Understanding Michigan Income Tax For Your Cannabis Business

We constantly receive inquiries from individuals who want to know how Michigan income taxes will affect them at the corporate and individual levels. We’ve addressed federal tax law time and time again and will continue to do so. However, what about Michigan cannabis business income tax? How does this affect Michigan residents and non-residents working in Michigan? Fortunately, we have an attorney who is also a CPA on our staff. We recommend speaking with her when you need a cannabis business income tax lawyer.

Do you need help navigating cannabis business income tax at the state and federal levels? Would you like to speak with a cannabis business income tax lawyer? Request a consultation now.

With proper planning and analysis of the financial projections of your cannabis business, together, we’ll be in the best position to advise, implement and help you execute your corporate strategy.

I’ll break this out into three main parts:

1. Corporate Income Tax (CIT)
2. Flow-Through Withholding Tax (FTW)
3. Individual Tax

If you’re based in another area of the world, like Canada for instance, please consult with a Canadian Tax Lawyer about what to do with your business.

Corporate Income Tax

The Michigan Corporate Income Tax (CIT) imposes a 6% corporate income tax on C corporations and taxpayers taxed as corporations federally.

The CIT has one credit, the small business alternative credit, which offers an alternate tax rate of 1.8% of adjusted business income.

There are no other credits, except those under the MBT election, which doesn’t apply to newly established entities.

Insurance companies and financial institutions pay alternative taxes.

Taxpayers with less than $350,000 in allocated or apportioned gross receipts and/or less than or equal to $100 in annual liability are not required to file or pay the CIT.

The gross receipts threshold does not apply to financial institutions or insurance companies.

Under the CIT, a taxpayer is defined as a corporation, insurance company, financial institution, or unitary business group.

Flow-through entities, including S-corporations, partnerships, and trusts, generally are not taxpayers under the CIT, unless the flow-through entity elects or is required to file as a C-corporation for federal tax purposes or otherwise constitutes an insurance company or financial institution.

Small Business Alternative Credit (SBAC)

Taxpayers are not eligible for the SBAC if any of the following conditions exist:

• Gross receipts exceed $20,000,000.
• Adjusted business income after loss adjustment exceeds $1,361,100 for Corporations (and LLCs federally taxed as such).
• Any shareholder or officer has allocated income after loss adjustment of over $180,000, as determined on Form 4894. In addition, the SBAC is reduced if any of the following conditions exist:
• Gross receipts exceed $19,000,000 but are not more than $20,000,000.
• A shareholder or an officer has allocated income after loss adjustment of more than $160,000 but not over $180,000. This reduction is based on the officer/shareholder with the largest allocated income.

Allocated income is the greater of either:

(a) A shareholder or officer’s compensation and director fees from Form 4894, column L, or

(b) A shareholder’s compensation, director fees, and share of business income (or loss) after loss adjustment, from Form 4894, column N.

If either (a) or (b) is greater than $180,000 for any shareholder or officer, the taxpayer is not eligible for the SBAC. In addition, if either (a) or (b) is over $160,000 but not more than $180,000 for any shareholder or officer, the taxpayer must reduce the SBAC based on the officer or shareholder with the largest allocated income.

Note, the CIT Schedule of Shareholders and Officers (Form 4894) also must be filed with a return to qualify for the SBAC. An SBAC claimed on Form 4893 will be denied if Form 4894 is not also included with the return.

Do you need help navigating cannabis business income tax at the state and federal levels? Would you like to speak with a cannabis business income tax lawyer? Request a consultation now.

Flow-Through Withholding (FTW)

FTW was repealed on June 9, 2016, when PA 158 was signed into law.

Under PA 158, flow-through entities are no longer required to withhold income tax on members’ distributive share of income or file Michigan Flow-Through Withholding Quarterly Returns (Form 4917) or an Annual Flow-Through Withholding Reconciliation Return (Form 4918) for tax years that begin on or after July 1, 2016.

The individual or corporate members with a Michigan filing requirement are responsible for filing and remitting their own estimated taxes when they expect to owe Michigan tax.

Nonresident individual members may not have to pay estimated tax if the flow-through entity files a composite return on their behalf.

Michigan Composite Individual Income Tax Return (Form 807)

Form 807 is used to report and pay individual income tax under Part 1 of Public Act 281 of 1967, as amended.

It’s a collective individual income tax filing of participating nonresident members, filed by a flow-through entity on behalf of those nonresident members.

The composite return should only be filed on behalf of two or more nonresident members subject to Michigan Individual Income Tax.

This return is not an entity-level filing for income tax imposed on the flow-through entity.

A flow-through entity – which doesn’t include an entity that files federally as a C-corporation – currently has no return filing requirements for Michigan income tax.

A flow-through entity isn’t required to file Form 807.

Nonresident members of a flow-through entity may elect to have the flow-through entity file a composite return in lieu of the members filing Individual Income Tax Returns (Form MI-1040).

All nonresident members of the flow-through entity don’t have to participate.

A flow-through entity that does business in Michigan may file this return if it’s filing on behalf of two or more non-resident individuals, partners, shareholders or members.

A flow-through entity in a tiered structure may also be eligible to file a composite return on behalf of the ultimate owners who are nonresident individuals.

A flow-through entity may not file on behalf of a member that is a C-corporation or a member that files federally as a C-corporation.

The ultimate individual owners must be identified.

The individual income tax filing obligation of a member is satisfied when the member participates in a composite filing only if the member has no other Michigan-sourced income.

The filing entity and participating members must agree to comply with the participation and reporting to member requirements.

