The R&D Tax Credit Aspects of Innovation in Michigan
After a few, somewhat rocky years, the
Michigan economy is on an upward trajectory being buoyed by
innovation and technological creativity within all business
sectors. In the past few years, nearly every sector of
Michigan’s economy has seen significant growth, resulting in
over 350,000 new jobs since 2009 and about 60,000 in 2014
alone, according to numbers from the Bureau of Labor
Growing sectors in the
state’s economy include manufacturing, agriculture, mining,
fishing, and professional services. Manufacturing is a
particularly innovative industry were successful entrepreneurs
rely on new product development and innovative process
improvements to gain a competitive edge.
In agriculture, the
growing worldwide population means innovators must constantly
develop creative techniques to combat disease and increase
production output while using less land, water, and natural
resources. Mining innovations involve smart
exploration, more efficient mining and safer working
In the fishing
community, commercial innovation involves data improvement,
electronic monitoring, state-of-the-art fishing gear and new
tools for monitoring the environment.
In the service sector,
innovation involves increasingly smart analytical software and
data management capabilities. All of these sectors have
the common focus of a commitment to innovation. Federal
and state research and development tax credits are available
to help support and stimulate those conducting R&D or
incurring expenses on innovative pursuits.
The Federal R&D
Enacted in 1981, the Federal Research and
Development (R&D) Tax Credit allows a credit of up to 13
percent of eligible spending for new and improved products and
processes. Qualified research must meet the following four
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include
employee wages, cost of supplies, cost of testing, contract
research expenses, and costs associated with developing a
patent. On December 19, 2014 President Obama signed the
bill extending the R&D Tax Credit for the 2014 tax year.
As of this writing, proposed tax extender legislation would
extend the tax credit through December 31, 2016.
Manufacturing is perhaps the most
innovative of all business sectors in Michigan.
Historically, this sector claims the most R&D tax credits
nationwide. On a state level, the industry accounts for
30% of Michigan's total gross state product (GSP), more than
twice as much as any other sector. The state ranks first in
the nation in the rate of job growth in the manufacturing
sector since 2009, more than twice as fast as the
second-ranked state of Indiana. Automobile
manufacturing is of course the largest contributor to the
sector, accounting for about half of total manufacturing
output however, other manufacturers are significant as well.
Production of machinery
(computers, machine parts, engines, valves, conveyors, tools,
and pumps) are next in line in terms of total output.
Fabricated metal products (cutlery, hand tools, hardware) rank
third in Michigan. The state is also among the leading states
in the manufacture of sporting goods and athletic
equipment. Innovations in this sector involve new
product developments and more efficient production
processes. Expenses incurred on these activities are
often R&D credit eligible.
Agriculture accounts for a significant
portion of total GSP in Michigan. About twenty five
percent of Michigan's agricultural revenues are generated by
dairy products, mostly milk and cheese. The output
in the state is so large that it ranks number two in the
nation for dairy products even though it is geographically
much smaller than some other larger states, hence the
nickname, “cheese heads”.
Innovations in this
sector involve improving food production’s environmental
footprint, incorporating smart tools to monitor and analyze
the supply chain, anaerobic digesters that can turn manure and
food waste into energy, increasing the health and nutrition of
cattle, and the use of drones for collecting data on crop and
feed development to maximize water and nutrient usage.
Although mining contributes less to GSP
than agriculture or manufacturing, Michigan still has
significant mining operations, mainly of iron ore, cement,
sand, and gravel. In addition, the state is a leading producer
of peat, bromine, calcium-magnesium chloride, gypsum, and
magnesium compounds. Mining has always been an
innovative industry. Typical challenges involve creating
better efficiency, safer working environments, and containing
On a more specific
level, innovations generally involve signal processing,
aerospace technology, communications, and the discovery of new
materials. The world of mining, like any other industry,
however does not exist in a vacuum. Innovations are
often developed in other industries and later developed to
contain certain applications geared toward mining.
Modern mines are almost
completely mechanized and each operation involves a different
technical solution. New technologies are constantly
being developed from the blasting process through extraction
to environmental rehabilitation.
Fishing is a thriving industry in
Michigan. Most of the catch there is taken from the
Great Lakes and usually includes catfish, chubs, lake herring,
lake trout, salmon, whitefish and yellow perch.
Innovations in the
commercial fishing industry involve new data collection and
reporting systems, tools to assist with the sustainability of
fisheries, innovative fishing gear, electronic at-sea
monitoring, and new fishing net designs that can actually weed
out undesired catch.
In addition to some of the other growing
sectors listed above, Michigan has seen significant growth in
the professional and business services industry.
Community, business, and personal services (private health
care, law offices, engineering, research companies, repair
shops, computer software companies, etc.) are the leading
service industry in Michigan. Ranking second is the
wholesale (automobiles, automobile parts, groceries,
machinery) and retail (automobile dealerships, discount
stores, grocery stores, restaurants) trade sector. Michigan's
third-ranking service industry is finance, real estate and
insurance. Finally, there has also been
significant growth in industries such as education, health
services, leisure and hospitality.
Innovations in the
service sector involve the use of intelligent software, big
data analytics, cyber security, and data management
systems. Innovations such as these have contributed
significantly to Michigan’s high ranking in the professional
and business services sectors when compared with the rest of
the nation. The hiring of engineers, consultants,
management, and temporary workers by firms in the growing
manufacturing industry has also contributed significantly to
Michigan’s success in this sector. While Michigan ranks fifth
in percent growth in this industry, the 57,200 jobs gained
since 2009 lag only to California and Texas.
Mayor of Detroit, Mike Duggan, announced
last year, an initiative to build a new innovation district
that will promote small business growth and create jobs
throughout Detroit. Duggan states, “The focus of the
Innovation District will be to create an anchor to support
neighborhood business incubators across the city”.
Officials say it will
encompass downtown, midtown, and stretch from East to West
roughly from I-75 to Woodward Avenue, and North to South from
Grand Boulevard to the Detroit riverfront. That space
encompasses a roughly 4.3 square mile area that already hold
about 55 percent of the city’s jobs.
The initiative is in
line with many of the economic strategies in regions across
the country. Innovation is generally the backbone of
meaningful economic growth. Recently, however there has
been a growing consensus about the importance of collaboration
between businesses, government, and academia in their pursuits
of innovation. Bruce Katz, Vice President of Brookings
Institution has co-authored a report outlining how innovation
districts can support economies, stating, “What’s
going to happen is we’re going to have a
two-plus-two-equals-five effect”... “Collaboration and synergy
in this district are going to have unanticipated discoveries
for the market.”
The Michigan economy is increasingly
innovating. Growing sectors in the state’s economy
include manufacturing, agriculture, mining, fishing and
professional services. Federal and state Research and
Development Tax Credits are available to help support and
stimulate innovation efforts in the state of Michigan.