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Contact Information:
Edward S. Kisscorni, CPA
290 Suncrest Court, SW
Grandville, MI 49418

Office: 616/233-0667
Cell: 616/443-6730
Fax: 616/233-0667




Thursday, December 09 2010

MBT Business Income:  The Self-Employed health Insurance Deduction and the 1/2 Self Employed Tax Deduction


Following is an excellent discussion of two common questions relating the deduction for self-employed health insurance and the deduction for self-employment income.  These comments were provided by Joe Tomczyk.


Can the self-employed health insurance deduction and SE tax deduction taken on Page 1 of the 1040 be subtracted from the Schedule C income to get to business income for MBT for an individual with Schedule C earnings from self-employment?


            Is the net earnings from self-employment deduction 92.35% of the self-employment earnings, rather than 100% of self-employment earnings (discounting on this issue either way whether or not there is a return on capital)? 


Business Income:  For a self-employed individual, it is a unique set of deductions to consider in arriving at "Business Income" as defined in the MBT (MCL 208.1105(2)).  Michigan statute specifically refers to "federal taxable income derived from business activity."  From the language of the Internal Revenue Code, both self employed health insurance premiums and SE tax deduction fit the definition of "federal taxable income derived from business activity."  The unique twist is that neither item is deducted on the Federal Schedule C.  Rather they are both deducted on the Federal 1040, line 27 (1/2 Self Employee Tax) and line 29 (Self-employed health insurance deduction).  Therefore, it is probable that a number of sole proprietors might have missed these two deductions in arriving at MBT "Business Income."


In order to identify "federal taxable income derived from business activity," one needs to look at IRC sections 61 (Gross Income), 62 (Adjusted Gross Income), and 63 (Taxable Income). The MBT definition refers to "Taxable Income" (Section 63). However, Sections 61 and 62 are referenced in Section 63, and, therefore, related. 


The self-employed health insurance deduction is allowed by IRC section 162(l)(1).  This section identifies deductible trade or business expenses allowable in arriving at federal "adjusted gross income" (IRC section 62).  It is subject to certain limitations and is reported on federal schedule 1040, line 29.  Therefore, it should be an allowable deduction in arriving at MBT "Business Income."


The of SE Tax deduction if allowed under IRC section 164(f).  That section specifically stated that this deduction "shall be treated as attributable to a trade of business carried on the by the taxpayer."  It is taken on Federal schedule 1040, line 27.  Therefore, it should be an allowable deduction in arriving at MBT "Business Income."


From a practical standpoint, neither deduction provides substantial MBT relief.


Self Employed Health Insurance:  Assume that a sole proprietor pays $2,000 a month ($24,000 a year) for health coverage of the proprietor and family.  Also assume that the sole proprietor had SE earnings of $110,000 (Note: the health insurance deduction is limited to the premium paid less the deduction for SE tax). 


Self Employment tax is made up of two parts: 

         Old-age, survivors, and disability insurance (OASDI):  This is taxed at a rate of 12.4% on the first $106,800 (for 2009 and 2010).

         Medicare:  2.9% on all income


Assuming an effective MBT tax rate of 2% (including surcharge) and a Michigan apportionment factor of 0%, the tax reduction for the health insurance premium is $315.67, calculated as follows:


Health Insurance Premiums


Less of SE Tax Deduction ((106,800*.124) + (110,000*.029))*.5



Federal Health Insurance Premium Deduction



Effective MBT rate


MBT Reduction



The Self-Employment Tax Deduction:   Assume that a sole-proprietor has SE income of $1,000,000.00 for the year.  Also, assume a MBT effective tax rate of 2.0% and a Michigan apportionment percentage of 0%.  The MBT savings would be $422.43, calculated as follows:


OASDI (106,800 * .124)


Medicare (1,000,000 * .029)


Total SE Tax


SE Tax Deduction


Effective MBT rate


MBT Reduction




Another consideration that I did not address was the effect on the deduction allowed under MCL 208.1201(2)(h) regarding "self employment income" to a sole proprietor.  By combining both reductions (1/2 of the self employment tax and the Internal Revenue Code 1402 earnings from self employment), you could end up with a negative business income tax base for MBT.

Posted by: Ed Kisscorni AT 10:19 am   |  Permalink   |  2 Comments  |  Email
The calculation for benefit of helath insurance does not make sense. Why reduce by all of 1/2 of SE tax deduction? maybe only 1/2 of SE tax deduction related to health insurance. If it is a deduction from income, all of the health insurance should be subtracted.
Posted by Gene Dillenbeck on 01/03/2011 15:04:19
In the second example there is no benefit as the taxpayer is over the APT limit and the only tax calculated is gross receipts. He does make an excellent arguement on the calculation of Business income! Any indication from the State if they would agree?
Posted by Gene Dillenbeck on 01/03/2011 15:18:04

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