With the initial application cycle now largely complete, taxpayers have gained firsthand experience with Michigan’s newest business incentive. From Treasury guidance and eligibility clarifications to the state’s proration notice, businesses now have a much better understanding of what it takes to successfully secure and maximize the Michigan research and development (R&D) tax credit.
Perhaps most importantly, the first year demonstrated just how much interest exists among Michigan businesses performing research and development activities. While the program continues to mature, organizations that begin planning today can position themselves for a smoother filing process and potentially maximize available benefits in future years.
Here are five key lessons from Michigan’s first R&D tax credit cycle and what taxpayers should consider doing now.
Lesson 1: The credit remains valuable — even after proration
The most widely discussed development from the inaugural filing cycle was Treasury’s issuance of a proration notice after aggregate credit applications exceeded the program’s annual funding limits.
While proration results in reduced final credit awards, the broader takeaway from the first filing cycle remains overwhelmingly positive. Michigan businesses demonstrated significant demand for the credit, and many taxpayers still received meaningful benefits that improved the return on their investments in innovation and development activities.
For years, Michigan businesses operated without access to a broad-based state R&D credit. The fact that demand exceeded available funding in the program’s first-year highlights both the value of the credit and the level of statewide qualifying activity.
Rather than viewing proration as a deterrent, taxpayers should view it as confirmation that the credit is generating substantial interest and delivering real economic value. Even when a credit is ultimately reduced through the allocation process, the benefit can still be significant enough to justify the effort required to identify, document, and claim eligible expenditures.
Businesses should certainly factor the possibility of future proration into their planning and financial projections. However, the potential for future allocation adjustments shouldn’t overshadow a much more important reality: Michigan’s R&D credit has created a meaningful incentive for businesses investing in innovation.
Lesson 2: Early preparation creates a significant advantage
One of the most common observations from the first filing cycle was that organizations that began evaluating eligibility and gathering information early generally experienced a more efficient filing process.
Many businesses are accustomed to addressing tax incentives during return preparation. Michigan’s R&D credit requires a more proactive approach due to an early application due date, which will be March 15 starting with 2026 claims. Identifying qualified research activities, gathering supporting documentation, and completing the application process often requires coordination across multiple departments, including engineering, operations, accounting, payroll, and tax.
Organizations that wait until the application deadline approaches may find themselves scrambling to assemble information that could have been accumulated throughout the year.
Those that start planning now have an opportunity to establish processes, identify qualifying projects, and collect supporting documentation as activities occur. This should lead to more accurate calculations, stronger substantiation, and fewer administrative challenges as the application deadline approaches. The companies best positioned to maximize the credit will likely be those that have begun capturing information and evaluating eligibility well in advance.
Lesson 3: More businesses may qualify, and benefit, than many realize
One of the biggest surprises from the first filing cycle was the number of businesses that initially assumed they either didn’t qualify for the credit or wouldn’t receive meaningful value from it.
Many taxpayers continue to associate R&D incentives primarily with technology companies, laboratories, or scientific research organizations. In reality, qualifying activities occur across a wide range of industries. Manufacturers develop new products and improve production processes, construction companies solve unique engineering challenges, software developers create new applications and functionality, and businesses across numerous sectors routinely engage in technical problem-solving that may satisfy the requirements for qualified research.
However, industry misconceptions weren’t the only barrier. Many taxpayers who historically received limited or no benefit from the federal research credit initially overlooked the Michigan credit despite being well-positioned to benefit from the state’s program.
For example, employee-owned flow-through entities, including many ESOP-owned businesses, often have limited opportunities to realize immediate value from federal research credits because the federal credit generally offsets income tax liabilities. Since many ESOP-owned businesses don’t pay federal income taxes, they can’t benefit from the same economic benefit that federal research credits generate for other taxpayers.
Michigan’s flow-through R&D credit, however, can create value by offsetting Michigan payroll withholding tax obligations, providing an incentive opportunity that many employee-owned businesses may have not previously considered.
Similarly, C corporations generating significant federal net operating losses often receive little immediate benefit from nonrefundable federal research credits because those credits will only be carried forward until future taxable income is generated. Michigan’s refundable credit structure can create a very different outcome. Even when a taxpayer has little or no current Michigan income tax liability, the credit may still generate an immediate cash benefit through the refund process.
These distinctions highlight an important point: Businesses shouldn’t assume that their experience with the federal research credit determines whether the Michigan credit is worth pursuing. In many cases, taxpayers that historically received little immediate value from federal incentives may find that Michigan’s credit structure creates a meaningful and more immediate financial benefit.
