conversion method described in this RAB for the relevant calendar years.

Example 13: Acquisition to Which IRC 41(f)(3)(A) Applies

Claimant acquires Research Division, a division of ABC Company, on 2/1/2025 in a transaction to which the adjustment under IRC 41(f)(3)(A) applies. For calendar years 2022-2024, ABC Company’s MQREs with respect to Research Division totaled $460 ($100, $150, and $210, respectively). For calendar year 2025, claimant had $1,000 in MQREs and total MQREs for the period calendar years 2022-2024 of $2,100 ($600, $700, and $800, respectively) before making the adjustment required under IRC 41(f)(3)(A).

When calculating its CIT R&D credit based on its calendar year 2025 MQREs, claimant calculates its base amount for the period calendar years 2022-2024 by taking the total of the following calculation and dividing by its number of base years:

Claimant’s total MQREs for the period

Plus

The total MQREs incurred by ABC Company with respect to Research Division for the period multiplied by the result of taking the number of days beginning on the acquisition date and ending on 12/31/2025 (334) and dividing by the number of days in calendar year 2025 (365).

In numerical terms, this is expressed as $2,100 + ($460 multiplied by 0.9151) = $2,520.95. This amount is divided by 3 (the number of base years) to compute the $840.32 base amount. Claimant would therefore calculate its 2025 CIT credit using its $1,000 in calendar year 2025 MQREs and a base amount of $840.32.

For its calendar year 2026 credit, claimant would calculate its base amount for the period calendar years 2023-2025 by taking its MQREs for the period ($700 + $800 + $1,000 = $2,500), adding Research Division’s MQREs for calendar years 2023 and 2024 ($150 + $210 = $360), and dividing by 3 ($2,860 divided by 3 = $953.33). Claimant would not apply any proration in adding Research Division’s MQREs for the base years because Research Division’s calendar year 2026 MQREs are fully included in claimant’s credit calculation. Generally, proration of any base period additions under IRC 41(f)(3)(A) only occurs in the acquisition year.

Example 14: Disposition to Which IRC 41(f)(3)(B) Applies

Continuing with the above example, claimant sells Research Division to Buyer Corp on 4/1/2027 in a transaction to which the adjustment under IRC 41(f)(3)(B) applies. For calendar years 2024-2026, claimant’s MQREs with respect to Research Division totaled $760 ($210, $250, and $300, respectively). For calendar year 2027, claimant had $1,800 in MQREs, including $115 attributable to Research Division, and total MQREs for the period calendar years 2024-2026 of $3,100 ($800, $1,000, and $1,300, respectively) before making any adjustment required under IRC 41(f)(3)(B).

Provided claimant supplies Buyer Corp with the information needed for Buyer Corp to make the calculation required by IRC 41(f)(3)(A), claimant would calculate its base amount for the period calendar years 2024-2026 by taking the total of the following calculation and dividing by its number of base years:

Claimant’s total R&D expenses for the period

Minus

The total MQREs incurred by claimant with respect to Research Division for the period multiplied by the result of taking the total number of days beginning on the disposition date and ending on 12/31/2027 (275) and dividing by the number of days in calendar year 2027 (365).

In numerical terms, this is expressed as $3,100 minus ($760 multiplied by 0.7534) = $2,527.42. This amount is divided by 3 (the number of base years) to compute the $842.47 base amount. Claimant would therefore calculate its 2027 CIT credit using its $1,800 in calendar year 2027 MQREs and a base amount of $842.47.

For its calendar year 2028 credit, claimant would calculate its base amount for the period calendar years 2025-2027 by taking its MQREs for the period ($1,000, + $1,300 + $1,800 = $4,100), subtracting Research Division’s MQREs for the period ($250 + $300 + 115 = $665), and dividing by 3 ($3,435 divided by 3 = $1,145). Claimant would not apply any proration in subtracting Research Division’s MQREs for the base years because Research Division’s calendar year 2028 MQREs are not included in claimant’s credit calculation. Generally, any proration of the base period subtractions under IRC 41(f)(3)(B) only occurs in the disposition year.