These requirements are described in the Form 807 instructions.

Estimated Tax – Michigan Composite Individual Income Tax Return (Form 807)

If the flow-through entity intends to file a Michigan Composite Individual Income Tax Return (Form 807), the flow-through entity may file and remit estimated taxes on behalf of participating members who are nonresident individuals.

Estimated vouchers and payments are required if the annual income tax liability for each participant is expected to exceed $500 after exemptions and credits.

The estimated payments must be remitted with an Estimated Income Tax Voucher for Fiduciary and Composite Filers (Form MI-1041ES) with the name of the flow-through entity and the flow-through entity’s federal employer ID number (FEIN).

Estimated payments should only be remitted for those nonresident individual members who will participate on the Composite Return (Form 807).

Flow-through entities with a calendar tax year must file vouchers and pay quarterly estimated tax.

Flow-through entities that aren’t using a calendar year must file vouchers and pay quarterly estimated tax on the appropriate due dates that, in the flow-through entities’ fiscal year, correspond to the calendar year (the first payment is due on the 15th day of the fourth month after the fiscal year ends).

Fiscal year filer due dates apply regardless of the tax years of the participants.

Each member who doesn’t participate in a composite filing is responsible for filing and remitting their own required estimated taxes for the flow-through income.

A flow-through entity may elect to make separate voluntary estimated income tax payments on behalf of each member who is an individual using an Estimated Individual Income Tax Voucher (MI-1040ES) and that member’s Social Security number.

Do you need help navigating cannabis business income tax at the state and federal levels? Would you like to speak with a cannabis business income tax lawyer? Request a consultation now.

Reporting Requirements to Members

Regardless of the withholding requirement repeal, a flow-through entity must continue to report certain information to its members, because both individuals and CIT taxpayers require this information to complete their income tax returns.

A flow-through entity may use any method to report the information to its members, but the Department of Treasury recommends that the information is provided as a supplemental attachment to the member’s federal Schedule K-1.

The following information must be conveyed:

• The FEIN of the flow-through entity.
• The tax year of the flow-through entity.
• For members subject to individual income tax, the member’s distributive share of taxable income attributable to the flow-through entity. For members subject to CIT, the member’s distributive share of business income and the member’s share of statutory additions and subtractions before apportionment, attributable to the flow-through entity.
• The amount of the flow-through entity’s sales that are sourced to Michigan.
• The flow-through entity’s total sales.
• For members that are corporations or other flow-through entities, the amount of the flow-through entity’s gross receipts. Corporation members will report their proportionate share of allocated or apportioned gross receipts from flow-through entities on their CIT returns.
• For nonresident individual members that will participate in a Composite Individual Income Tax Return (Form 807), the member’s share of the tax liability paid by the flow-through entity on the composite return.

Individual Income Tax

The State of Michigan imposes a 4.25% individual income tax rate.

Your tax preparer will discuss the income tax credits, additions, and subtractions applicable to you.

Resident

You’re a Michigan resident if Michigan is your permanent home.

Your permanent home is the place you intend to return to whenever you go away.

A temporary absence from Michigan, such as spending the winter in a southern state, doesn’t make you a part-year resident.

Income earned by a Michigan resident in a nonreciprocal state (as described below) or Canadian province is taxed by Michigan and may also be taxed by the other jurisdiction.

If you pay tax to both, you can claim a credit on your Michigan return.

Part-Year Resident

You’re a part-year resident if, during the year, you move your permanent home into or out of Michigan.

You must pay Michigan tax on income you earned, received, or accrued while living in Michigan.

You would need to:

• Allocate your income from the date you moved into or out of Michigan
• Bonus pay, severance pay, deferred income and any other amount accrued while a Michigan resident is subject to Michigan tax no matter where you lived when received it
• Deferred compensation reported to you on Form 1099-R, dividends and interest income are allocated to the state of your residence when received
• Part-year residents who lived in Michigan at least six months of the tax year may qualify for a homestead property tax credit

Non-Resident

You must pay Michigan income tax on the following types of income:

• Salary, wages and other employee compensation for work performed in Michigan, unless you live in a state covered by a reciprocal agreement
• Net rents and royalties from real and tangible personal property in Michigan
• Capital gains from the sale or exchange of real property or tangible personal property located in Michigan
• Patent or copyright royalties if the patent or copyright is used in Michigan or if you have commercial domicile in Michigan
• Income (including dividends and interest) from an S corporation, partnership or an unincorporated business, or other business activity in Michigan
• Lottery winnings and prizes won from casinos located in Michigan

Reciprocal States

Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin have reciprocal agreements with Michigan.

Michigan residents pay only Michigan income tax on their salaries and wages earned in any of these states.

A Michigan resident may file a withholding form with an employer in a reciprocal state to claim exemption from that state’s income tax withholding.

The out-of-state income may make Michigan individual income tax estimate payments necessary.

Residents of reciprocal states working in Michigan don’t have to pay Michigan tax on salaries or wages earned in Michigan but do have to pay Michigan tax on business income earned from business activity in Michigan.

A resident of a reciprocal state who claims a refund of Michigan withholding tax must file Schedule NR with the Michigan income tax return form MI-1040.

In conclusion, be sure to have conversations with your cannabis income tax lawyer, or CPA, and plan around not only your income tax exposure at the federal level but at the state level.

This will need to include the State of Michigan and your resident state if applicable.

Do you need help navigating cannabis business income tax at the state and federal levels? Would you like to speak with a cannabis business income tax lawyer? Request a consultation now.