Early fall 2023 saw a package of bills introduced that would reestablish a state research & development R&D) tax credit in Michigan – HBs 5099, 5100, 5101 and 5102. Ever since Michigan moved from the Michigan Business Tax regime to the current Corporate Income Tax regime twelve years ago, Michigan taxpayers have not been afforded a state tax credit for their R&D expenditures.
As proposed, taxpayers and authorized businesses with 250 or more employees could claim up to $2.0 million per taxpayer or business, respectively, per year. Taxpayers and authorized businesses with fewer than 250 employees (i.e., a “small” business) could claim up to $250,000 per taxpayer or business, respectively, per year. Additionally, taxpayers or employers could claim up to $200,000 in an additional credit for expenses from collaboration with a research university. The aggregate amount of R&D credits could not exceed $100.0 million (of which $25 million would be set aside solely for small businesses), and if they did, the Department of Treasury (DoT) would have to prorate the credits as prescribed by the bills. The bills would require the DoT to submit an annual report concerning the effectiveness and operation of the proposed R&D tax credits.
Michigan’s proposed credit will be a boost to taxpayers, particularly small businesses and start-ups. The immediate cash savings from the credit allow taxpayers to invest in their businesses, hire employees, launch new products, encourage capital expenditures to build out a lab or expand a production facility. These tax savings are in addition to any federal R&D credit for which Michigan taxpayers are already eligible.
Initially, the bills proposed that the credit be administered via the Michigan Strategic Fund. MichBio along with many other statewide stakeholder organizations argued loudly that such an administrative process would be too unwieldy and bureaucratic and undermine its appeal to companies, especially early-stage ventures. Prior to final passage in the House, the bills were revised completely to allow the credit to be administered by DoT as part of annual state tax filings.
Much credit for the proposed legislation is due to the efforts of Rep. Julie Rogers (D-Kalamazoo, and a Michigan Biosciences Legislative Caucus co-chair, who sought close counsel from MichBio regarding the essential elements needed to develop the credit. She was/is a strong champion for the life sciences cluster and understands keenly the benefit that a R&D tax incentive would bring to companies.
The federal R&D credit already offers Michigan taxpayers roughly 10% of its QRE in the form of a tax credit. Should the Governor sign this legislation, Michigan taxpayers could potentially receive a combined federal and state credit up to 25% of its total qualified research expenses. This could make Michigan a very attractive state in which to start a business. For those businesses already operating in the state, this credit could provide huge tax savings for activities they are already conducting.
Regrettably, while the R&D tax credit bills moved rapidly (almost too much so) to passage in the waning days of the fall legislative session, including bypassing a Senate Committee hearing and vote completely, it failed on the full Senate floor in the last hours before recess because of other political dynamics at play.
MichBio continues to work with Rep. Rogers and Senate legislators on the bills. We seek some revisions to the language as proposed in our testimony, particularly as is relates to small businesses.
First, we believe that the threshold for defining a “small” business should be lowered to 100 employees or less. This would ensure that true early-stage and growth stage ventures will have fair access to credit funds. Secondly, we’ve argued strongly that any tax credit for small businesses should be fully refundable if there are no tax liabilities, as this is a significant consideration for early-stage, bioscience companies with no products on the market and hence no profits. Also, the definition of a “research university” should be changed to “research institution” so that it encompasses any institution involved in academic or clinical research whether part of a university or not. Lastly, MichBio had suggested from the outset, that expenses related to initial patent and regulatory filings be eligible as research expenses. Such a qualification would be a boon to small start-ups who must expend precious funds to cover those activities.
We’re confident that the Michigan R&D Tax Credit will pass in 2024, the only question is how long it will it take to resolve partisan differences over other related economic development legislation to which the tax credit bills seems to be tethered.