Unitary Business Groups

Under the CIT, where a unitary business group (UBG) exists, it is the taxpayer. MCL 206.611. Consequently, where a corporation with MQREs is a member of a UBG, the UBG, not the corporation, would apply for and claim the Michigan R&D credit, and eligibility would be determined based on a calculation of the UBG’s MQREs and base amount. In calculating its base amount, a UBG must include a year in the denominator if it was a CIT taxpayer in that year and any member of the UBG had MQREs for that particular base year.

Example 15: Base Amount and MQRE Combination for a UBG

Salty Science Inc. is the designated member of a UBG that has been a CIT taxpayer since 2020 and that also includes members Products, Inc. and Widgets, Inc. The group will claim a Michigan R&D credit for expense year 2026, and its MQREs for its expense and base years are as follows:

The UBG computes its base amount and eligibility as follows:

1. Add the group’s combined 2023, 2024, and 2025 MQREs. $3,400,000 + $4,700,000 + $4,500,000 = $12,600,000
2. Divide the combined result by the number of years in which the UBG had MQREs. At least one member of the UBG had MQREs in each of the three base years. $12,600,000 divided by 3 = $4,200,00 base amount for the UBG
3. Compare expense year MQREs to base amount. For the 2026 expense year, the amount of the UBG’s combined MQREs, $5,600,000, is greater than the UBG’s base amount, $4,200,000; therefore, the UBG is eligible for a credit for its 2026 expense year.

Generally, a UBG does not include flow-through entities. Consequently, where a member of a UBG has an ownership interest in a flow-through entity, generally, the flow-through entity’s MQREs cannot be included in the UBG’s MQREs. To the extent the flow-through entity qualifies as an authorized business and an employer, it may be able to claim the withholding credit.

MQREs and Base Amount with Intercompany Expenses

Where one member of a UBG pays another member to perform services that result in MQREs, the UBG will claim the Michigan R&D credit based on the expenses of the member performing the services because those are the expenses ultimately incurred by the claimant UBG. To the extent the payments received by that member for those services exceed the expenses it incurred in performing them, the excess amount will not be used in determining the UBG’s credit. Because this accounting removes the duplicative effects of transactions between persons in the UBG, it satisfies the eliminations requirement under MCL 206.691(1).

Example 16: Intercompany (Intra-UBG) MQREs

UBG ABC, Inc. is comprised of members A, B, and C. Member B provides Michigan-based services to Member A that result in MQREs, and, in return, Member A pays B $100,000. Because these services benefit the UBG taxpayer, of which B is a member, they are treated like in-house research services under the CIT. However, only the expenses ultimately incurred by the claimant UBG qualify as MQREs. While Member A pays B $100,000 for the services, Member B only incurred $55,000 in expenses in providing the services. Under these facts, the UBG reports $55,000 in MQREs.

Base Amount for UBG Composition Changes

Similar to the discussion above regarding the calculation of the base amount following federal reorganizations and elections, the calculation of the base amount following changes to a UBG’s membership depends on whether the resulting UBG is considered the same taxpayer. Under the CIT, a UBG that has the same designated member following a change in membership is considered to be the same taxpayer. Accordingly, a UBG claimant must calculate its base amount and credit using the tax years for which it had the same designated member, regardless of any change in membership during that period.

In calculating its base amount, the claimant UBG should account for membership changes by using formulas similar to those set forth in IRC 41(f) for acquisitions and dispositions. Generally, when a member joins or leaves a UBG during a calendar year for which the UBG claims a credit, a prorated portion of that member’s MQREs for the UBG’s base period will be added to or subtracted from the UBG’s base amount calculation. In subsequent years, that member’s MQREs will be added to or subtracted from the UBG’s base amount calculation without proration. If the MQREs of the member were determined on a fiscal year basis, they will have to be redetermined on a calendar year basis using either actual calendar year numbers or the conversion method described in this RAB for the relevant calendar years.

Where a member files a claim for a credit as a separate CIT taxpayer for a partial calendar year prior to joining or after leaving a UBG, it will determine its base amount using all years in the base period for which it had MQREs, including years it was a member of the UBG, and by applying proration based on the percentage of the calendar year for which it is claiming the credit.

Where a UBG’s designated member changes following a change in membership, the resulting UBG will be treated as a new taxpayer for purposes of calculating the base amount. Consequently, when calculating a credit for the calendar year in which the membership change occurs, the resulting UBG will have a base amount of $0. In calculating any credit for that same calendar year, the old UBG will prorate its base amount calculation based on the percentage of the calendar year for which it is filing a return.

