Michigan — Corporate Income / Franchise Tax

Michigan levies a corporate income tax (CIT) on every taxpayer with business activity in the state or an ownership interest in a flow-through entity that has business activity in Michigan, unless prohibited by federal law (P.L. 86-272). The tax is imposed at a rate of 6.0% on the corporate income tax base after allocation or apportionment to Michigan.

A "corporation" for CIT purposes means a person that is required or has elected to file as a C corporation under IRC sections 1361(a)(2) and 7701(a)(3). This definition adopts the federal check-the-box classification rules. Insurance companies and financial institutions are excluded from the definition of "corporation" and are subject to separate taxes—insurance companies pay a 1.25% premiums tax, and financial institutions pay a 0.29% franchise tax on net capital.

The CIT replaced the Michigan Business Tax (MBT) effective January 1, 2012. Flow-through entities such as S corporations, partnerships, and LLCs generally are not subject to the CIT, though Michigan imposes separate withholding obligations on flow-through entities with non-Michigan corporate or flow-through entity members, and flow-through entities may elect into Michigan's Flow-Through Entity Tax.

Source: MCL 206.623; MCL 206.605; Michigan Dept. of Treasury, Corporate Income Tax FAQs

Michigan apportions the corporate income tax base using a single sales factor. For taxpayers whose business activities are subject to tax both within and outside Michigan, the tax base is apportioned to Michigan by multiplying the tax base by the sales factor. The sales factor is a fraction: the numerator is total sales of the taxpayer in Michigan during the tax year, and the denominator is total sales everywhere during the tax year. The legislature expressly stated that apportionment shall be based solely on the sales factor multiplied by 100%, not on property, payroll, or any other factor.

Source: MCL 206.661; MCL 206.663

Michigan imposes the corporate income tax on a taxpayer that has nexus with the state under one of three alternative tests. First, a taxpayer has nexus if it has physical presence in Michigan for more than one day during the tax year. Second, a taxpayer has nexus if it actively solicits sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan. "Actively solicits" means speech, conduct, or activity purposefully directed at persons within Michigan that explicitly or implicitly invites an order for purchase or sale. Third, a taxpayer has nexus if it has an ownership interest or beneficial interest in a flow-through entity, directly or indirectly through other flow-through entities, that itself has nexus. The CIT is subject to federal P.L. 86-272 protections.

Source: MCL 206.621

Michigan's corporate income tax base starts with the taxpayer's business income, defined as federal taxable income, and applies specified statutory adjustments before allocation or apportionment. Required additions include state and local bond interest, net operating loss carrybacks or carryovers deducted federally, and certain related-party intangible expenses. Required subtractions include dividends and royalties from non-U.S. persons and foreign operating entities, and U.S. obligation interest. For tax-exempt taxpayers, business income includes only federal taxable income from unrelated business activity.

Source: MCL 206.603(3); MCL 206.623(2)

Michigan corporate income tax annual returns are due by the last day of the fourth month after the end of the taxpayer's tax year. For calendar-year taxpayers, the original due date is April 30; for fiscal-year filers, the due date is the last day of the fourth month following the fiscal year end. Final tax liability must be remitted by the original annual due date, excluding any extension of time to file the return.

Quarterly estimated payment requirement

A taxpayer that reasonably expects its annual CIT liability to exceed $800 must file estimated returns and pay estimated tax for each quarter of the tax year. For calendar-year taxpayers, quarterly estimated returns and payments are due on April 15, July 15, October 15, and January 15 (of the following year). Fiscal-year taxpayers must file quarterly returns and make estimated payments on the corresponding due dates in their fiscal year.

The estimated payment made with each quarterly return must be either the estimated tax base applicable to the taxpayer for the quarter, or 25% of the estimated annual liability. The second, third, and fourth estimated payments in each tax year must include adjustments, if necessary, to correct underpayments or overpayments from previous quarterly payments in the tax year to a revised estimate of the annual tax liability. Taxpayers that calculate and pay federal estimated payments under IRC section 6655(e) may use the same methodology—the annualized income installment or adjusted seasonal installment—to calculate Michigan quarterly estimated payments.

Safe harbor from penalty and interest

Interest and penalty will not be assessed on estimated payments if either of the following conditions is met:

1. 85% safe harbor (MCL 206.681(3)(a)): The sum of the estimated payments equals at least 85% of the final liability, and the amount of each estimated payment reasonably approximates the tax liability incurred during the quarter for which the payment was made.

1. Prior-year safe harbor (MCL 206.681(3)(b)): For tax years 2013 and later, if the preceding year's CIT liability was $20,000 or less, the taxpayer may submit four equal installments that together equal the immediately preceding tax year's tax liability.

