Changes to tax law in 2025 offer new R&D opportunities for Michigan manufacturers
Michigan’s manufacturing sector has long stood as a cornerstone of American industry by driving technological advancement, creating thousands of jobs and pushing the boundaries of what’s possible. In 2025, this momentum got a powerful boost thanks to major changes to Section 174 and other federal tax rules, plus a new state-level incentive specifically crafted to support in-state research and development (R&D) — the Michigan R&D tax credit.
These developments offer Michigan manufacturers a rare opportunity: the ability to drive innovation while significantly lowering tax liability. Keep reading to learn more about how both could benefit your business.
How did Section 174 R&D tax rules change in 2025?
The One Big Beautiful Bill (OBBB) Act changed Section 174 tax rules to allow for immediate expensing of domestic R&D costs, catch-up deductions for prior amortized costs and retroactive deduction opportunities for small businesses with under $31 million in gross receipts. Together, these moves represent a dramatic reversal of policies from the Tax Cuts and Jobs Act (TCJA) of 2017, which required businesses to capitalize and amortize R&D costs under Section 174 over a period of five to 15 years.
1. Full expensing of section 174 R&D costs
Starting with tax years beginning after December 31, 2024, businesses can now deduct 100% of their domestic R&D expenses in the year those costs are incurred. This immediate expensing puts money back in businesses’ hands, allowing them to reinvest in growth, hire more employees or scale up promising projects.
2. Catch-up deductions for prior amortized costs
The federal reforms don’t just apply moving forward — they also address previously capitalized R&D costs from 2022 through 2024. Businesses now have the option to deduct any remaining unamortized balance in one of two ways:
- As a lump sum deduction in 2025
- Through a two-year amortization spread over 2025 and 2026
This relief will result in reduced tax liabilities for companies that incurred large R&D expenditures in previous years but were forced to capitalize and amortize them due to prior rules.
3. Small businesses can deduct previously capitalized expenses
Recognizing the disproportionate burden on smaller companies, the OBBB includes specific provisions for companies with gross receipts of $31 million or less. These businesses can amend past returns to deduct previously capitalized expenses.
This could lead to refunds for startups or growing manufacturers that struggled under the now-defunct TCJA capitalization and amortization requirements.
What is Michigan’s new state-level R&D tax credit?
In 2024, Michigan’s legislature enacted Public Acts 186 and 187, which establish a state-level refundable R&D tax credit beginning in tax year 2025. This marked the return of Michigan’s incentive for in-state research, previously sunset in the early 2010s, and reflects the state’s commitment to remaining competitive on the global manufacturing stage.
The credit applies only to research conducted within the state
Michigan’s credit is calculated based on a business’s increase in Michigan-based R&D expenses compared to a rolling three-year base period. It is available to corporations and pass-through entities alike, including LLCs and partnerships, and applies only to qualified research conducted within the state.
Small businesses stand to benefit
The Michigan R&D tax credit offers benefits specifically designed to support R&D by small businesses with under 250 employees:
- 3% credit for R&D expenses up to the base amount
- 15% credit for expenses above the base amount
- An annual cap of $250,000
Large businesses are also eligible
The credit also applies to large businesses with 250 or more employees, but the rules are slightly different. Large businesses are eligible for a significantly higher annual cap but a lower percentage credit for expenses above the base amount:
- 3% credit for R&D expenses up to the base amount
- 10% credit for expenses above the base amount
- An annual cap of $2 million
The credit supports collaboration with Michigan universities
To stimulate public-private partnerships, the legislation includes a bonus credit of 5% — capped at $200,000 per year — for businesses that engage in collaborative R&D efforts with Michigan-based research universities. This encourages manufacturers to tap into university talent and facilities, such as lab equipment and faculty expertise, while advancing cutting-edge technologies.
The bonus helps align industrial objectives with academic resources, fostering an ecosystem of innovation throughout the state.
Refundable format boosts cash flow
Unlike many state R&D incentives, Michigan’s credit is refundable. This means that if a company’s credit exceeds its tax liability, the excess amount is refunded directly to the business — making the incentive especially powerful for early-stage manufacturers or firms in growth mode with limited tax exposure.
Refundable credits reduce the need for carryforwards and offer immediate liquidity, which can be used to:
- Hire skilled workers.
- Purchase manufacturing equipment.
- Expand product development or prototyping initiatives.
Annual cap and proration
To manage the credit’s fiscal impact, Michigan lawmakers set a statewide annual cap of $100 million. If the total amount of claimed credits exceeds this cap, the Michigan Department of Treasury will prorate awards based on the volume of valid claims received.
Businesses are therefore advised to file on time to help ensure maximum eligibility.
What’s next for Michigan’s manufacturing sector?
From precision metalworking to advanced robotics, Michigan’s manufacturers continue to redefine what’s possible. These new tax changes could supercharge that potential by freeing up cash flow that can be reinvested in hiring more people, overhauling processes and acquiring new technology. The changes introduced in 2025 offer more than just financial incentives—they signal a broader cultural and economic commitment to innovation.
As a result, now is the time to rethink your R&D strategy. Key next steps include consulting with your tax advisor to learn how new tax rules apply to your business and working with your leadership team to chart a path forward.
How Wipfli can help
We help manufacturers thrive in the face of change. Ask us to assess your tax strategy, operations and technology to help make your business more profitable. Start a conversation.
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