Example 17: UBG with Member Joining the Group (similar to an acquisition under IRC 41(f))

UBG ABC became a CIT taxpayer in calendar year 2024. Sometime in calendar year 2025, it added member D, which incurred MQREs in calendar years 2022-2025. UBG ABCD has the same designated member and FEIN as UBG ABC. Consequently, it is treated as the same taxpayer for CIT purposes.

In calculating a Michigan R&D credit for its calendar year 2025 expenses, UBG ABCD would first determine its base period. Because the UBG taxpayer, which is currently comprised of members A, B, C, and D, only became a CIT taxpayer in calendar year 2024, its base period would only include calendar year 2024.

UBG ABCD would calculate its base amount by taking its MQREs for calendar year 2024 (i.e., the MQREs of UBG ABC) and adding a portion of member D’s calendar year 2024 MQREs equal to member D’s total MQREs for calendar year 2024 multiplied by the percentage of calendar year 2025 for which member D was a member of UBG ABCD. In subsequent years, in determining its base amount, UBG ABCD would add member D’s MQREs for the base period without proration.

If member D filed a short-year return as a separate taxpayer for part of calendar year 2025 and claimed a Michigan R&D credit on that return for the MQREs it incurred in calendar year 2025 prior to joining UBG ABCD, it would calculate its base amount for purposes of that credit by adding its MQREs for the period  calendar years 2022-2024, multiplying that amount by the percentage of calendar year 2025 for which it was filing the return, and dividing by 3 (its number of base years).

Example 18: UBG with Member Leaving the Group (similar to a disposition under IRC 41(f))

Continuing with the above example, if member B, which was not the designated member, left UBG ABCD sometime in calendar year 2028, UBG ABCD would calculate any credit for its calendar year 2028 MQREs using the base period calendar years 2025-2027. UBG ABCD’s base amount would be equal to UBG ABCD’s MQREs for the base period minus a portion of member B’s MQREs for the base period equal to member B’s total MQREs for the base period multiplied by the percentage of calendar year 2028 for which member B was not a member of UBG ABCD. In subsequent years, the resulting UBG, UBG ACD, would not include any of former member B’s MQREs in determining the UBG’s base amount.

If member B filed a short-year return as a separate taxpayer for part of calendar year 2028 and claimed a Michigan R&D credit on that return for the MQREs it incurred in calendar year 2028 after leaving UBG ABCD, it would calculate its base amount for purposes of that credit by adding its MQREs for the period calendar years 2025-2027, multiplying that amount by the percentage of calendar year 2028 for which it was filing the return, and dividing by 3 (its number of base years). In future years, member B will simply add its MQREs for the prior 3 years and divide by 3.

Where a UBG’s designated member changes following a change in membership, the resulting UBG will be treated as a new taxpayer for purposes of calculating the base amount, and the old UBG, to the extent it claims a credit on a short-year return, will need to prorate its base amount.

Example 19: UBG with Designated Member Leaving the Group

Continuing with the above example, assume UBG ACD and its members have calendar year tax years. If member A, which was the designated member, left UBG ACD on 5/31/2029, UBG ACD would file a short-year return under member A’s FEIN for the period 1/1/2029 – 5/31/2029. The resulting UBG, UBG CD, would subsequently file a short-year return for the remainder of calendar year 2029 under the FEIN of member C (the new designated member). UBG ACD would calculate any credit for its calendar year 2029 MQREs (i.e., its MQREs incurred between 1/1/2029 and 5/31/2029) using the base period calendar years 2026-2028 and a base amount equal to UBG ACD’s MQREs for the period multiplied by the percentage of calendar year 2029 for which UBG ACD is filing a return (i.e., 41.37%) and divided by 3 (its number of base years). UBG CD, as a new taxpayer, would calculate any credit for its calendar year 2029 MQREs (i.e. its MQREs incurred between 6/1/2029 and 12/31/2029) using a base amount of $0.

Unadjusted Credit Amount

For a qualifying claimant, whether a fiscal year or calendar year filer, the unadjusted Michigan R&D credit amount (also referred to in this RAB as the “tentative claim”) is calculated each year based on MQREs incurred during the calendar year ending with or within the tax year (the “expense period”).

