Michigan Corporate Income Tax
On May 25, 2011, Governor Snyder signed a law which became effective January 1, 2012. The impact is that the Michigan Business Tax (“MBT”) was replaced with the Michigan Corporate Income Tax (“CIT”). In addition to significantly changing the tax that will be imposed on corporations, and repealing the business level tax applicable to flow-through entities, the new law imposes significant new withholding requirements on these flow-through entities. Flow through entities are now required to withhold Michigan income tax on behalf of their corporate members and non-resident individuals.
What is a flow through entity for withholding purposes?
Flow through entities include S Corporations, general partnerships, limited partnerships, limited liability partnerships, or a limited liability company that is not taxed as a C Corporation for federal income tax purposes. Trusts are not flow through entities for purposes of withholding and are not required to withhold on trust beneficiaries.
When is a flow through entity required to withhold on behalf of corporate members?
A flow through entity must withhold and pay CIT at the rate of 6 percent on the distributive share of income for its members that are C Corporations or that are taxed as C Corporations for federal tax purposes. However, flow through withholdings for C Corporation members are not required if the annual Michigan business income of the flow through entity is $200,000 or less. If the business income of the flow through is $200,000 or less, the C Corporation must make estimated payments instead.
When is a flow through entity required to withholding on behalf of non-resident individual members?
A flow through entity must withhold and pay Michigan individual income tax at a rate of 4.35 percent on the distributive share of income for its non-resident individual members regardless of the entity’s level of business income.
How are tiered structures treated?
In general, a flow through entity that has other flow through entities as members must withhold on the distributive share of each lower tier member at the corporate income tax rate of 6 percent unless it can determine the ultimate owners of the lower tier entity. For example, if the upper tier flow through entity can identify the lower tier entity’s member(s) are non-resident individuals the withholding rate would be the 4.35 percent; if it can identify the lower tier entity’s member(s) are resident individuals no withholdings are required; and if the lower tier entity’s member(s) are corporations the withholding would be 6 percent.
What form is used for reporting the withholding, and when is it due?
The withholdings described above are required on a quarterly basis, April 15, July 15, October 15, and January 15, using Form 4917. In addition to the quarterly forms, an Annual Withholding Reconciliation Return (Form 4918), which will reconcile the aggregate liabilities and payments from the quarterly returns is required to be filed by the end of the second month after the flow through entity’s year end.
Will an annual information return be required in addition to the withholding requirements?
The Michigan Compiled Law 206.711(1) also gives the department the right to require flow through entities to file an annual business income information return on the due date, including extensions, of its annual federal return but the Treasury has not yet released guidance about this filing.
Does the State of MI allow the quarterly withholding to be paid via Electronic Funds Transfer (“EFT”)?
Taxpayers may elect to make remittances by EFT. If a taxpayer does pay through EFT, the requirement to file the quarterly Form 4917 is waived.
When is the Final MBT Return due for Fiscal Year-end taxpayers?
Fiscal year-end taxpayers required to file an MBT return will file a final short year return through December 31, 2011 unless it has certified credits and elects to continue to file the MBT. This final MBT return will be due April 30, 2012 but can be extended to December 31, 2012.
When is the Initial CIT Return due for Fiscal Year-end taxpayers?
Fiscal year-end taxpayers required to file a CIT return will file a short year return from January 1, 2012 through their year-end. Returns for fiscal years ending in 2012 will be automatically extended and due the same date as 2012 calendar year returns, which is April 30, 2013. However, it is important to keep in mind an extension of time to file is not an extension to pay. An additional extension can be filed using Form 4 if the extension of time to April 30, 2013 is not sufficient. When the legislature adjourns for the year in December 2012, new forms will be finalized and posted on the Treasury’s website. The paper forms are expected to be distributed in January 2013.
How will income or loss be allocated between periods for Fiscal Year-end taxpayers?
The choice between the annual and actual calculation methods apply to the final MBT and initial CIT returns. The annual method computes income for the entire year and then prorates the amounts for the number of months included in each period. The actual method is computed by closing the books as of December 31, 2011 and using the actual amounts for each period. For those taxpayers subject to the CIT the calculation method chosen by the taxpayer for the first short period (i.e., the final MBT) must be the same method used by the taxpayer when computing the initial CIT return for the other portion of the taxpayer’s same tax year. Timing could be critical, for a taxpayer who chooses to use the annual method. Because, for example, a taxpayer with a September 30, 2012 year end will only have three months to compute income for the entire year and file the final MBT that has an extended due date of December 31, 2012.