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  Michigan Business Tax
B2. Under MCL 208.1201, the business income tax base means the business income of the taxpayer subject to certain adjustments, including a deduction for net earnings from self-employment. Specifically, the section instructs "[t]o the extent included in federal taxable income, deduct any earnings that are net earnings from self-employment as defined under section 1402 of the [IRC] of the taxpayer or a partner or limited liability company member of the taxpayer except to the extent that those net earnings represent a reasonable return on capital." MCL 208.1201(2)(h). What impact does this deduction have on the business income tax base of professional service partnerships (for example, some consulting, law, and accounting firms)?
The impact of any deduction from business income to calculate the tax base varies by taxpayer. However, net earnings from self-employment under IRC 1402 generally means "the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in [IRC] 702(a)(8) from any trade or business carried on by a partnership of which he is a member," subject to certain exclusions, including rentals from real estate, dividends and interest, and certain net operating losses and personal exemptions. IRC 1402(a). Therefore, the deduction from business income for net earnings from self-employment for some professional service partnerships is likely to result in a significantly reduced business income tax base.