Example 20: Fiscal Filer’s Expense Period

Corporation A, a CIT taxpayer, has a fiscal tax year beginning 7/1/2025 and ending 6/30/2026 and incurs MQREs in calendar year 2025 that exceed its base amount. Corporation A files its tentative credit claim based on these MQREs once the application becomes available on January 1, 2026, and submits its application by April 1, 2026. The calendar year 2025 ends within Corporation A’s tax year ending 6/30/2026; therefore, Corporation A claims its credit based on 2025 MQREs on its annual CIT return for its tax year ending 6/30/2026.

A claimant may claim a Michigan R&D credit for a short tax year that ends within the calendar year expense period; however, such a claimant may need to file an extension to ensure that it is able to file its tentative claim and calculate its allowed credit amount before filing its final return.

Example 21: Short Tax Year Ending During Expense Year

Widget Corporation, a calendar year CIT filer, incurred MQREs for the period beginning 1/1/2026 and ending 7/15/2026, when its short tax year ended. Widget may claim a Michigan R&D credit for those MQREs on its 2026 annual CIT return, which under these facts would be due 11/30/2026. Claimants are not permitted to file tentative claims for 2026 calendar year expenses until 1/1/2027, so Widget will have to file its tentative claim for these expenses on or after that date, but no later than 3/15/2027 (see Tentative claim filing deadline below). Widget will not be able to file its annual return to claim the credit until Treasury posts its proration notice, which, for example, could be on 4/15/2027, after Widget’s annual return due date. Widget should request an extension to file its annual return, which, if valid, would give Widget until 7/31/2027 to file the return and claim the credit.

Standard Credit Calculation

The standard Michigan R&D credit is calculated as follows:

Example 22: Unadjusted Standard Credit for a Small Employer

Manufacturing Company has fewer than 250 employees and thus qualifies as a small employer. For its 2025 expense period, the company has a base amount of $100,000, MQREs totaling $2,000,000, and no MQREs that were incurred in collaboration with a Michigan research university. Manufacturing Company qualifies for the credit because its MQREs for the expense period exceed its base amount. It would calculate its Michigan R&D credit as follows:

1. 3% credit calculation: Multiply the base amount of $100,000 by 3%: $100,000 multiplied by 0.03 = $3,000

2. 15% credit calculation:

a. Subtract the base amount from the total MQREs: $2,000,000 minus $100,000 = $1,900,000

b. Multiply $1,900,000 by 15%: $1,900,000 multiplied by 0.15 = $285,000

3. Preliminary credit total: Add the 3% credit and the 15% credit amounts: $3,000 + $285,000 = $288,000

4. Apply small-employer credit limit: Since the maximum allowable standard credit for a small employer is $250,000, Manufacturing Co’s unadjusted credit is limited to $250,000

Example 23: Unadjusted Standard Credit for a Large Employer

Tech Industries has 250 or more employees and qualifies as a large employer. For its 2025 expense period, the company has a base amount of $1,000,000, MQREs totaling $22,000,000, and no MQREs that were incurred in collaboration with a Michigan research university. Tech Industries qualifies for the Michigan R&D credit because its MQREs for the expense period exceed its base amount. It would calculate its credit as follows:

1. 3% credit calculation: Multiply the base amount of $1,000,000 by 3%: $1,000,000 multiplied by 0.03 = $30,000

2. 10% credit calculation:

a. Subtract the base amount from the total MQREs: $22,000,000 minus $1,000,000 = $21,000,000

b. Multiply $21,000,000 by 10%: $21,000,000 multiplied by 0.10 = $2,100,000

3. Preliminary credit total: Add the 3% credit and the 10% credit amounts: $30,000 + $2,100,000 = $2,130,000

4. Apply large-employer credit limit: Since the maximum allowable standard credit for a large employer is $2,000,000, Tech Industry’s unadjusted credit is limited to $2,000,000

Calculating Employees

Employee is defined in the CIT as, “an employee as defined in section 3401(c) of the internal revenue code. A person from whom an employer is required to withhold for federal income tax purposes is prima facie considered an employee.” MCL 206.605(3). This definition applies to both the CIT credit and the withholding credit. While this definition establishes a presumption for identifying an employee, IRC 3401(c) and its accompanying regulations should be consulted when doing an employee count to determine whether the small- or large-employer credit applies.

