By Michael Siegel and Anna Nika
July 21, 2011
Michigan offers several business tax incentives that can help local companies by driving development and creating jobs. Specifically, the Michigan Research and Development (R&D) tax credit has been effective in lightening the load of tax liability and providing companies with additional dollars for new machinery and employees.
We’ve all read in the papers and magazines about the big companies keeping their taxes low - and the R&D tax credit is the number one credit that the big companies use to reduce their federal tax burden. Small and medium businesses need to sharpen their pencils and take advantage of the R&D tax credit to reduce their taxes.
The key problem we see in working with Michigan businesses is that they wrongly believe that they don’t qualify for the R&D tax credit. Too often, businesses think that the R&D credit at both the federal and state level is just for businesses with people in labs and patents. Nothing could be more incorrect. The R&D tax credit - one of the biggest at the federal level - is a applicable to a wide variety of industries. Unless your company is making the exact same widget the exact same way - you are probably doing R&D and may be eligible for the credit. We have found particularly in Michigan that architects, engineers, and software developers often do not understand that their work could very well qualify for the R&D credit.
The state of Michigan has adopted the federal criteria to qualify research and development activity - so useful for business - you qualify for one you qualify for the other. Starting with the 2009 tax year, a taxpayer may claim a credit equal to 1.90 percent of the taxpayer’s research and development expenses in Michigan during the tax year (in 2008, the credit was 1.52 percent of qualified research expenses). Although 1.90 percent may not seem substantial at first, the R&D credit, coupled with the federal credit, has significantly affected Michigan companies taking advantage of the credit.
Here are some examples to highlight how this tax credit can bring real benefit:
Case #1 – A manufacturing and tool and die company (“ManufactureCo”) designs and develops plastic injection and die cast molds that produce parts to the precise specifications for numerous applications including the automotive, home appliance and aeronautic industries. ManufactureCo also designs and develops supporting tools and applications for the molds or molded parts. ManufactureCo’s gross receipts range from $24 million to $27 million throughout 2005 - 2010. ManufactureCo conducts qualified research activities that satisfy the requirements of the Federal and Michigan statutes and is eligible for more than $200,000 in Michigan and Federal credits. As a result of these tax savings, ManufactureCo was able to increase its capital investment and employment levels.
Case #2 - A tool and die company (TDCo), with gross receipts of $3 million, designs and develops critical machining, distributes products and conducts trial production runs.
TDCo was eligible to claim over $75,000 in Federal and Michigan tax credits. As a result of these tax savings, the company has been able to invest in new capital equipment. Good news indeed in a tough economy.
The R&D tax credit - it’s not just for the Fortune 500 - it’s for your business as well. Michigan companies benefit from a state R&D that will put significant dollars into the pockets of business owners.
Michael Siegel is a managing director for alliantgroup focused on Business Development in Michigan. Anna Nika is an associate for alliantgroup and a member of its Manufacturing Industry Specialization Program. Contact them at www.alliantgroup.com.