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 Statistics.
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 conditions.
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
The Federal R&D Tax
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 criteria:
- 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,
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
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 environmental risks.
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
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
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
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.