Disregarded entities are generally required to withhold for their employees under federal law. Therefore, a taxpayer claiming the CIT credit may not count persons for whom a disregarded entity withholds for federal income tax purposes in determining whether it qualifies for the small- or large-employer credit unless the taxpayer concludes that such persons can be considered employees of the taxpayer under IRC 3401(c) and its accompanying regulations. In addition, the use of a professional employer organization (PEO) or third-party payroll service provider may impact a claimant’s employee count, depending on who is considered the employer under federal law. Specifically, a claimant may count only its own employees, and if a PEO or third-party payroll service provider is legally considered the employer, the claimant may not count those employees. A claimant that uses a PEO should consult IRC 3401(c) and its accompanying regulations in performing an employee count to determine which credit applies.

The number of employees must be determined using a point-in-time calculation. Consequently, if at any point in time during the calendar year expense period a qualifying claimant had 250 or more employees, it would claim the large-employer credit; otherwise, it would claim the small-employer credit.

Example 24: Employees of a Disregarded Entity Not Counted

ABC Corp. owns Single-Member LLC, a federally disregarded entity. For 2025, ABC Corp. and Single-Member LLC have combined MQREs of $70,000 and a base amount of $50,000. ABC Corp.’s peak employment level for 2025 was 230 employees and Single-Member LLC’s was 40 employees. ABC Corp. may not include Single-Member LLC’s employees in determining which credit applies unless those employees are considered the employees of ABC Corp. under IRC 3401(c) and its accompanying regulations. Assuming that exception doesn’t apply, because ABC Corp. has fewer than 250 employees, it would claim the small-employer credit.

Example 25: Employee Count with Use of PEO

Fun Corp. is a member of XYZ UBG. The UBG’s other members have a combined 200 employees in 2025. Fun Corp. contracts with Employer LLC, a PEO, to provide human resources, payroll, and benefits administration services for Fun Corp.’s 80 employees. Fun Corp. maintains control over the payment of wages. Under the IRC, Fun Corp. is considered the employer of its 80 employees, so those employees may be included in XYZ UBG’s total count for 2025. Because XYZ UBG had 280 employees in 2025, it would claim the large-employer credit.

Additional Credit for Research University Collaboration.

Claimants may claim an additional credit amount equal to 5% of any MQREs used in the standard credit calculation that were incurred in collaboration with a Michigan research university pursuant to a written agreement. This additional credit amount is capped at $200,000 annually per taxpayer.

Note: This additional credit requires an agreement between the taxpayer and the research university. When acquisitions and dispositions occur or when members join or leave a UBG, the taxpayer with the agreement may end up being different from the taxpayer performing the research. In some cases, it may be necessary for a new agreement to be entered into between the claimant and the research university in order for the research performed by an acquired division or a new member of a UBG to continue to qualify for the additional 5% credit.

Research university is defined as, “a public university described in section 4, 5, or 6 of article VIII of the state constitution…or an independent nonprofit college or university in [Michigan].” MCL 206.677(8)(d) and MCL 206.717(8)(d).

Example 26: Unadjusted Standard Credit for a Small Employer with Research University Collaboration

Innovation Inc. qualifies as a small employer. For its 2025 expense period, the company has a base amount of $1,000,000, and MQREs totaling $4,500,000, all of which were incurred in collaboration with a Michigan research university. Innovation Inc. qualifies for the credit because its MQREs for the expense period exceed its base amount. It would calculate its Michigan R&D credit (standard + additional) as follows:

1. 3% credit calculation: Multiply the base amount of $1,000,000 by 3%. $1,000,000 multiplied by 0.03 = $30,000

2. 15% credit calculation:

a. Subtract the base amount from the total MQREs: $4,500,000 minus $1,000,000 = $3,500,000

b. Multiply $3,500,000 by 15%: $3,500,000 multiplied by 0.15 = $525,000

3. Preliminary credit total: Add the 3% credit and the 15% credit amounts: $30,000 + $525,000 = $555,000

4. Apply small-employer credit limit: Since the maximum allowable standard credit for a small employer is $250,000, Innovation Inc.’s standard credit is limited to $250,000

5. Preliminary additional credit: Multiply the MQREs incurred in collaboration with a research university by 5%: $4,500,000 multiplied 0.05 = $225,000

6. Apply additional credit limit: Since the maximum allowable additional credit is $200,000, Innovation Inc’s additional credit is limited to $200,000

7. Calculate total unadjusted credit: Add the standard credit and the additional credit amounts: $250,000 + $200,000 = $450,000

Unitary Business Groups

As noted above, under the CIT, where a UBG exists, it is the taxpayer. Consequently, in claiming the CIT credit, a UBG will make all calculations (e.g., number of employees, total MQREs, base amount, maximum Michigan R&D credit amount, and any applicable proration) at the UBG level.

