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.