Michigan Issues Detailed Guidance on Claiming Refundable R&D Credit

The Michigan Department of Treasury has released Revenue Administrative Bulletin (RAB) 2026-4 to provide guidance and explain the process of claiming the research and development (R&D) credit available under Parts 2 and 3 of the Michigan Income Tax Act. The RAB complements Treasury’s discussion of the credit regime, with numerous examples to guide taxpayers (see our previous Alert, Michigan Introduces New R&D Tax Credit).

The guidance varies based on whether the claimant pays corporate income tax (CIT) or is a flow-through entity subject to withholding. However, for either type of taxpayer, the credit is available starting with R&D expenses incurred during the 2025 calendar year with the first statutory filing deadline of April 1, 2026. Both fiscal- and calendar-year taxpayers must compute their Michigan qualified research expenses (MQREs) for credit year and base period on a calendar-year basis. Further, claimants cannot use statistical sampling to calculate their MQREs. 

The 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 CIT or Michigan business tax (MBT). They also must have increased their Michigan qualified research expenses (MQREs) relative to a base amount.

For a claimant with fewer than 250 employees (small employer), the credit is 3% of MQREs up to the base amount plus 15% of MQREs above the base amount and is limited to $250,000 per taxpayer. For a claimant with at least 250 employees (large employer), the credit is 3% of MQREs up to the base amount plus 10% of MQREs above the base amount and is limited to $2 million per taxpayer. 

Claimants can claim an additional credit equal to 5% of the MQREs incurred in collaboration with a Michigan research university. That additional credit is capped at $200,000 annually per taxpayer.

Qualifying Claimants

As noted, eligible claimants can claim R&D credits only for tax years beginning on and after January 1, 2025. However, a CIT taxpayer that has a 52-53 week tax year beginning in the last week of December 2024 might also qualify if otherwise eligible.

A claimant must be an authorized business to qualify for the credit. For the CIT credit, an authorized business is a taxpayer as defined under the CIT (MCL 206.611(5)) with MQREs exceeding the base amount. 

For the withholding credit, an authorized business is a flow-through entity subject to Michigan income tax withholding with MQREs exceeding the base amount. Only employers as defined under Section 3401(d) of the Internal Revenue Code (IRC) can claim the withholding credit. 

Calculating Employees

In calculating number of employees, a taxpayer applies the definition of the word “employee” in IRC Section 3401(c) using a point-in-time calculation for both CIT and withholding credit purposes. Under that rule, if at any point during the calendar-year expense period a qualifying claimant had at least 250 persons from whom it had to withhold for federal tax purposes, it would claim the large-employer credit; otherwise, it would claim the small-employer credit.

A taxpayer claiming the CIT credit cannot count the employees of any disregarded entity in its employee count in determining whether the taxpayer is a small or large employer. Also, taxpayers that use a professional employer organization (PEO) or third-party payroll service provider could affect a claimant’s employee count. See RAB Examples 24 and 25 for explanations of those concepts.

Computing Base Amount

Both fiscal- and calendar-year claimants must compute their base amounts using MQREs reported on a calendar-year basis.

If a claimant had MQREs in only some of the preceding three calendar years, its base amount would be calculated using only the years it had MQREs and would not include in the denominator any calendar year when it did not incur MQREs. Further, any of the three preceding calendar years that includes a partial calendar year should be treated as a full calendar year.

Consider X Co., a claimant that incurred MQREs in Years 1 and 3 but not Year 2. In calculating its base amount, X Co. would add its MQREs for Years 1 and 3 and divide by only two in determining its base amount. If instead X Co. had been in existence for only two-and-a-half of the three calendar years preceding the expense year for which a credit is being claimed and incurred MQREs in each year, it would calculate its base amount by adding its MQREs over that the entire period but would divide by three, not two-and-a-half.

Reorganization can affect how a taxpayer calculates its base amount. If, after reorganization, the claimant and former entity are considered the same taxpayer, the base amount is calculated using the former entity’s applicable base years only. If a reorganization results in a new taxpayer, that taxpayer is a different authorized business from the former entity and must calculate its base amount independently of the former business.

Following an acquisition or disposition of a trade or business, claimants should follow IRC Section 41(f) in calculating their base amounts. That section requires a claimant to adjust its base amount by adding or subtracting the prorated base-year MQREs of the business acquired or disposed of.

Unitary Business Groups

Under the CIT, if a unitary business group (UBG) exists, the UBG is considered the taxpayer. Thus, in claiming the CIT credit, a UBG will make all calculations (e.g., number of employees, total MQREs, base amount, maximum credit amount, and any applicable proration) at the UBG level.

Consider an example. A Corp. and B Corp. make up a UBG that will claim an R&D credit under the CIT. A has 100 employees and B has 200. The two corporations combine their employees for a total of 300 and thus calculate the credit as a large employer. 

When one member of a UBG pays another to perform MQRE services, the UBG will claim the credit based on the expenses of the member performing the services. If the payments received by that member exceed its expenses, the excess amount is not used in determining the UBG’s credit.

As with 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 after a change in membership is considered the same taxpayer. Thus, a UBG claimant must calculate its base amount and credit using the tax years when it had the same designated member, regardless of any change in membership during that period. Further, in calculating its base amount, the claimant UBG cannot adjust its MQREs for prior years based on membership changes. That is because under the CIT, the taxpayer is the total UBG membership in each year, not just the collection of members that continue in the UBG for a given period. In cases of acquisitions or dispositions, the claimant UBG should follow IRC Section 41(f) when determining its base amount. RAB Example 17 addresses that concept.

When a UBG’s designated member changes because of a change in membership, the resulting UBG will be treated as a new taxpayer when calculating the base amount. See RAB Example 18 for an explanation of that concept.

Proration

Michigan has limited the total amount of all R&D credits for any calendar year to $100 million ($25 million for small employers and $75 million for large employers). If tentative total claims exceed that amount, statutory proration provisions will reduce the credit for all or some claimants. Proration is determined by employer group. RAB Examples 29-31 explain those concepts.

If proration is triggered, it must be applied to any tentative claim amount that does not exceed the allowed claim amount. So, if a claimant later determines its tentative claim was too low, it must prorate its tentative claim, not the higher amount. If a claimant later determines that its tentative claim was too high, it must prorate the corrected (lower) amount. RAB Examples 32 and 33 explain those concepts.

According to the RAB, the Michigan Treasury will publish a notice if claimants must adjust their tentative claims to account for proration.

Timing of Credit Claims

CIT payers must claim the R&D credit with their annual returns for the tax year in which the credit is claimed, which is the tax year when the expense period ends. Flow-through entities filing a withholding return must claim the credit with their sales, use and withholding taxes annual return for the tax year in which the tentative claim was filed, which is the tax year following the end of the expense period. Flow-through entities can begin reducing their 2026 periodic withholding payments as soon as Treasury issues its tentative claim adjustment notice for 2025 expenses.

For MQREs incurred in calendar year 2025, all claimants with tax years beginning in 2025 must submit their tentative claims by April 1, 2026. For MQREs in later calendar years, all claimants must submit their tentative claims between January 1 and March 15 of the following year.

For MQREs incurred in calendar year 2025:

• 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 (using 2025 forms). For instance, a fiscal filer whose tax year ends October 31 would submit its tentative claim by April 1, 2026, and would claim the credit on its return for the 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). It could begin reducing its 2026 periodic withholding payments as soon as Treasury issues its tentative claim adjustment notice for 2025 expenses.