Does Your Business Need to Pay the Michigan Business Tax (MBT)? 

When it comes to complicated taxes, business taxes are often near the top of the list. This is especially true in Michigan, which doesn’t always have the simplest tax laws. In particular, over the past few decades, Michigan has made significant changes in how its businesses pay taxes.

If you own or operate an incorporated business in Michigan or a business that has elected to be taxed as an S-corp, you likely need to pay the Corporate Income Tax (CIT), not the Michigan Business Tax (MBT). However, in some cases, you might continue paying the MBT. In this guide, we’ll discuss both taxes, with a special focus on when, why, and how you might choose to pay the MBT instead of the CIT. To get help now, contact us at the W Tax Group today. 

History of the Michigan Business Tax 

In 2007, Governor Jennifer M. Granholm signed the MBT into law. The MBT requirements went into effect on January 1, 2008, and replaced the Single Business Tax (which was enacted in 1975 and went into effect in 1976). The Single Business Tax (SBT) replaced several business-related taxes, such as the corporate income tax, financial institution income tax, corporate franchise tax, and business intangibles tax.

At the time it first went into effect, the MBT consisted of two actual taxes. First, there was the business income tax, which was 4.95% of federal adjusted business income. Second, there was the modified gross receipts tax, which was 0.8% of a business’s gross receipts, less purchases made to other businesses.

The MBT did not apply to insurance companies and financial institutions, although insurance companies continued paying the Single Business Tax and financial institutions paid a 0.235% franchise tax on their net capital. One of the key features of the MBT (besides how complicated it was), was that it offered a host of tax credits for businesses.

In December 2007, Governor Granholm signed Public Act 145 into law. This added a surcharge component to the MBT. This amounted to 21.99% of the taxpayer’s MBT tax liability after allocation and apportionment, but before credits. There was a $6 million cap on the MBT surcharge tax. Insurance companies did not have to pay this MBT surcharge and financial institutions paid a different surcharge rate of 23.4%. The surcharge expired on January 1, 2017.

If all that sounds complicated to you, you’re not alone. In May 2011, Governor Rick Snyder signed into law the Michigan CIT. The CIT largely repealed the MBT and replaced it with a 6% tax on all “C” corporations and taxpayers that are taxed like corporations at the federal level. The CIT replaced the MBT for the majority of Michigan taxpayers starting January 1, 2012. 

Who Needs to Pay the Michigan Business Tax?

Even though the CIT has replaced the MBT for the majority of Michigan business taxpayers, some businesses can still file an MBT return if they have a certificated tax credit that’s been awarded, but not yet fully utilized. The taxpayer may continue as an MBT taxpayer until that certificated credit and any carryforward of that credit runs out.

In addition to this certificated credit requirement, MBT taxpayers must also have a nexus with the state. This means either: having a physical presence in Michigan of more than one day during the tax year, or actively soliciting sales in Michigan and having gross receipts of $350,000 or more from sales in Michigan. 

Michigan Business Tax Credits 

When the MBT went into effect, it brought in many new or revised tax credits. Some of the more notable ones include:

• Michigan compensation credit
• Michigan investment tax credit
• Research and development expense credit
• Motorsports entertainment complex credit
• Sports/entertainment facility credit
• New motor vehicle dealer credit
• Start-up business credit
• Personal property tax credit
• Renaissance zone credit
• Workers’ disability compensation credit
• Public contributions credit
• Michigan Economic Growth Authority (MEGA) payroll credit

As noted above, some of these credits can still be used today, but there will come a point when the credit runs out and business taxpayers have no choice but to file CIT returns. 

When and How to Pay the MBT 

If your business has a tax liability that’s expected to exceed $800, you need to make quarterly estimated MBT payments. These are generally made on the 15th of the month following the relevant payment quarter. You will also have an annual MBT return to file, which is due on April 30th or the last day of the fourth month after the close of the tax year. Also, when you file your MBT return, you must do so electronically.

MBT Penalties and Interest 

Michigan imposes penalties and interest if Michigan Business Taxes aren’t fully paid or aren’t paid on time. The interest will accrue at a rate of 1% + prime. The penalty is 5% of the assessed tax and applies if the tax is late by two months or less. Starting the third month, the penalty increases by 5% up to a maximum of 25%.

To avoid an underpayment penalty, a taxpayer must have paid at least 85% of the total annual tax liability and made quarterly estimated payments that reasonably approximate the tax liability for that quarter. If the prior year’s MBT (including surcharge) is $20,000 or less, then the taxpayer can avoid penalties and interest if they pay at least 100% of that prior year’s tax liability for the current year. 

The “New” Corporate Income Tax

When the CIT went into effect in 2012, it was a major change to the Michigan tax system with a major goal of making state tax compliance much simpler. One of the ways it did this was to replace many of the available tax credits, with the one generally applicable small business tax credit. And because it only applied to those taxable as “C” corporations (and taxpayers taxed like S-corporations at the federal level), many thousands of Michigan businesses that used to pay the SBT or MBT would no longer have general business taxes to pay or returns to file. 

Want to Learn More about Michigan’s Business Tax and Corporate Income Tax? 

The MBT is one of the more complicated taxes, which is one reason why it’s been mostly replaced by the CIT. If you’re still an MBT taxpayer and are about to run out of your certificated credits, you might be wondering how to go about paying the CIT, assuming you even have to.

The tax professionals and lawyers at the W Tax Group have plenty of experience handling Michigan tax matters, including Michigan Business Tax and Corporate Income Tax questions. If you have any other concerns, such as issues with the Michigan sales tax, sales tax audits or IRS audits you can contact us for a free consultation. We are more than happy to discuss your tax case and we’ll work with you to find an optimal solution to your situation.