Professional service firm tax reduction opportunity
March 16, 2018
Article courtesy Gordon Advisors, PC
In a recent verdict (Honigman Miller Schwartz and Cohn LLP v. City of Detroit), the Michigan Court of Appeals held that services rendered by an attorney should be considered as where the client receives the service and not where the attorney performs the service for sales factor apportionment purposes of the City Income Tax Act. In general, taxpayers are required to apportion their entire net profits based on an equally weighted three factor apportionment formula (property, payroll, and sales) with each factor computed using the total “in-city” activity over the total overall activity.
With respect to the sales factor, the taxpayer uses a percentage based on its gross revenue derived from sales made and services rendered in the city is to the total gross revenue from sales and services wherever made or rendered. As a result of the court’s decision, the term “services rendered” should now be interpreted in a manner similar to the sourcing of tangible goods – i.e., by destination.
What does this mean for me…you may ask? Are you an architectural, a staffing, an actuarial, a consulting, an engineering or other similar service firm? Are you located in Detroit, Flint, Lansing, Pontiac, Grand Rapids or one of the other 15 cities and pay a local corporate income tax? Do you have clients outside the city? If so, you may have an opportunity for a tax refund; yet, time is of the essence!
Depending on when you filed or paid your city corporate income tax, the statute of limitations may soon bar a potential refund claim. For example, for calendar year taxpayers that filed a timely 2013 City Corporate Income Tax Return without extension, any protective refund claim must be filed by April 30, 2018. Even if the 2013 filing is missed, there are still opportunities for the 2014, 2015, 2016 and 2017 returns!
The author, Arthur Orzame, JD, CPA is a Senior Manager with Gordon Advisors PC. (www.GordonCPA.com) in Troy, Michigan. He has over 20 years of experience with a specialization in state and local taxes. Gordon Advisors is the 17th largest accounting and business advisory firm in Michigan serving the small and medium business community for 64 years. Arthur can be reached at 248-952-0263 or via email at Arthur.Orzame@GordonCPA.com.