Example 27: Counting Employees for a UBG

Cat Co. and Mouse Co. comprise a UBG that will claim a Michigan R&D credit under the CIT. Cat Co. has 100 employees and Mouse Co. has 200 employees. Cat and Mouse combine their number of employees, which total 300, and thus the UBG calculates its credit as a large employer.

As discussed earlier, generally, a UBG does not include flow-through entities. Consequently, where a UBG member has an ownership interest in a flow-through entity, the flow-through entity’s employees generally may not be included in the UBG’s employee count. To the extent the flow-through entity qualifies as an authorized business and an employer, it may be able to claim the withholding credit.

Tentative Claim Requirement

To be eligible for the Michigan R&D credit, a claimant must first timely submit, in a form and manner prescribed by Treasury, a tentative claim identifying the unadjusted credit amount and including certain information required for the proper administration of the credit.

Tentative Claim Filing Deadline

For MQREs incurred during the 2025 calendar year, all claimants with tax years beginning in 2025, including both calendar year and fiscal year CIT taxpayers, and flow-through entities filing withholding tax returns, must submit their tentative claims no earlier than January 1, 2026, and no later than April 1, 2026.

For MQREs incurred in calendar years after 2025, all claimants must submit their tentative claims for the calendar year no earlier than January 1 and no later than March 15 of the following year (e.g., for MQREs incurred in calendar year 2026, all claimants with tax years beginning in 2026, including fiscal year CIT taxpayers, must submit their tentative claims by March 15, 2027).

A tentative claim must be filed timely to claim the R&D credit, and tentative claims will not be accepted by Treasury after the statutory filing deadline. Tentative claims must be made using actual—not estimated—expenses, as those expenses will be used in any required proration calculation. If a tentative claim needs to be amended, the claimant may amend its claim before the statutory filing deadline.

Example 28: Fiscal Year CIT Filer Claiming Credit for 2026 MQREs

Claimant incurs MQREs in calendar year (expense year) 2026 in excess of its base amount and is a CIT taxpayer eligible to claim the Michigan R&D credit. Claimant is a fiscal year filer with a tax year ending on October 31. Claimant must file its tentative credit claim for calendar 2026 MQREs no later than March 15, 2027.

Tentative Claim Contents

Under MCL 206.677(3) and MCL 206.717(3), a tentative claim must include the unadjusted credit amount and, at a minimum:

• Whether the credit being claimed is the small-employer or large-employer credit;
• The amount of MQREs incurred for which a credit is being claimed; and
• Whether the additional credit for research university collaboration is being claimed.

Treasury may prescribe additional information to be included in a tentative claim and requires the following:

• The type of tax/taxpayer applying for the credit (withholding or CIT, and whether the applicant is a UBG);
• The amount of MQREs incurred in the previous 3 calendar years;
• The applicant’s number of employees;
• The amount of MQREs incurred in collaboration with a Michigan research university, if applicable;
• The name and address of the Michigan research university, if applicable;
• If the applicant is a UBG, each UBG member’s name, FEIN, and expense year’s MQREs, and whether the member collaborated with a Michigan research university; and
• A certification, under penalty of perjury, that the information provided in the application is true and complete to the best of the signor’s knowledge.

Adjusted Credit

The total amount of all Michigan R&D credits that may be claimed by all claimants for a calendar year is limited to $100M. If total tentative claims (shortened to “claims” for purposes of this section) exceed this amount, statutory proration provisions will apply to reduce the allowed credit for all or certain claimants.

