Michigan Tax Law

The Michigan Business Tax is actually four taxes. Normal taxpayers pay both a Business Income Tax and a Modified Gross Receipts Tax. Two additional specific taxes apply to insurance companies and financial institutions. The tax on Gross Receipts is meant to reduce the cyclicality of the State’s revenue by taxing a base that does not fluctuate as much as business income. In an effort to make Michigan’s tax environment more business friendly, the Single Business Tax was repealed as part of the package to enact the Michigan Business Tax. In addition, substantial changes were made in the taxation of business real property, and the Michigan Business Tax provides substantial credits for personal property tax and many other tax credits.

The Michigan Business Tax is complex. To simplify let’s first look at a single business entity located in Michigan. We can then add complications such as combined entities and foreign businesses.

Unless our business is an insurance company or a financial institution, it will, if it is located in Michigan, be subject to the Michigan Business Tax once its receipts reach $350,000. And once subject to the tax, it will be subject to both branches of the tax, the Business Income Tax and the Modified Gross Receipts Tax.

I. Business Income Tax

The Business Income Tax is one component of the Michigan Business Tax. It is a tax on all Michigan businesses (other than insurance companies and financial institutions) of any form (proprietors, partnerships, corporations, trusts or associations).

The starting point for calculating the Business Income Tax base is Federal Taxable Income. Several adjustments are made to Federal Taxable Income, first the usual adjustments for converting federal taxable income to state taxable income—Subtract From Income: U. S. interest which is not taxable in Michigan, Add To Income: federally tax exempt interest paid by states other than Michigan, Add To Income: state taxes measured by income, Add To Income: the Michigan Business Tax, Add To Income: any Net Operating Loss deducted in calculating Federal Taxable Income, Subtract From Income: carryover losses to the extent allowed in the Michigan Business Tax (Business Tax losses can be carried over for ten years).

The Michigan Business Tax then has some more unusual adjustments. Subtract From Income: any self-employment income included in Federal Taxable Income (to equalize the tax base between corporations for whom all compensation is deductible and partnerships and proprietorships having non-deductible self-employment income), Subtract From Income: dividends and royalties received from persons other than United States persons, Add to Income: any deduction for a royalty, interest or other expense paid to a related person for use of any intangible asset, Subtract From Income: any income attributable to another entity whose business activities are subject to the separate provisions of the Michigan Business Tax that would otherwise be included with the unitary income of the taxpayer (related insurance companies and financial companies which are subject to separately calculated Michigan Business Tax). The Business Income Tax rate (before surcharge) is 4.95% of the tax base.

II. Modified Gross Receipts Tax

The starting point for calculating the Modified Gross Receipts tax base is Gross Receipts, which is total sales plus all other receipts of the company in the year in question—interest income, dividend income, sales of business assets, freight charges, miscellaneous income, service income and any other receipts. (Personal investments of a natural person are excluded, including interest, dividends and capital gains.) The major modification of Gross Receipts to reach Modified Gross Receipts is the deduction of purchases from other firms. Deductible Purchases include purchases of inventory (including shipping and delivery), purchases of depreciable assets, purchases of materials and supplies including repair parts and fuel, for a staffing company the compensation of personnel supplied to customers, and for most construction contractors, payments to subcontractors.

The Modified Gross Receipts Tax is imposed on the Modified Gross Receipts Tax base at the rate of 0.8% before the surcharge.

The Michigan Business Tax is the sum of the Business Income Tax and the Modified Gross Receipts Tax.

III. Surcharge

Michigan’s legislature had no sooner finished drafting the Michigan Business Tax than the State determined that it was going to be short an additional $750,000,000 in the 2008 fiscal year. The first attempted solution was to extend the sales tax, which applies to the sale of tangible personal property, to services. This solution did not sit well with voters, and the legislature repealed the sales tax extension on the very day it was to go into effect. To replace the needed revenue, the legislature determined to extend the just drafted Michigan Business Tax. A surcharge was added to each component of the Michigan Business Tax.

The legislature determined to apply a surcharge of 21.99% to both components of the Michigan Business Tax, raising the effective rate of the Business Income Tax to 6.0385%, and the effective rate of the Modified Gross Receipts Tax to 0.976%. The maximum surcharge was set at $6,000,000. Taxpayers qualifying for the Small Business Alternative Credit (Gross Receipts of less than $20,000,000, and no officer or shareholder earnings in excess of $180,000) are exempt from the surcharge. Some credits that are provided against the Michigan Business Tax are not allowed to offset the tax surcharge.

IV. Returns

The annual Michigan Business Tax return is filed on Form 4567—MBT Annual Return, or on Form 4583—MBT Simplified Return. Annual returns are due at the end of the fourth month following the end of the taxpayer’s fiscal year. Estimated tax returns are due on Form 4548—Michigan Business Tax Quarterly Return, due 15 days after the end of each quarter, or on Form 160—Combined Return for Michigan Taxes, due 20 days after the end of each month, if the taxpayer is also liable to pay either sales and use tax or withheld Michigan income tax. The Michigan Department of Treasury requires that all Michigan Business Tax returns prepared on commercial software be filed electronically.

V. Segue

The above is an introduction to the Michigan Business Tax. There are many other important elements to the tax. Any companies related to each other must be familiar with the Unitary filing requirement. Anyone based outside of Michigan must be familiar with the requirements for what sort of connection to Michigan one must have to be subject to the tax (Nexus). There are many credits under the Michigan Business Tax, some to reduce other business taxes to make Michigan more business friendly, some to ease the burden for some types of businesses, and some to encourage certain investments or contributions.

References:

Michigan Compiled Laws:

Section 208.1101 et. seq.—Michigan Business Tax Act

Michigan Business Tax Forms:

Form 4600—Michigan Department of Treasury, Michigan Business Tax Instruction Booklet for Standard Taxpayers

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