Michigan Business Tax Relief to Contractors

The Governor recently signed an amendment to the Michigan Business Tax Act (MBT) to revise the definition of “Purchases from other firms” as it applies to general contractors, heavy construction contractors, and special trade contractors.  “Purchases from other firms” now includes payments for materials that were deducted in determining the cost of goods sold.  Therefore, these payments are excluded from the calculation of the gross receipts tax base required by the MBT.

The MBT is in part a tax imposed on the modified gross receipts tax base, after allocation or apportionment to the State at a rate of 0.8%.  The tax base is a taxpayer’s gross receipts less purchases from other firms before apportionment.  Specifically, the amendment allows the following to be included in “purchases from other firms” for the contractors:

1. Payments to subcontractors for a construction project under a contract specific to that project;
2. To the extent not deducted under other provisions of the act allowing deductions for materials and supplies, payments for materials deducted as purchases in determining the cost of goods sold for the purpose of calculating total income on the taxpayer’s federal income tax.

Payments to subcontractors for a construction project under a contract specific to that project are limited to contractors that do not qualify for a credit under Section 417 of the MBT.  Section 417 allows a credit against the MBT for any taxpayer with gross receipts that do not exceed $20 million and with adjusted business income minus the loss adjustment that does not exceed $1.3 million as adjusted annually for inflation.

Payments for materials deducted as purchases in determining the cost of goods sold are limited to the extent the payments were not deducted under provisions allowing deductions for materials and supplies.  This could include repair parts, fuel, and inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price for that inventory.

This bill would be retroactive and effective for taxes levied after December 31, 2007.

* Jeff Jacobsonis an associate attorney with Parmenter O’Toole in Muskegon, Michigan.  Parmenter O’Toole is a full-service business and real estate law firm with extensive experience in the area of construction law.  The comments in this article are not intended to be a substitute for legal guidance or advice for a specific situation.  You should obtain informed legal counsel to assist in your decisions relating to any issues which may be raised in this article.  For additional information regarding the above topic, or any other legal issues you may have, Mr. Jacobson can be reached at (231) 722-1621 or jaj@parmenterlaw.com.