Hey, are you excited about the new Michigan Business Tax?
Neither am I.
But there is a bit of good news for services businesses with out-of-state clients.
Service businesses can reduce their MBT tax by “sourcing” their revenues out of state if the benefit of their service is received outside of Michigan. Under the old SBT, service revenues were generally sourced to the state where the services were performed.
Example: A management consultant in Michigan with $700,000 in revenues has a client in Ohio. The Ohio client provides $400,000 of the management consultant’s revenues. Normally, the management consultant would be subject to MBT because her revenues exceed the filing threshold of $350,000.
However, since the benefit of the consultant’s services are enjoyed in Ohio, the revenues can be sourced outside of Michigan. The consultant’s Michigan revenues are now $300,000 and the consultant is now under the MBT filing threshold and will have no MBT tax liability.
Under the SBT, the revenues would be sourced to Michigan, since this is where the services were performed.
While this strategy may not get you under the filing threshold, it may qualify you for more tax credits and lower your overall tax.
Taxpayers must have “nexus” with the outside state(s) to source revenues outside of Michigan. Nexus exists where:
1) the taxpayer has physical presence in the outside state for more than one day
2) the taxpayer actively solicits in the outside state and has more than $350,000 in revenues sourced to that outside state
The MBT statute defines “state” to include foreign countries. So if you perform services for a Canadian client (or a client in any other country), these revenues can be sourced to an outside “state.”
This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.