Michigan Tax Law

Archive for the ‘Michigan Business Tax’ Category

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 In an effort to make Michigan’s tax environment more business friendly, the Single Business Tax was repealed as part of the package to enact the Michigan Business Tax.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

Two components of the Michigan Business Tax apply to most businesses, the Business Income Tax and the Modified Gross Receipts Tax. The first test for whether a business is subject to the Michigan Business Tax applies to both components, that test being whether the company has sufficient contact with Michigan to be subject to its jurisdiction. A second test applies to the taxpayer to determine whether it must file a tax return: If the business’s receipts are less than $350,000 for a 12 month period, it is exempt from filing the tax. A third test applies to the Business Income Tax, being whether the income tax is prohibited by the federal Interstate Commerce Tax Act.

I. Nexus

Businesses that have physical presence in Michigan for more than one day, or that actively solicit sales in Michigan, and have gross receipts sourced to Michigan in excess of $350,000, are subject to the Michigan Business Tax. States are prohibited by the federal Interstate Commerce Tax Act from imposing income taxes on out-of-state businesses whose only activity in the state is to solicit orders, which are accepted and filled from outside the state.

Note that the exemption from the Business Income Tax provided by the federal interstate Commerce Tax Act is an all or nothing test. A non-Michigan person or company having substantial sales in Michigan who only solicits orders in Michigan, which orders are accepted and filled outside of Michigan is exempt from all of the Business Income Tax. If the person or company adds any activity in Michigan besides the solicitation of orders, all of its Michigan sales are subject to the Business Income Tax as well as the Modified Gross Receipts Tax.

Businesses having no physical presence in Michigan, but having sales in Michigan in excess of $350,000, are not subject to the Michigan Business Tax unless they actively solicit sales in Michigan. Active solicitation has been defined by the Department of Treasury to mean “purposeful solicitation”, explicitly or implicitly inviting an order, or activities that are entirely ancillary to requests for an order intended to reach the Michigan market. Purposeful solicitation can be by print, audio or video advertisement, or by internet advertisement or web site.

The Modified Gross Receipts Tax is imposed on all businesses having a “substantial nexus” in Michigan. Substantial nexus means that the taxpayer either has a physical presence in Michigan for more than one day during the year, or “actively solicits” sales in Michigan and has Michigan gross receipts of at least $350,000. Physical presence is any activity conducted in Michigan by a taxpayer directly, on behalf of the taxpayer through its employee, agent, or independent contractor. It does not include activities of professionals or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in Michigan.

If a company has related entities which must be combined in Michigan Business Tax’s Unitary Tax Reporting, the activities of all members of the Unified Business Group and the sum of all receipts by all members of the Unified Business Group are measured against the filing requirements.

A non-Michigan taxpayer whose only activity in Michigan is solicitation of sales is exempt from the Business Income Tax under the federal Interstate Commerce Tax Act restricting the ability of states to impose income taxes on out-of-state corporations, but such a taxpayer would be subject to the Modified Gross Receipts Tax.

II. Unitary Tax

Michigan’s tax is a “Unitary Tax”, that is, income and receipts of all of a business’s branches, subsidiaries and other related companies, wherever located, are reported on a single return, A Unified Business Group is two or more Unite States persons that satisfy both a control test and one of two relationship tests under Mich. Compiled Laws Section 208.1117(6):

• The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interests, with voting or comparable rights, of another person. Generally, indirect ownership is determined by applying the constructive stock ownership rules of Internal Revenue Code Section 318; Section 318 attributes all of the ownership of one person to another who is his spouse, his child or his parents, and attributes ownership by a corporation to anyone owning more than 50% of the corporation. The Treasury Department will apply the rules from Section 318 to all forms of ownership interests.

• The relationship test is satisfied if the Unified Business Group has business activities or operations (a) which result in a flow of value between or among persons included in the group, or (b) has business activities or operations that are integrated with, are dependent upon, or contribute to each other. Flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. Flow of value is established when members of the group demonstrate one or more of functional integration, centralized management, and economies of scale. Examples of functional integration include common programs or systems and shared information or property. Examples of centralized management include common management or directors, shared staff functions, and business decisions made for the group rather than separately by each member. Examples of economies of scale include centralized business functions and pooled benefits or insurance. Groups that commonly exhibit a flow of value include vertically or horizontally integrated businesses, conglomerates, parent companies with their wholly owned subsidiaries, and entities in the same general line of business. Flow of value must be more than the mere flow of funds arising out of passive investment. Businesses are integrated with, are dependent upon, or contribute to each other under many of the same circumstances that establish flow of value. However, this alternate relationship test is also commonly satisfied when one entity finances the operations of another or when there exists intercompany transactions, including financing.