Lesson 4: Organizational structure may also affect eligibility
The first filing cycle also highlighted a less obvious consideration for certain flow-through entities: Eligibility for the Michigan withholding tax credit isn’t based solely on whether the business performs qualifying research activities.
Treasury guidance indicates that, to claim the withholding tax version of the credit, a taxpayer must be an “authorized business.” For flow-through entities, this includes being a qualifying flow-through entity subject to Michigan income tax withholding and meeting the applicable employer requirements. Treasury further clarified that federally disregarded entities aren’t considered qualifying flow-through entities for purposes of the withholding credit, and that only an employer may claim the credit.
As a result, some business structures that otherwise incur significant Michigan qualified research expenses may discover that they’re not eligible for the withholding tax credit because the entity conducting the research isn’t the same legal entity as the entity serving as the employer. In practice, this issue often arises when a parent flow-through entity conducts operations through one or more wholly owned disregarded entities that handle payroll and employment functions. Treasury’s guidance suggests that these facts may prevent otherwise qualifying businesses from claiming the withholding credit.
At the same time, the guidance may create planning opportunities for certain taxpayers. Some businesses may wish to evaluate whether modifications to payroll, employment, or legal entity structures could improve eligibility for future years.
While an opportunity may exist, taxpayers should exercise caution before implementing any changes solely for credit purposes. These considerations involve complex questions regarding federal and state tax law, payroll administration, legal entity structure, employer status, and overall business operations. The appropriate treatment will depend heavily on the taxpayer’s specific facts and circumstances. Any potential restructuring should be carefully evaluated in consultation with qualified tax and legal advisors.
The broader lesson is that eligibility for the Michigan credit may not always align with expectations based solely on whether research activities are performed. Businesses that previously assumed they were ineligible may benefit from a closer review, while others may identify planning opportunities that merit further analysis before the next filing cycle to take advantage of this benefit.
Lesson 5: The most successful claims involve cross-functional collaboration
Calculating a Michigan R&D credit is rarely a tax-only exercise.
The businesses that were most prepared during the first filing cycle were typically those that involved multiple stakeholders early in the process. Tax and finance personnel may understand the reporting requirements, but engineering, product development, operations, project management, and payroll personnel often possess the information necessary to identify and support qualifying activities.
Creating communication channels between these groups can significantly improve the quality and efficiency of a claim.
As organizations look toward future filing cycles, they should consider identifying key internal stakeholders now and establishing a process for periodically discussing ongoing development activities. The result is often a more complete understanding of qualifying projects, stronger supporting documentation, and a more accurate credit calculation.
Prepare before the year-end
Although the 2026 tax year application deadline may still seem distant (March 15, 2027), the best time to prepare is before year-end.
Businesses should consider engaging advisors early to help evaluate eligibility, documentation requirements, filing considerations, and assist with additional preparation action items, including:
- Evaluate current projects for potential qualified research activities.
- Identify employees involved in technical problem-solving and development efforts.
- Review existing documentation practices and determine whether enhancements are needed.
- Evaluate whether ownership structure, payroll structure, or entity organization could impact eligibility.
- Establish communication between tax, finance, engineering, payroll, and operational leadership.
- Estimate potential credit benefits and incorporate them into planning discussions.
Organizations that begin planning today will likely be better positioned to navigate next year’s application process and maximize available credits.
Looking ahead
Michigan’s reinstated R&D tax credit has quickly established itself as one of the state’s most significant business incentives. While the first filing cycle provided valuable lessons for taxpayers, it also demonstrated the strong demand for a program that rewards innovation and investment within the state.
The businesses that achieve the greatest success in future years will likely be those that use the lessons learned from the inaugural filing cycle to prepare proactively. By evaluating eligibility early, strengthening documentation practices, understanding structural considerations, and engaging the right stakeholders, taxpayers can put themselves in position to take full advantage of the opportunity the Michigan R&D tax credit provides.
The most important takeaway from the program’s first year isn’t that credits were prorated or that filing requirements were complex. Rather, it’s that Michigan businesses across a broad range of industries, ownership structures, and tax profiles successfully unlocked meaningful value from activities they were already performing.
For organizations investing in innovation, product development, process improvement, automation, software development, construction methodologies, manufacturing improvements, or technical problem-solving, now is the time to start preparing for the next application cycle.
Those that begin planning today will be best positioned to maximize the opportunity tomorrow.
Key takeaways
- Michigan’s R&D tax credit can provide value even after credit proration.
- Businesses that prepare early are better positioned to maximize available credits.
- R&D credit eligibility extends beyond traditional technology and research companies.
- Taxpayers should evaluate ownership and payroll structures before filing.
- Successful R&D credit claims rely on coordination across tax, finance, engineering, and operations teams.