Extensions

If a taxpayer is granted a federal extension, the filing of a copy of the federal extension request together with a tentative return and payment of estimated tax by the original due date automatically extends the due date for filing the Michigan CIT return until the last day of the eighth month following the original due date (December 31 for calendar-year filers). Interest at the statutory rate is added to the amount of tax unpaid for the period of the extension. An extension of time to file is not an extension of time to pay.

The Department of Treasury may, upon application and for good cause shown, grant a discretionary extension. The state treasurer will require payment of the estimated tax liability unpaid for the tax period covered by the extension with the application. Interest accrues on the amount of tax unpaid during the extension period.

Filing threshold exceptions

A taxpayer (other than an insurance company or financial institution) whose apportioned or allocated gross receipts are less than $350,000 is not required to file a return or pay the CIT. A taxpayer whose CIT liability is $100 or less also is not required to file a return or pay the tax. A taxpayer with a tax year of less than four months is not required to file estimated tax returns or remit estimated payments.

Source: MCL 206.685; MCL 206.681

Michigan sources sales to the state under market-based rules that look to where the customer receives the benefit, not where the taxpayer performs its activities. Because Michigan apportions the corporate income tax using a single sales factor, correct sourcing of receipts to the Michigan numerator is critical to determining tax liability. The sourcing rules in MCL 206.665 are detailed and vary by transaction type.

Tangible personal property sales

Sales of tangible personal property are sourced to Michigan if the property is shipped or delivered to any purchaser within Michigan based on the ultimate destination at the point the property comes to rest, regardless of FOB point or other conditions of sale. For electricity and gas, the sale is sourced to Michigan if the contract requires delivery to the purchaser within Michigan.

Property stored in transit for 60 days or more before receipt by the purchaser (or in the case of a dock sale not picked up for 60 days or more) is deemed to have come to rest at the ultimate destination. Property stored in transit for fewer than 60 days (or a dock sale picked up before 60 days) is not deemed to have come to rest at the ultimate destination.

Services

Sales from the performance of services are sourced to Michigan based on where the recipient of the service receives the benefit of the service. All receipts from services are included in the Michigan numerator if the recipient receives all of the benefit of the services in Michigan. If the recipient receives only a portion of the benefit in Michigan, the receipts are included in the numerator in proportion to the extent that the recipient receives the benefit in Michigan.

The statute focuses on the "recipient" of the services, which in many cases is the purchaser but may be someone other than the purchaser. A taxpayer may not simply use the customer's billing address to source a sale of services without first making a reasonable and demonstrable effort, based on its books and records, to determine the location where the recipient of the service received the benefit.

Michigan Treasury's Revenue Administrative Bulletin 2015-20 provides interpretive guidelines for determining where the benefit of a service is received. Under RAB 2015-20, all the benefit of a service is received in Michigan if the service relates to real property located entirely in Michigan. If only a portion of the benefit is received in Michigan, the taxpayer must apportion the receipts proportionally. If a taxpayer is unable to determine where the benefit is received after a reasonable effort, the default rule sources the receipts to the customer's billing address.

MCL 206.665 also includes special sourcing rules for specific service categories including securities brokerage services, investment management services, lending and credit card transactions, telecommunications services, and transportation services, among others. These industry-specific rules override the general benefit-received standard.

Leases and rentals of tangible personal property

Receipts from the lease or rental of tangible personal property are sales in Michigan to the extent the property is utilized in Michigan. Utilization is measured by multiplying the receipts by a fraction: the numerator is the number of days of physical location of the property in Michigan during the lease or rental period in the tax year, and the denominator is the number of days of physical location of the property everywhere during all lease or rental periods in the tax year. If the physical location during the lease or rental period is unknown or cannot be determined, the property is deemed utilized in the state where the lessee obtained possession.

Real property

Receipts from the sale, lease, rental, or licensing of real property are sourced to Michigan if the property is located in Michigan.

Royalties and intangible property

Royalties and other income received for the use of or privilege of using intangible property (including patents, know-how, formulas, copyrights, trade names, licenses, and custom computer software) are attributed to Michigan if the property is used by the purchaser in Michigan. If the intangible property is used in more than one state, the royalties are apportioned to Michigan pro rata according to the portion of use in Michigan. Intangible property is used in Michigan if the purchaser uses it in the regular course of its business operations in Michigan, regardless of the location of the purchaser's customers. If the portion of use in Michigan cannot be determined, the royalties are excluded from both the numerator and the denominator.

Effective date

MCL 206.665 was added by 2011 PA 38, effective for tax years beginning on or after January 1, 2012, when the CIT replaced the Michigan Business Tax. The statute was amended by 2014 PA 13, effective February 25, 2014.

Source: MCL 206.665; Michigan Dept. of Treasury Revenue Administrative Bulletin 2015-20