Statutory Proration

Depending on the dollar amount of claims filed for the small-employer and large-employer credits, proration could affect only large-employer claimants, each type of claimant separately, or both types of claimants collectively. MCL 206.677(3) and MCL 206.717(3). Specifically:

• If small-employer claims are equal to or less than $25M, only large-employer claims will be prorated, based on the amount remaining after deducting the small-employer claims from $100M
• If small-employer claims are more than $25M but not more than 25% of all claims, small-employer claims and large-employer claims will be separately prorated. Small-employer claims will be prorated based on $25M in available credits, and large-employer claims will be prorated based on $75M in available credits
• If small-employer claims are more than $25M and more than 25% of all claims, small-employer claims and large-employer claims will be collectively prorated based on the full $100M of available credits

Example 29: Proration for Large Employers Only

For 2025, tentative claims total $110M, with $10M in small-employer claims and $100M in large-employer claims. A small employer submitting a tentative claim for $100,000 would receive a $100,000 credit. A large employer submitting a tentative claim for $1M would receive a credit of $900,000 ($1M claim multiplied by ($90M in remaining available credits divided by $100M in large-employer claims)). Treasury would publish the small-employer rate as 100% and the large-employer rate as 90% (See Treasury’s proration notice below).

Example 30: Different Proration for Large and Small Employers

For 2025, tentative claims total $190M, with $40M (21% of total claims) in small-employer claims and $150M in large-employer claims. Because the percentage of small-employer claims does not exceed 25% of all claims, separate proration applies. A small employer submitting a tentative claim for $100,000 would receive a $62,500 credit ($100,000 claim multiplied by ($25M in available credits divided by $40M in small-employer claims)). A large employer submitting a tentative claim for $1M would receive a credit of $500,000 ($1M claim multiplied by ($75M in available credits divided by $150M in large-employer claims)). Treasury would publish the small-employer rate as 62.5% and the large-employer rate as 50%.

Example 31: Same Proration for Large and Small Employers

For 2025, tentative claims total $125M, with $40M (32% of total claims) in small-employer claims and $85M in large-employer claims. Because the percentage of small-employer claims exceeds 25% of all claims, collective proration applies. A small employer submitting a tentative claim for $100,000 would receive an $80,000 credit ($100,000 claim multiplied by ($100M in available credits divided by $125M in total claims)). A large employer submitting a tentative claim for $1M would receive a credit of $800,000 ($1M claim multiplied by ($100M in available credits divided by $125M in total claims)). Treasury would publish both the small- and large-employer rates as 80%.

If proration is triggered, it must be applied to the tentative claim amount unless that amount exceeds the allowed claim. Thus, if a claimant later determines its tentative claim was too low, the claimant must prorate its tentative claim, and not the higher amount. If a claimant later determines that its tentative claim was too high, the claimant must prorate the corrected (lower) amount.

Example 32: Claimant Underreports Tentative Claim

For 2025, Acme Inc. files a tentative claim for a large-employer credit for $1M. Total credit claims exceed $100M and proration is triggered for that year. The large-employer proration rate is determined to be 75%, resulting in Acme Inc. calculating a $750,000 credit. Acme Inc. later discovers it undercounted its MQREs and that its unadjusted credit should have been $1.1M. Acme Inc. cannot apply the proration rate to this higher amount. Its credit is capped at $750,000.

Example 33: Claimant Overreports Tentative Claim

Same facts as above except that Acme Inc. discovers it overcounted its MQREs and that its unadjusted credit should have been $900,000. Acme Inc. must apply the proration rate to this lower amount, resulting in a credit of $675,000.

Treasury’s Proration Notice

Treasury will publish a notice on its website notifying claimants whether adjustments are required to the tentative claims for the expense year and the rate of any such adjustments. Once Treasury has published this notice, taxpayers will be eligible to claim the credit, adjusted as necessary, on their annual returns filed after the end of the taxpayer’s applicable tax year.

Treasury’s published notice will be a general notice that announces whether proration is required for each type of claimant and will not contain taxpayer-specific information; however, MCL 206.718 requires certain taxpayer-specific information to be reported to the governor and the legislature, including each claimant’s name and allowed credit amount. It is anticipated that Treasury’s notice will be published before the annual return deadline for calendar year CIT filers (i.e., April 30 after each expense year).

