What is the Business Income Tax in Michigan?
What kind of tax will you owe on Michigan business income?
Most states tax at least some types of business income derived from the state. The details of how income from a specific business is taxed depend in part on the business’s legal form. In most states, corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, four states (Nevada, South Dakota, Washington, and Wyoming) do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax.” This is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Michigan has a corporate income tax (CIT), but, as of 2012, no franchise or privilege tax generally applicable to businesses. Michigan’s tax rules for businesses recently changed. Currently, it is generally true that, unless your business is a traditional corporation (a C corporation), the business itself should not be subject to a state tax on income or net worth. However, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Michigan now taxes corporation income at a flat rate of 6%. (By comparison, Michigan generally taxes personal income at a flat rate of 4.25%.) Returns are due on the 15th day of the fourth month after the end of the tax year. For corporations with a tax year that corresponds to the calendar year, this means April 15th.
Let’s briefly look at additional details for five of the most common forms of Michigan business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Michigan corporations now are subject to Michigan’s corporate income tax at a flat 6% rate.
Example: For the latest tax year, your Michigan corporation had taxable income of $100,000. The corporation will owe Michigan corporate income tax in the amount of $6,000 (6% of $100,000).
S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each individual shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Michigan recognizes the federal S election, and Michigan S corporations are not required to pay corporate income tax to the state. However, an individual S corporation shareholder will owe tax on his or her share of the company’s income.
Example: For the latest tax year, your S corporation had net income of $100,000. The $100,000 in net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns. In most cases, shareholders will pay tax at a rate of 4.25%.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Michigan. Instead, income from the business is distributed to the LLC members, and each individual member is subject to federal and state taxes on his or her share of the company’s income.
While by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would be subject to Michigan’s corporation income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow LLC members, and each member will pay tax on his or her own portion on his or her individual state tax return. In most cases, members will pay tax at a rate of 4.25%.
Partnerships. Income from partnerships is distributed to the individual partners, and each individual partner is subject to federal and state taxes on his or her share of the partnership’s income.
Example: For the latest tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and each partner will pay tax on his or her own portion on his or her individual state tax return. In most cases, partners will pay tax at a rate of 4.25%.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Example: For the latest tax year, your sole proprietorship had net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return. In most cases, you will pay tax at a rate of 4.25%.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Michigan. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Michigan, it may be subject to Michigan taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
For further guidance on Michigan’s corporate income tax, check the Department of Treasury website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Frederick Daily (Nolo).