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2. How is Michigan business income or loss determined?
Business income is taxable in Michigan based on the location of the business activity. Business income or loss is allocated and apportioned under the provisions in Part 1, Chapter 3 of the Michigan Income Tax Act.
If the business activity occurred solely in Michigan, the entire business income or loss is allocated to Michigan. MCL 206.102
If the business activity occurred within and without Michigan, the Michigan business income or loss is determined using Michigan’s method of apportionment. MCL 206.105 Business income apportioned to Michigan is computed on the Michigan Schedule of Apportionment (Form MI-1040H). MCL 206.115 provides that all business income shall be apportioned to Michigan by multiplying the business income or loss included in adjusted gross income (AGI) by the Michigan sales factor for years beginning in 2012 and after.*
Business income apportioned to Michigan is taxable to Michigan. Business income not apportioned to Michigan may be claimed as a subtraction from AGI. Conversely, business losses not apportioned to Michigan cannot reduce Michigan taxable income and must be added to AGI.
If the business activity occurs entirely outside of Michigan, the business income may be subtracted from AGI. Conversely, losses from business activity that occurs entirely outside of Michigan cannot reduce Michigan taxable income and must be added back to AGI.
*For years 2011 and earlier business income was apportioned using a three-factor apportionment formula.