Claiming the Michigan R&D Credit

A CIT taxpayer must claim the Michigan R&D credit with its annual return for the tax year for which the credit is claimed; whereas a flow-through entity filing a withholding tax return must claim the credit with its annual return for the tax year in which its tentative claim was filed. The tax year for which a CIT taxpayer claims the credit is the tax year with which or within which the expense period ends. The tax year in which a flow-through entity will submit its tentative claim (application) is the tax year following the end of the expense period. Annual return credit claims can only be filed after the claimant has filed its tentative credit claim and Treasury has published its proration notice for the expense year.

Example 34: Timing of Credit Claims

For MQREs incurred in calendar year 2025 (the 2025 “expense period”):

• A calendar year CIT taxpayer would claim the credit with its 2025 CIT return.
• A fiscal year CIT taxpayer would claim the credit with its CIT return for its tax year beginning in 2025 (on 2025 forms). For instance, a fiscal filer whose tax year begins on November 1, 2025, and ends October 31, 2026, will submit its tentative claim by April 15, 2026, and will claim this credit on the return for its tax year ending October 31, 2026.
• A flow-through entity filing a withholding tax return would claim the credit with its 2026 withholding tax return (due February 28, 2027). This entity could begin reducing its 2026 periodic withholding payments as soon as Treasury issues its tentative claim proration notice for 2025 expenses.

A flow-through entity that will claim a Michigan R&D credit on its annual withholding return may reduce its periodic withholding payments accordingly for that tax year once Treasury issues its proration notice (described above). If a liability exists on its annual withholding return, the flow-through entity will be subject to penalty and interest for deficiencies for any of the periods that were underpaid.

The Michigan R&D credit is refundable and must be claimed after all nonrefundable credits. A member of a flow-through entity that submits a claim for a credit is not allowed to claim any portion of that credit.

If a flow-through entity uses the services of a third-party payroll service provider and that service provider has appropriate authorization, the third-party payroll service provider would generally file returns and pay withholding on the flow-through entity’s behalf. In that case, either the payroll service provider or the flow-through entity, but not both, could claim the Michigan R&D credit on the annual withholding return. If the flow-through entity files an annual return, it should not duplicate withholding liability. Only the filer that will ultimately claim the credit on an annual return is permitted to offset its periodic withholding payments, in accordance with other limitations.

Prohibition on Assignment or Transfer

A claimant is not permitted to assign or transfer any portion of the Michigan R&D credit, and assignments or transfers by agreement or operation of law are prohibited. MCL 206.677(6) and MCL 206.717(6). A reorganization where the original business and the reorganized business are considered the same taxpayer under federal law does not result in an assignment or transfer of the credit by operation of law. As discussed earlier, following such a reorganization, the reorganized business is still permitted to claim a credit based on the predecessor’s base and expense year MQREs, as applicable. A reorganization that results in an entity that is considered a different taxpayer under federal law would be an assignment or transfer, and the resulting entity would not be allowed to claim the prior entity’s credit.

MBT Taxpayers Computing the CIT Hypothetical Liability

MBT taxpayers may not use the Michigan R&D credit to calculate their hypothetical CIT liability under MCL 208.1500(4)(b) because credit eligibility depends on the performance of certain actions that can only be performed by CIT taxpayers, such as the timely filing of a tentative credit claim under the CIT. While subsection (4)(b) instructs an MBT taxpayer to calculate its hypothetical CIT liability as if it were subject to the CIT, it does not permit the taxpayer to assume the satisfaction of conditions needed to qualify for the credit that only a CIT taxpayer may perform. However, a different R&D credit may be available for an MBT taxpayer under MCL 208.1405.

Example 35: MBT Taxpayer with MQREs

An MBT taxpayer with MQREs is calculating its hypothetical CIT liability under MCL 208.1500(4)(b). That provision instructs a taxpayer to calculate its hypothetical liability, after the application of all credits, deductions, and exemptions under the CIT, as if the taxpayer were subject to the CIT. If the taxpayer were subject to the CIT, it would have to timely file a tentative credit claim to qualify for the Michigan R&D credit. As an MBT filer, the taxpayer is not eligible to file a tentative claim under the CIT, and because timely filing of such a claim is a condition for claiming the CIT credit, the taxpayer cannot determine whether it would have been eligible to claim the credit under the CIT. Accordingly, the taxpayer cannot apply the Michigan R&D credit in calculating its hypothetical CIT liability.