Highlights of the Michigan Business Tax Replacement Act
On May 25, 2011, Governor Rick Snyder fulfilled his campaign promise to rid Michigan of the complicated Michigan Business Tax (MBT) by signing into law H.B. 4361; PA 38, and creating the Michigan Corporate Income Tax (CIT). Following is a summary of the impact of this new law on the business community.
Highlights of PA 38 Related to Corporate Income Tax (“CIT”)
- PA 38 replaces the Michigan Business Tax Act effective January 1, 2012 and creates a CIT on “C” corporation business income at a rate of 6%. Business income is generally federal taxable income with some common adjustments including, but not limited to, the add back of bonus deprecation and domestic production deduction. It retains a small business credit, but eliminates most other credits available under the MBT.
- Elimination of double taxation of pass-through entities by requiring only “C” corporations to pay CIT. Previously, owners of pass-through entities were taxed on business activity first via the MBT and a second time when paying tax at the individual level on their share of Michigan business income. By requiring only “C” corporations to pay the CIT, owners of pass-through entities will only be subject to one layer of tax at the individual level. This is true of both individual Michigan resident and non-resident owners.
- Pass-through entities will be required to withhold Michigan Income Tax on the applicable share of Michigan source business income of non-resident individuals; “C” Corporations; and other pass-through entities that are members or partners.
- Retains the unitary filing requirement rule for commonly controlled “C” corporations and provides that if the tax liability is less than $100, no return will be required.
- Retains the MBT nexus standard for Domestic corporations:
- Physical presence in Michigan for a period of one day during the tax year,
- Active solicitation of sales in Michigan and gross receipts of $350,000 sourced to Michigan; or
- A taxpayer with a beneficial ownership in a pass-through entity that has substantial nexus in Michigan.
We believe there will be more to come on the issue of nexus. Public Law 86-272 prohibits a state from assessing an income tax when a taxpayer’s activities are limited to certain protected activities such as sales solicitation.
- Retains the apportionment methodology of the MBT using a single factor formula based on sales.
- Limits the previous MBT exclusion from filing that previously applied to all Foreign (non-U.S.) businesses that met certain requirements to limiting the exemption from CIT to businesses organized in NAFTA countries (Canada & Mexico) that meet certain requirements.
- Businesses that received MEGA Credits will have to elect to continue to be taxed under the MBT in order to utilize credits.
Domestic businesses that currently operate as a “C” corporation should review their operating structure to determine if it would be advantageous to reorganize as a pass-through entity. The CIT rate for a corporation is 6% while the tax rate for Michigan Individual income tax is 4.35%.
Foreign (Non-U.S./Non-NAFTA) Corporations should analyze the types of activities they are conducting in Michigan. Many foreign businesses have created subsidiaries based in Michigan. The parent companies of those subsidiaries generally send parent company employees into Michigan. It is important to understand the activities of those employees to ensure a Michigan tax filing responsibility isn’t created for the parent. There are planning opportunities for those foreign companies selling tangible personal property that is delivered to a Michigan customer. For example, PA 38 states that when calculating a Michigan tax base, foreign corporations would only include sales where title passes in the U.S. This would allow the foreign corporation the opportunity to structure transactions so that title passes outside the U.S. Service businesses have more complexity in structuring activities to avoid Michigan nexus.
Review MBT position for 2011 and maximize opportunities to reduce the gross receipts tax and take advantage of credits that will be eliminated in the future. For example, consider whether it would be beneficial to accelerate items that qualify as “purchases from other firms,” make sure industrial personal property taxes are paid, etc.
Business that have MEGA credits will have to review tax calculations under both the MBT and CIT to determine if they should elect to continue to be taxed under the MBT system to take advantage of credits.
More To Come
It is expected that there will be additional guidance forthcoming related to the new CIT as the Treasury begins implementation of the new tax.