Michigan Business Tax

C32. What expense items are included in compensation for purposes of the compensation credit provided for at MCL 208.1403(2)? What accounting method is used to determine compensation?

For the 2008 tax year, MCL 208.1403 provides a compensation credit equal to .296% of a taxpayer's Michigan compensation. For the 2009 tax year and beyond, the rate is increased to .370% of Michigan compensation. The compensation credit cannot exceed 50% of the taxpayer's liability imposed under the MBT before the imposition and levy of the surcharge under section 281 for the 2008 tax year. For the 2009 tax year and beyond, the credit cannot exceed 52% of liability before the imposition and levy of the surcharge.

Compensation payments made in the tax year on behalf of or for the benefit of employees, officers or directors is defined at MCL 208.1107(2). Generally, under this definition, compensation includes, but is not limited to, payments that are subject to or specifically exempt or excepted from withholding under sections 3401 to 3406 of the Internal Revenue Code including any earnings that are net earnings from self-employment as defined under section 1402 of the Internal Revenue Code. Similar to the SBT, wages, salaries, fees, bonuses, commissions, and other payments made in the tax year on behalf of or for the benefit of employees, officers or directors as well as self-employment earnings must be reported on a cash basis.

Compensation includes expenses such as payroll taxes (exclusive of payments for state and federal unemployment compensation and federal insurance contributions) and all other fringe benefits made for the benefit of employees. Payments made to a pension plan, retirement or profit sharing plan, employee insurance plans and payments under health and welfare benefit plans as well as the administration fees paid for the administration of the health and welfare benefit plan are compensation. Compensation also includes certain payments made by licensed taxpayers that are statutorily identified. These compensation payments are calculated on a cash or accrual basis consistent with the taxpayer's method of accounting for federal income taxes. The statute provides for certain exclusions from compensation including employee discounts on merchandise and services purchased as well as payments made to independent contractors.

Expense incurred for the benefit of the taxpayer rather than for the benefit of employees of the taxpayer is not compensation. Non compensation expenses might include payments reported on a 1099 to an employee for the rental of a building or for interest income. Compensation computed using the methods described above will be used in computing the compensation credit.