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Michigan Business Tax – Complete Guide
Whether you are a first-time business owner or have been operating a company for several years, you are obligated to fulfill certain tax requirements at the federal, state, and local levels. Different states have different forms of taxes applicable as well as incentives that help in offsetting such taxes. This article has been created to provide you with an insight into Michigan business taxes. In the state of Michigan, different entities will be taxed differently and hence this guide will help you to understand the tax liabilities for a variety of entities including LLCs, profit corporations, sole proprietorships, and partnerships.
Michigan Business Tax
Most business entities are required to file tax returns at the federal level as well as the state level. If you have registered a company in Michigan then some form of business taxes may be applicable. A Michigan business tax calculator will help you in determining your taxes but before that, you will need to understand the various taxes required by the state. The Michigan business tax rates, as well as the filing processes, will be different from those in other states of the USA. It is also important to note that foreign entities would be required to file taxes in their home state (state of formation) as well as Michigan or other states of operations.
What taxes do businesses pay in Michigan?
The state of Michigan is considered to be one of the top states for new and expanded corporate facilities. It is currently ranked number 3 with the most popular being the Detroit-Warren-Livonia metro area. The state offers some remarkably aggressive film incentives, which have generated economic activity amounting to $430 million. The state also has a fairly good business tax climate that attracts entrepreneurs to the state.
There are several different types of domestic and foreign entity structures that you can choose to form in Michigan, hence the tax status will vary from one entity to another. The Michigan LLC taxes would be different from that of a sole proprietorship or a C corporation. Your company may be required to file a single tax or multiple taxes depending on the business activity. In such a scenario, you will need to use a Michigan business tax calculator for determining the exact rate or amount of tax. The most common form of taxes applicable in the state are:
Corporate Income Tax (CIT)
The Corporate Income Tax (CIT) has a flat rate of 6% and has to be filed by profit corporations in the state of Michigan. This is one of the important Michigan Corporation taxes and will not be applicable if the apportioned gross receipts are less than $350,000. There is a formula for this type of tax and is currently based on an entity’s sales in the state, divided by its total sales everywhere. The CIT has replaced the Michigan Business Tax (MBT) since 2012. It is important to note that certain tax credits or tax incentives like the Small Business Alternative Tax Credit program help in providing some relief.
Sales and Use Tax
The sales and use tax is an important Michigan business tax and will be paid to the state or local governing body depending on the jurisdiction in which the said business is operating. Normally, a business owner or entity involved in the selling of taxable goods or services has to collect this tax from purchasers or consumers and pass it forward to the appropriate state or local tax authority. This tax is administered by the Michigan Department of Treasury. The base tax rate for Michigan sales tax is 6% and the local tax is also 6%.
Since the local sales tax rates can vary according to the city or county, it always helps to use a Michigan business tax calculator. The use tax is remitted to the state in the form of monthly, quarterly, or annual returns and applies to tangible personal property. If a company meets the criteria for collecting sales and use tax but doesn’t file it with the Department of Treasury then they will be levied penalties and interest on the tax due amount.
Withholding Tax
The withholding tax is a type of Michigan business tax that is levied at the Federal and state level. It is also known as the payroll withholding tax and the current tax rate in the state is 4.25%. The Department of the Treasury, Internal Revenue Service requires employers to withhold employment taxes from their employees. The employment taxes have several components including federal income tax withholding, Medicare taxes, and Social Security taxes. The IRS provides a withholding table also known as Percentage Method Tables for Income Tax Withholding for withholding allowances and applicable taxes. You can also use a Michigan business tax calculator to determine your withholding taxes at the Federal and state level.
Are you thinking of forming a new company in Michigan?
How are Michigan Businesses taxed?
If you are planning to form a new business in Michigan then one of the foremost annual requirements is filing your business tax returns. The state does not have any franchise tax or privilege tax but there are several other forms of small business taxes. The type of Michigan business tax and the tax rates may vary according to the type of entity structure and the location of the said company. It is also important to note that Michigan LLC tax filing requirements will vary from that of a corporation or a sole proprietorship. You may be required to file more than one type of tax return. Let us look at the various entities and their tax obligations in Michigan.
