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Michigan Business Tax
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M24. Must a contractor enter into a written contract with subcontractors in order to reduce gross receipts by the amount of payments made to subcontractors for a construction project?
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Answer:
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Under the MBT, the modified gross receipts tax base is a taxpayer's gross receipts less purchases from other firms before apportionment. MCL 208.1203(3). Contractors, defined as persons included in SIC codes 15, 16, and 17, that do not qualify for the credit under MCL 208.1417 may deduct "payments to subcontractors for a construction project under a contract specific to that project" as purchases from other firms. MCL 208.1113(6)(e).
While the statute is silent as to whether a contractor must enter into a written contract with a subcontractor for labor costs specific to a project, a taxpayer bears the burden to prove it is entitled to a deduction in computing its tax liability. It is contemplated that good business practice would include documentation such as a written contract that would support a deduction from gross receipts for payments to subcontractors as "purchases from other firms."
The supporting information for payments to a subcontractor could be incorporated into the contract for the specific project or memorialized in a separate contract with a subcontractor specifying the project the costs pertain to.
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