Do you understand the Michigan Corporate Income Tax apportionment? If your business has sales in states outside of Michigan and are not taking advantage of it, you might be paying more taxes than you need to.
The Problem
Upon reviewing the prior tax returns of new clients, we have seen quite a few with overstated tax amounts, especially the Michigan Corporate Income Tax (CIT) return. Often times, it is due to not apportioning out-of-state sales off of the Michigan return.
What is Apportionment?
Many businesses have sales outside of Michigan. If you do, the possibility exists to apportion sales off of the Michigan CIT to save you tax. The State of Michigan allows you to reduce your Michigan tax base if you have created nexus in at least one other State. Nexus can be created if you have an employee solicit sales in another State for only two days during the year. If you have nexus with at least one other State, Michigan allows you to exclude ALL sales to other states off of the Michigan tax return.
How is it Calculated?
When the Michigan Corporate Income Tax (CIT) became effective January 1, 2012, it renewed questions over how exactly does a corporation apportion its sales if it is in multiple states. Like the previous Michigan Business Tax, the CIT uses a single sales factor. For example, your business has sales inside Michigan of $1,000,000 and sales to other states of $2,500,000:
- The numerator is the portion of your businesses sales sourced to Michigan (In our example $1,000,000).
- The denominator is the sales for your entire business ($3,500,000).
- This results in a Michigan apportionment factor of 40% ($1,000,000/$3,500,000).
If the above corporation had taxable income of $250,000, it may have paid a 6% CIT tax of $15,000 ($250,000 x 6% CIT rate). With apportionment, the CIT could have been $6,000 ($250,000 x 40% apportionment factor x 6% CIT rate), resulting in $9,000 of tax savings in Michigan.
If too much tax was paid, we may amend the Michigan CIT for all open tax years (generally the prior four years) and generate nice refunds for our clients.
However, we still need to review the possibility of filing tax returns in other states depending on the nexus standards for other states. Often times, we have found that there is still significant savings using the apportionment method even when having to file and pay other state taxes.
Record Keeping
Make sure your accounting records allow for you to gather the necessary information to determine sales by each state. Getting the correct apportionment allows your returns to be accurate both for calculating liabilities and so they can stand up to the scrutiny that taxing authorities may put them through.
If you have any questions about this topic or need assistance, please request a complimentary accounting consultation with one of our CPAs or contact us at (616) 642-9467.