III. Exempt Persons

The following persons are exempt from the Michigan Business Tax:
1. The United States, any state and their agencies and political subdivisions.
2. Persons exempt from federal income tax under most provisions of Internal Revenue Code Section 501(c), and subsidiary entities.
3. Nonprofit cooperative housing corporations for housing activities.
4. Persons whose primary activity is the “production of agricultural goods” to the extent of the tax base attributable to the production of agricultural goods (not including the retail marketing of agricultural goods).
5. Certain farmers’ cooperative organizations where the purchase of commodities from non-producers is less than 5% of purchases.
6. Farmers’ cooperative corporations to the extent of specified direct and indirect marketing activities.

References:

Michigan Compiled Laws:

Section 208.1101 et. seq.—Michigan Business Tax Act

Michigan Department of Treasury Revenue Administrative Bulletins:

Bulletin 2007-6—Michigan Business Tax—“Actively Solicits” Defined
Bulletin 2008-4—Michigan Business Tax—Nexus Standards

Michigan Business Tax Forms:

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

The Michigan Business Tax is applied to all businesses having even a very modest contact with Michigan. (See the topic “Nexus”.) The tax base is then allocated to Michigan and other states according to the sources of the company’s revenue.

I. Apportionment

A taxpayer whose activities are subject to tax both within and outside of Michigan apportions its tax base using the single factor of sales within or outside of Michigan. A taxpayer is subject to tax in another state if either (1) The taxpayer is subject in the other state to a business privilege tax, a net income tax, a corporate stock tax, or a tax of the type imposed by the Michigan Business Tax, or (2) The other state has jurisdiction to subject the taxpayer to one or more of these taxes, whether or not the state does impose such a tax.

II. Sourcing Revenue

Sales involving Property are sourced as follows for purposes of allocating the entity’s activities:
1. Sales of Personal Property are sourced at their final destination, regardless of the “FOB” point or other conditions of the sales.
2. Receipts from the sale, lease, rental or licensing of real property are in Michigan if the real property is located in Michigan.
3. Tangible personal property leases including leases for mobile equipment are related to Michigan based on the number of days of physical presence of the property in Michigan during the tax year, compared to the total number of days of the lease or rental period during tax year.
4. Intangibles (patents, know-how, designs, processes, copyrights and similar items) are sourced where they are used.
Sales involving Services are sourced as follows in allocating the entity’s activities:

1. Service receipts are sourced according to where the recipient receives the service. If the recipient of the service receives all of the benefit of the services in Michigan, the services are sourced to Michigan. If only a part of the service is delivered in Michigan, the receipts are sourced to Michigan to the extent that the benefits are received in Michigan.
2. Credit related services, loan servicing fees and interest from loans on real property are sourced to Michigan if the real property (or more than half of the property) is located in Michigan.
3. Loan origination and servicing fees on unsecured loans are sourced according to the address of the borrower.
4. Receipts from credit card activities are allocated to Michigan if the cardholder’s billing address is in Michigan.
5. Securities brokerage services are sourced according to the sales commissions earned in Michigan or elsewhere.

These rules regarding “Sourcing” are used either to source sales in Michigan for out-of-state taxpayers, or to source sales to other states for taxpayers located in Michigan.

References:

Michigan Compiled Laws:

Section 208.1101 et. seq.—Michigan Business Tax Act

Michigan Department of Treasury Revenue Administrative Bulletins:

Bulletin 2007-6—Michigan Business Tax—“Actively Solicits” Defined
Bulletin 2008-4—Michigan Business Tax—Nexus Standards

Michigan Business Tax Forms:

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

The Michigan Business Tax was meant to reduce several taxes that were seen as detrimental to promoting business activity in Michigan. Adjustments were made to the property tax rates charged industrial equipment, and several reductions are handled by allowing credits against the Michigan Business Tax. There are over 40 credits against the tax, some of wide application and significant, and some designed for specific industries or specific taxpayers.

Compensation Credit. The Michigan Business Tax provides a credit of 0.37% of compensation paid “in this state”. This credit is designed to benefit service businesses having a high proportion of their expenses in the form of compensation.

Investment Credit. The Michigan Business Tax provides for an Investment Credit equal to 2.9% of the taxpayer’s net acquisitions of new capital assets in Michigan. New acquisitions include assets brought into Michigan from other jurisdictions. If net acquisitions are negative for the year, the computed negative credit is added to the Michigan Business Tax.

