Effective January 1, 2008, the Michigan single business tax is replaced by the Michigan business tax. The Michigan business tax is imposed on persons or unitary business groups doing business or having business activity in the state of Michigan. The tax has two components: (1) a 4.95% tax on business income, and (2) a 0.8% modified gross receipts tax.

Also effective January 1, 2008, the Texas franchise tax is significantly revised. The revised franchise tax is also called the “margin tax.” The tax base for the Texas margin tax is the taxable entity's margin. “Margin” equals the lesser of three calculations: (1) total revenue minus cost of goods sold, (2) total revenue minus compensation paid, or (3) total revenue times 70%.

May a corporation deduct the Michigan business tax or the Texas margin tax?

A corporation may not deduct any component of either the Michigan business tax or the Texas margin tax for Wisconsin franchise or income tax purposes.

Corporations compute their Wisconsin net income under the Internal Revenue Code (IRC) as defined for Wisconsin purposes, with certain modifications. One of the modifications is sec. 71.26(3)(g), Wis. Stats. (2005-06), which provides that IRC sec. 164(a) is modified so that state taxes and taxes of the District of Columbia that are value-added taxes, single business taxes, or taxes on or measured by all or a portion of net income, gross income, gross receipts, or capital stock are not deductible. Similar statutory language applies to tax-option (S) corporations.

Do the Michigan business tax and the Texas margin tax qualify for the credit for net income tax paid to another state?

Both the Michigan business tax and the Texas margin tax qualify for the credit for net income tax paid to another state, if the other requirements of the credit provided in sec. 71.07(7), Wis. Stats. (2005-06), are met. For the Michigan business tax, the business income component and the modified gross receipts tax component both qualify for the credit. For the Texas margin tax, the credit applies regardless of which of the three computations is used to compute the “margin.”

Section 71.07(7), Wis. Stats. (2005-06), provides that if a resident individual, estate, or trust pays a net income tax to another state, that resident individual, estate or trust may credit the net tax paid to that other state against the net income tax otherwise payable to Wisconsin on income of the same year. The credit may not be allowed unless the income taxed by the other state is also considered income for Wisconsin tax purposes.

A Wisconsin resident shareholder, partner, or member may also claim a credit for his or her pro rata share of the Michigan business tax or the Texas margin tax paid by a tax-option (S) corporation, partnership, or limited liability company treated as a partnership, provided the income taxed by Michigan or Texas is also considered income for Wisconsin.

February 26, 2008