Taxes on Business Income in Michigan
Michigan imposes entity-level income tax on all forms of business, pass-through entities as well as corporations. This tax is computed at 4.95 percent of business net income is required of all forms of business in Michigan. Michigan also imposes a modified gross receipts tax on receipts of more than $350,000.
In Michigan, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may decide whether you or your business pays income taxes on the business income.
Effective January 1, 2012, the Corporate Income Tax (CIT) replaced the Michigan Business Tax (MBT) (which taxed the business income of all entities doing business in Michigan) for most taxpayers. Michigan’s CIT is comprised of three separate taxes: a corporate income tax, a premiums tax on insurance companies, and a franchise tax on financial institutions. The CIT applies to C corporations and entities taxed as C corporations for federal income tax purposes (e.g., a limited liability company that checks-the-box to be taxed as a corporation). Individuals and pass-through entities, including partnerships, S corporations, and trusts, are not subject to the CIT, although pass-through entities may be subject to withholding.
The CIT is equal to 6% of the CIT tax base after allocation or apportionment. The CIT tax base is federal taxable income subject to specified additions and subtractions. For a taxpayer whose business activities are subject to tax within and without Michigan, the CIT tax base is apportioned to Michigan using a 100% sales factor.
A small business alternative credit is available under the CIT. The small business alternative credit is retained from the Michigan Business Tax (MBT) and is the only credit in the CIT. The credit is available to any taxpayer, other than insurance companies and financial institutions, with gross receipts that do not exceed $20 million and with adjusted business income minus the loss adjustment that does not exceed $1.3 million, as adjusted annually for inflation and subject to certain additional disqualifiers. The taxpayer will also be disqualified if an officer or shareholder receives more than $180,000 in compensation, or if compensation plus share of business income exceeds that amount (allocated income disqualifier). A taxpayer may be able to take a reduced credit before complete disqualification. Recapture provisions apply.