Types of Tax in Michigan Business Income: Ultimate Guide

 

 

The IRS offers several ways to determine what kind of taxes you’ll owe on Michigan business income.

Corporation Tax

A corporation is taxed like a person. The corporation pays a flat rate of 6% of its taxable income. This includes profits earned from selling goods and services, interest, dividends, rents, royalties, capital gains, and net gain from selling the property. The corporation must include its net operating loss carryover in calculating its taxable income if it does not sell products or services.

Partnership Tax

Like a sole proprietorship, a partnership is treated as a separate taxpayer. Each partner is responsible for paying his or her proportionate share of the partnership’s tax liability. To calculate each partner’s share of the partnership’s taxable income, use Form 1065-B, Schedule K-1 Partner’s Share of Income, Credits, Deductions, etc., along with Form 1065-B(E) Schedules K-1 Expenses Relevant to Partnership Activities.

LLC/Limited Liability Company Tax

An LLC is treated like a corporation. Like a corporation, an LLC is required to file a Federal Corporation Income Tax Return, Form 1120. In addition, an LLC is liable for the same tax as a corporation. However, unlike a corporation, an LLC cannot deduct expenses related to its trade or business activities. Instead, it must allocate those costs among its members according to the percentage of ownership interests held by each member.

Michigan income tax rates

Filing a Michigan income tax return is mandatory for an individual or corporation. If you are self-employed, you must file Form MI-1040EZ, Michigan Individual Income Tax Return. If you are employed by someone else, you must file Form 1099-MISC, Miscellaneous Income. If you are a sole proprietorship, partnership, or S corporation, you must file Form M1120, U.S. Income Tax Return for Estates and Trusts. All filers must attach Form MI-1101, Michigan Resident Alien Income Tax Return.

You may deduct certain expenses related to operating a business from your taxable gross receipts. These include rent, utilities, insurance, repairs, supplies, depreciation, interest, taxes, and fees. You must keep records of these expenses. You must meet several requirements to claim deductions, including maintaining adequate books and records. For information about how much you can deduct, see Publication 535, Your Federal Income Tax.

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If you receive wages, you must report them on Schedule W, Wage and Tax Statement. This form requires you to list your name, address, social security number, employer’s name, and the amount of each wage payment.

Michigan Business Tax Rates

The Michigan Business Tax is a special tax for businesses operating in Michigan. If you’re doing business in Michigan, it applies to you.

There are two different taxes involved in the Michigan Business Tax. One is a Michigan sales tax, which varies depending on where you live. The second one is an additional business tax. You’ll pay this extra tax whether you make $1 million or $100,000.

Don’t forget to file your returns before April 30th to ensure you don’t incur penalties.

Corporations

A corporation is a legal fiction used to limit liability and responsibility. In most countries, it is treated like a person for tax purposes.

An S corporation is a pass-through entity. An S corporation is a pass-thru entity. It does not pay income taxes itself; rather, it passes those taxes along to shareholders.

If you choose to become an S corporation, you cannot use Subchapter S of the Internal Revenue Code to avoid paying corporate income taxes. You must still pay federal income taxes on your earnings. However, you can deduct your expenses against your taxable income.

Multistate Businesses

If you operate in multiple states and are subject to tax laws, you might be surprised to learn that you’re liable for taxes in every state where you do business. This isn’t just a theoretical concern; there are real consequences to failing to pay up in every place you conduct business.

The Internal Revenue Service defines “nexus,” or “doing business,” in terms of physical presence. A nexus exists where a taxpayer owns the property, maintains offices, employs people, advertises, files returns, or otherwise engages in activities that indicate a permanent establishment. In addition, a taxpayer may be considered to be doing business in a particular state if he or she conducts substantial activity in that state.

A nexus does not exist merely because a person resides in a state or simply because a taxpayer has employees in a state. For example, a corporation that operates in several states but has no offices, employees, advertising, or sales cannot be considered to be doing any business in those states. However, if a corporation has employees in a state, purchases supplies in that state, sells products in that state, or solicits customers, it is doing business there.

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In some cases, a taxpayer may be required to file separate federal income tax returns for each state in which he or she does business. Although filing separate returns is usually unnecessary, it can help ensure compliance with taxing authorities in the various jurisdictions.

For example, suppose a taxpayer owns a restaurant in New York City and another in Chicago. He or she may be responsible for paying taxes in both places. But if the taxpayer files a single return covering his or her entire operation, he or she may inadvertently fail to report certain income earned in New York City. To avoid such problems, the IRS recommends that taxpayers file separate returns for each jurisdiction in which they engage in business.

This article discusses the rules governing nexus and explains what constitutes doing business in different states.

Michigan Business Tax (MBT)

The Michigan Business Tax (MBTA), commonly referred to as the Michigan Business Tax (MBT), is a state sales tax levied on businesses and individuals engaged in certain business activities within the state of Michigan. The MBT is based on a percentage (usually 2%) of taxable income and is assessed annually on both corporate and individual returns. The MBT is collected by the Michigan Department of Treasury (MDOT) and remitted to the Michigan Comptroller.

 

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Modified Gross Receipts Tax

The modified gross receipts tax applies to business entities with gross receipts over $1 million. Businesses are required to pay taxes based on their annual gross receipts rather than their net income.

Businesses must report their taxable income on Form 1040NR. For example, if you make $500,000 per year, you owe $25,000 in taxes. If you make $2 million annually, you owe $50,000 in taxes.

In addition to paying taxes based on gross receipts, businesses must also pay taxes on certain types of purchases. These purchases include: inventory acquired; other material & supplies; depreciated property acquired; for a staffing company, the compensation of personnel supplied to their client; and for a contractor, payments made to subcontractors.

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Inventory includes the floorplan interest expense incurred by new motor vehicle dealerships and inventories purchased from other businesses.

Company Premiums Tax

The state Senate passed legislation Wednesday that repeals the Single Business Tax and replaces it with a new tax on insurers’ gross receipts. According to estimates from the Office of Legislative Services, insurance companies are expected to pay about $100 million annually under the new law.

SBT repeal and replacement bills introduced in 2017

In 2017, lawmakers introduced three separate bills to repeal the SBT. Two of those bills were signed into law. One of those bills repealed the SBT, while another bill repealed the SBT and replaced it with a different tax structure.

Under the current system, insurance companies must pay taxes based on how much revenue they generate within Rhode Island. Under the new system, insurers will pay taxes based on their total income within the United States.

 

 

Frequently Asked Questions

How Your LLC Will Be Taxed

The Internal Revenue Service (IRS) has issued a new ruling that will affect the tax treatment of your limited liability company. The IRS ruled that an S corporation’s shareholders are not entitled to deduct their share of losses from the business, even if they have no personal income or expenses related to the business.

What business entities must pay Michigan Business Taxes?

The Michigan Business Tax is a tax businesses in Michigan must pay. The tax rate for the business tax is 6% of gross income, and it applies to all taxable income from any source. This includes wages, salaries, dividends, interest, rents, royalties, capital gains, pensions, annuities, insurance proceeds, and other similar items.

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