State R&D Tax Credits: New Rules, New Opportunities

Recent federal attention on research incentives has put research and development (R&D) tax credits back in the spotlight. Just as important: Several states introduced changes that could affect upcoming filings for your business. Here’s a concise, cross‑industry rundown.

Key state R&D tax credit changes

Minnesota: Partial refundability introduced

• House File 9 (HF 9) makes Minnesota’s Credit for Increasing Research Activities partially refundable
• Refundability rates:
  • 19.2% for tax years starting after December 31, 2024, and before January 1, 2026
  • 25% for tax years starting after December 31, 2025, and before January 1, 2028
• Annual cap: There’s a statewide cumulative refund limit of $25 million per year beginning December 15, 2027 and each subsequent year thereafter. The Department of Revenue may adjust future rates if the refundability amount is projected to exceed $25 million.
• The underlying credit calculation remains the same: 10% on the first $2 million of qualifying expenses, 4% above that, with a 15‑year carryforward. Research must be conducted in Minnesota.

Practical takeaway

Refundability may sweeten the pot for startups that are not impacted by the gross-receipts thresholds. Larger organizations could still face hurdles in finding benefit from a Minnesota credit.

Arizona: Shift to random selection

• The Arizona R&D Refundable Credit now uses a random selection process for applications (previously first-come, first-served).
• Application window — Opens on the first business day of the year (January 2, 2026, for tax year 2025), with substantially complete entries being accepted for the lottery system until midnight on that first business day. Partial or subsequent applications submitted after that date will be prioritized based on the time received, assuming there are still funds available.
• Eligibility — Companies must have fewer than 150 employees worldwide at year-end.
• Refundable credit amount — Up to $100,000 per taxpayer; $5 million total available statewide.
• Process — Requires a preliminary credit calculation, data collection, and officer signatures. Application fee applies and is non-refundable if not selected.

Practical takeaway

Identify eligibility and assemble documents early so you’re ready when the window opens.

Michigan: Credit reinstated

Michigan has reestablished its R&D credit beginning January 1, 2025 (inactive since 2012) for Corporate Income Tax taxpayers.

• Large taxpayers (250+ employees) — 3% of the base qualified research expenses (QREs) and an additional 10% of the qualifying research expenses exceeding the base (maximum of $2 million/year)
• Small taxpayers (<250 employees) — Same 3% calculation of the base but with an additional 15% of the qualifying research expenditures that exceed the base (max $250,000/year)
• Collaboration bonus — Additional 5% credit for work with Michigan research universities (maximum of $200,000/year)
• Statewide cap — $100 million ($75 million for large, $25 million for small taxpayers)
• Claim timing — Tentative claim due April 1, 2026 (for tax year 2025); March 15 in later years

Practical takeaway

Build a timeline around the tentative‑claim deadline and consider academic partnerships for the additional 5%.

Texas: Framework overhaul (effective 2026)

Senate Bill 2206 restructures Texas incentives beginning January 1, 2026.

Key changes

• Eliminates the sales and use tax exemption for R&D equipment
• Consolidates incentives into a single, performance-based franchise tax credit
• Eligible expenses more closely match the federal credit qualifications
• Increases the base credit rate to 8.722% (from 5%); 10.903% for research with Texas higher education institutions
• For businesses without a three-year R&D history, standard rates are 4.361% (base) and 5.451% (enhanced)
• Credit capped at 50% of franchise tax due; unused credits can be carried forward for up to 20 tax periods
• Certain non-taxpaying entities may be eligible for a refund

Practical takeaway

If R&D equipment purchases are planned, consider timing in 2025 given the expiring sales‑tax exemption, and model how the new franchise credit rates affect future filings.

Manufacturers refining processes, tech firms advancing software or hardware, and med‑tech companies iterating on devices or diagnostics can all benefit from monitoring these changes and aligning project tracking and filings accordingly.

What to do next

• Map qualifying activities to state‑specific rules (research location, employee thresholds, collaboration bonuses)
• Assemble contemporaneous documentation: project descriptions, technical uncertainties, experimentation steps, and QRE support
• Run a preliminary calculation to gauge potential credits and to meet states requiring it at application
• Track deadlines and caps (e.g., Arizona’s single‑day window; Michigan’s tentative‑claim dates; Minnesota’s refundability cap)
• Coordinate purchases (Texas equipment timing in 2025) and collaboration plans (Michigan university bonus)

How CLA can help with R&D and business tax credits

CLA supports organizations of all sizes in identifying and capturing business tax credits that drive growth and innovation.

Our dedicated team of R&D professionals can help identify and document qualifying research activities to enhance your R&D credit potential. They’ll help you calculate qualifying R&D expenditures by identifying research projects, wage costs, and other research-related expenses.

With experience across industries and state lines, our team helps you meet deadlines and stay ahead of regulatory changes — so you can focus on what’s next for your business.

Contact us

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