Compensation and Investment Credit Limitation. The sum of the compensation and investment credits is limited to 52% of the taxpayer’s total Michigan Business Tax liability.
Research and Development Credit. There is a credit in the Michigan Business Tax of 1.9% of a taxpayer’s qualified research and development expenditures in Michigan for the tax year. “Qualified” expenses are determined under Internal Revenue Code Section 41(b), the federal tax credit for increasing research activities. Note that the tax surcharge cannot be offset by the compensation, investment, or research and development credits.

Second Credit Limitation. The sum of the compensation, investment and research and development credits cannot exceed 65% of the taxpayer’s total Michigan Business Tax liability.

Personal Property Tax Credit. A significant Michigan Business Tax credit is the Personal Property Tax Credit, a refundable credit equal to 35% of personal property tax paid on industrial and commercial property. This credit is in addition to exemptions from the major portions of the school tax granted industrial and commercial property in Michigan’s business tax reform.

Small Business “Cliff” Credit. To eliminate the sudden “cliff” created by the $350,000 of gross receipts filing threshold, taxpayers with gross receipts between $350,000 and $700,000 are allowed a small business credit which “phase in” the tax ratably from $350,000 to $700,000.

Motor Vehicle Dealer Inventory Credit. New car dealers are allowed a credit of 2% of their expenditure for new motor vehicle inventory. The nonrefundable credit is limited to $10,000 in any year, and any excess may not be carried over.

Small Business Credit. A Michigan Business Tax small business credit is available to taxpayers having maximum gross receipts of $20 million, business income of less than $1.3 million, and maximum officer, shareholder or owner compensation of $180,000. The credit can reduce a taxpayer’s Michigan Business Tax liability to 1.8% of business income, computed with additional adjustments for purposes of the credit.

Start-up Business Credit. Qualified start-up businesses that have no business income for two consecutive years are given a credit to wipe out their Michigan Business Tax liability for the second of those years. If the taxpayer continues to have no business income, it is again given the credit for up to five years in total.

Arts and Culture Credit. A partial credit of up to $100,000 is allowed when donations are made to either of the following:
Category A: A municipality or a nonprofit corporation affiliated with a municipality and an art, historical, or zoological institute for the purpose of benefiting the art, historical, or zoological institute, OR
Category B: An institute devoted to the procurement, care, study, and display of objects of lasting interest or value.
To calculate the Arts and Culture Credit, a taxpayer may count contributions to the charities described in Category A to the extent that those contributions exceed $50,000, as well as contributions to charities described in Category B to the extent that those contributions exceed $50,000. A taxpayer is not precluded from taking the credit for donations made to both categories as long as the taxpayer meets the minimum donation separately for each category.

Contribution Credits. Taxpayers not claiming similar credits against the Michigan Income Tax may claim a credit against the Michigan Business Tax for 50% of the taxpayer’s contributions described below, up to a maximum annual credit is $5,000 or 5% of the taxpayer’s tax liability.
• Contributions to Colleges and Universities. A partial credit is allowed for Corporations and partnerships (and Limited Liability Companies federally taxed as such) when donations are made during the taxable year to public broadcast stations located in Michigan, Michigan public libraries, institutions of higher learning located in Michigan or a nonprofit corporation, fund, foundation, trust, or association organized and operated exclusively for the benefit of an institution of higher learning, the Michigan Colleges Foundation, and the Michigan Housing and Community Development Fund.

• Contributions to a Community or Educational Foundation: A partial credit is allowed when donating to the endowment fund of a certified community foundation or education foundation. The certification requirement means that only foundations approved by the Michigan Department of Treasury qualify. A listing is available in Form 4600—Michigan Department of Treasury, Michigan Business Tax Instruction Booklet for Standard Taxpayers.

• Contributions to Food Banks and Homeless Shelters: A partial credit is allowed when making a cash donation to a qualifying shelter for homeless persons, food kitchen, food bank, or other entity whose primary purpose is to provide overnight accommodations, food, or meals to indigent persons.

References:

Michigan Compiled Laws:

Section 208.1101—Michigan Business Tax Act

Michigan Department of Treasury Revenue Administrative Bulletins:

Bulletin 2007-6—Michigan Business Tax—“Actively Solicits” Defined
Bulletin 2008-4—Michigan Business Tax—Nexus Standards

Michigan Business Tax Forms:

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