Taxes for an LLC
If you are planning to start a limited liability company in Michigan, then for taxation purposes it will be considered a pass-through entity. This simply means that the LLC will not be required to file federal or Michigan LLC taxes. Since an LLC is a flow-through entity, the income will pass through to the owners and other members. Normally, in such a situation, members have to file personal income tax and the state has a Flow-Through Entity (FTE) Tax.
The FTE tax is governed by Section 51 of the Income Tax Act and is levied only on the positive “business income tax base” specific to Michigan. There are statutory adjustments that include charitable contributions, interest income and dividends, and tax refunds among others. The Michigan LLC tax filing requirements state that the tax return has to be filed by the Michigan FTE annual tax return due date and can be filed using Michigan Treasury Online (MTO). Apart from this, an LLC may be required to file Sales and Use Tax and Withholding Tax depending on the business activity and the number of employees.
Taxes for a C Corporation
If you are thinking of incorporating a Michigan C corporation then your company will be subjected to the Michigan Corporate Income Tax (CIT). The tax rate is a flat 6 percent and it replaced the earlier applicable Michigan Business Tax (MBT) in 2012. The CIT Michigan Corporation taxes takes into account the business income of a C corporation along with certain additions as well as subtractions before apportionment and business loss deduction after apportionment.
The Michigan corporation tax filing requirements specify that all corporations, insurance companies, and financial institutions that expect a liability that exceeds $800 for a specific tax year will be required to make quarterly estimated payments as well as returns. Each payment should approximate the tax liability of the taxpayer for the said quarter or should be 25% of the estimated annual liability of the said C Corporation. The CIT return has to be filed by the last day of the fourth month post the end of the taxpayer’s tax year.
It is important to note that the CIT Michigan Corporation taxes isn’t required to be filed by any taxpayer reporting less than $350,000 in apportioned or allocated gross receipts. This tax has to be filed with the Department of Treasury. Apart from this, a C corporation may also be required to file Withholding Tax, Sales and Use Tax, and other miscellaneous taxes and fees.
Taxes for S Corporation
If you elect an S Corporation tax status in Michigan then one of the benefits is that you will not be required to file Michigan Corporate Income Tax (CIT). However, if an S corporation is an insurance company or a financial institution then it will be subjected to CIT. An S Corporation may also be required to withhold on the shareholders and hence be subjected to withholding tax. One of the important Michigan corporation tax filing requirements is that an S Corporation will be required to submit Form 518 for Michigan Business Tax Registration to file taxes in the state.
If your S Corporation is involved in selling tangible property then certain Michigan Corporation taxes will be applicable like the sales tax and the use tax. If the company is selling tobacco or motor fuels then you will need to file Tobacco and Motor Fuel tax returns using the MiMATS (Michigan Motor Fuel and Tobacco Tax System).
Taxes for a Sole Proprietorship
A sole proprietorship is one of the easiest forms of business to start in Michigan. A sole proprietorship is run by a single owner and hence is required to file individual income tax. The tax rate is 4.25 percent and you will have to use the 1040 form to file this return each year. A sole proprietorship may also be required to file sales tax depending on the business activity.
Taxes for Partnerships
If you form a Michigan partnership company then the applicable Michigan business tax would be quite similar to that of sole proprietorships. Partners in the company will be required to file their individual tax returns based on the income they have earned through the said business. Apart from this, if your company is based in Detroit then you will be required to file the City Partnership Tax, which is normally due on the 15th day of the 4th month after the tax year ends. This tax has to be filed by partners although the partnership can elect to pay the taxes on behalf of all the partners.
If your company is not based in Detroit but has conducted business activities in Detroit then you will also need to file the City Partnership Tax using form 5458. You can use the Michigan business tax calculator to calculate the tax as well as the Renaissance Zone Deduction for City of Detroit Partnership.
Ready to Incorporate Your Michigan Company?
You can form different types of entities in Michigan from a Sole Proprietorship, to a Limited Liability Company, or a C Corporation. You can also elect for S Corporation status. There is an exhaustive process for new business formation and you will also need to file all applicable taxes each year. IncParadise, one of the top incorporation service providers in the state can provide you with meaningful assistance. We can help to register your LLC or corporation in Michigan.
Once you have formed a new business, in addition to the Michigan business tax, there are several important annual requirements from business licensing to annual reports. Hence, IncParadise offers additional services to fulfill such requirements as foreign qualification, Michigan domestication, and filing DBA among others.