A Guide to the Michigan Corporate Income Tax (CIT)

If you’re a business in Michigan, you’re likely paying or collecting a variety of business-related taxes, such as the sales tax, flow-through entity tax, and/or withholding tax. You’re no longer required to pay the Michigan Business Tax (MBT), although in some cases you could still be filing an MBT return each year to take advantage of certain tax credits. 

If you don’t have to pay or file the MBT, does your Michigan business have to pay an income tax? Possibly, but it will largely depend on whether the Corporate Income Tax applies. How does this tax work and who does it apply to? Read on to find out. 

A Brief History of the Michigan Corporate Income Tax 

On May 25, 2011, Governor Rick Snyder signed the Michigan Corporate Income Tax (CIT) into law. The CIT didn’t replace the MBT overnight but started a multi-year process. Even though most taxes are disliked by those who have to pay them, the MBT was especially unpopular because of its complexity. 

To help keep things simple, the CIT imposed a flat 6% tax on covered business entities in Michigan and removed almost all business tax credits. Today, the majority of Michigan businesses either pay the CIT or don’t pay any income taxes on their business income. 

Who Has to Pay the MI Corporate Income Tax and File a Return?

Generally speaking, C corporations and taxpayers taxed as S corporations at the federal level have to file CIT returns and pay the CIT. However, taxpayers with less than $350,000 in allocated or apportioned gross receipts, and/or less than $100 in annual CIT liability aren’t required to file or pay the CIT. This means that many smaller businesses, such as S corporations, LLCs, sole proprietorships, and partnerships won’t have to pay the CIT or file a CIT return.

To be subject to the CIT, the taxpayer must have a “nexus” with the state. This generally means the taxpayer must:

• Have a physical presence in the state for more than one day in the tax year;
• Actively solicit sales in the state and have gross receipts of $350,000 or more from Michigan; or
• Have an ownership or beneficial interest in a flow-through entity (directly or indirectly), that has a nexus in Michigan.

The CIT doesn’t apply to entities where their only in-state business activity involves soliciting orders of tangible personal property, that property gets sent to customers outside of Michigan, and the orders are filled by a shipping or delivery company outside the state. 

How Much Is the Corporate Income Tax in Michigan? 

Most CIT taxpayers pay 6% of the corporate income tax base, after allocation and apportionment. This means that, roughly speaking, the 6% tax rate only applies to the sales made in Michigan. In other words, if a company had $1,000,000 in annual sales, but only $100,000 of those sales came from Michigan, then the 6% rate applies to the $100,000, not $1 million. Eligible small businesses receive a small business alternative credit, which allows them to have a tax rate of 1.8%.

Insurance companies and financial institutions don’t technically pay the CIT, although they will file special CIT returns. Instead of a CIT, insurance companies pay a premiums tax, which is 1.25% of gross direct premiums. Financial institutions get taxed at 0.29% of their net capital. Net capital is the institution’s equity capital less the average daily book value of Michigan and U.S. obligations calculated over five years. 

Michigan CIT Filing Requirements

There are generally two filing requirements: quarterly and annual. Quarterly estimated tax payments (and returns) are required if you expect to have a liability of more than $800 for the tax year. Each tax payment is an estimate, although if the four quarterly estimated tax payments don’t add up to 85% of the total tax liability for the year, then penalties and interest are possible. 

The underpayment penalty can also be avoided if make four equal estimated quarterly payments that add up to the prior year’s total tax bill and that tax bill was $20,000 or less.

These quarterly returns are due on April 15, July 15, October 15, and January 15. If you have a fiscal year that doesn’t correspond to the calendar year, then use a corresponding date that parallels the calendar year’s deadlines. For example, if your fiscal year starts on March 1, then your quarterly payments would be due June 15, September 15, December 15, and March 15.

Annual (or final) returns are due by the last day of the fourth month following the end of your tax year (calendar or fiscal).

When it comes to filing CIT returns, you must file them electronically if they were prepared with tax preparation software or computer-generated forms. If you mailed your CIT return when it should have been e-filed, you will receive a letter asking you to resubmit your return with Michigan’s e-file system. Also, any payment you sent with the paper return will be applied to your taxpayer account (even if the return doesn’t get processed). 

How to Pay the CIT 

CIT tax payments are like most Michigan tax payments in that they can be made electronically or by mail. If mailing payment, include form CIT-V, CIT E-File Annual Return Payment Voucher (Form 4901) with the payment.

To pay the CIT without sending payment by mail, you can use the Electronic Funds Transfer online payment process or a touch-tone telephone. 

The Small Business Alternative Credit 

This is the only credit available under the CIT. Insurance companies and financial institutions aren’t eligible to use this credit. It’s only available to taxpayers who meet the following three conditions:

• Gross receipts of $20,000,000 or less;
• Business income of $1,300,000 or less; and
• Have shareholders or officers that receive $180,000 or less in total compensation.

When used, this credit will reduce the CIT tax rate to 1.8% of adjusted business income. 

Penalties and Interest 

There’s a 5% penalty for any unpaid CIT balance. This 5% penalty applies over the first two months. Starting the third month, an additional 5% penalty gets added for each month the assessed tax goes unpaid. The maximum penalty is set at 25% and interest is calculated by multiplying the outstanding tax balance by the applicable interest rate (adjusted prime rate plus 1%). 

Need Help Figuring Out the Michigan Corporate Income Tax? 

The CIT is an improvement over the Michigan Business Tax in that it’s usually simpler to calculate your taxes and file a return. That being said, you might still have questions about how to prepare a CIT return or if you should file an MBT return instead. If so, you should contact the tax professionals at the W Tax Group for a free consultation. We can assess your tax situation and help you figure out the best way to handle your Michigan business taxes. We can also help with other Michigan tax problems including sales tax audits.

Sources:

• https://www.michigan.gov/taxes/business-taxes/cit
• https://www.michiganbusiness.org/4a8165/globalassets/documents/reports/fact-sheets/mi-cit.pdf
• https://www.michbar.org/file/journal/pdf/pdf4article2056.pdf
• https://www.michigan.gov/taxes/questions/cit
• https://www.michigan.gov/taxes/iit/tools/tax-interest-rate-calculation
• https://www.michigan.gov/-/media/Project/Websites/taxes/2022RM/BUSINESS_CIT/4899_ty2021.pdf?rev=a73d05d47402455caad49b63c882b55c
• https://www.michigan.gov/taxes/business-taxes/cit/detail/corporate-tax-base
• https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/2023/2023-CIT-Forms/4890_ty2023.pdf?rev=4f74ddcef7bb4a6a9728bc971920761f&hash=313309270C263254BA27FE7EE0F3AD45
• https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/MISC/2012/2012_CIT_FAQ_4112.pdf?rev=5c0b4b598f3c4e0fb6fbbeab4dea3ae6&hash=1AA08C1CAEFAA6336A13A214E7FA7B0F
• https://www.michigan.gov/taxes/iit/tools/calculate-late-penalty-and-interest

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg