Do You Understand Michigan’s Business Tax Changes?

Joe Popp | October 19th, 2011

We recently reported that Michigan is changing their tax structure effective January 1, 2012. In a nutshell, Michigan is replacing the Michigan Business Tax (MBT) with a Corporate Income Tax (CIT). Changes coming with the new CIT include a 6 percent tax imposed on C corporations only, making Michigan’s corporate income tax rate the lowest in the Midwest.

In the past, if a corporation’s CIT liability is less than $100, no return was necessary. Smaller corporations with less than $350,000 in apportioned receipts are still exempt from filing, similar to the MBT. The new CIT is imposed only on those entities doing business as a C corporation.

Pass-through entities such as S corporations, limited liability companies (LLCs) and partnerships will not be subject to the CIT. The owners of these entities will pay tax on the pass-through income at the rate of 6 percent in the case of a C corporation owner and 4.35 percent in the case of an individual owner.  Fiscal year taxpayers will have a rough go of the transition at first as they will have to file two short-period returns for its fiscal year that includes December 31, 2011.

The CIT is similar to the MBT in that it requires adding any bonus depreciation and domestic production activities deduction taken at the federal level to arrive at the state tax base. However, there is no adjustment for the income or loss attributed to ownership in a pass-through entity, which differs from the treatment under the MBT.

Nearly all of the credits under the MBT have been eliminated under the new CIT. The principal credit allowed under the CIT applies to qualifying small businesses. For this purpose, these are businesses having no more than $20 million in gross receipts and business income of not more than $1.3 million. The credit is the amount by which the CIT exceeds 1.8 percent of adjusted business income. There are limitations placed on compensation and director’s fees paid to shareholders and officers. If the compensation is in excess of these limits, the credit will be reduced by the excess.

There are several provisions of the CIT that remain very similar to the MBT. These include mandatory unitary filing, nexus standards and the single, sales-only factor used to determine apportionment. The definition of sales under the CIT is also similar to the definition under the MBT. The “Finnigan rule” is also in place under the CIT for sourcing a unitary group’s sales receipts.

The CIT allows for a carry forward of a business loss generated under the CIT but not under the business income tax portion of the MBT. A business loss means a negative business income taxable amount after allocation and apportionment. The loss can be carried forward up to ten years.

Pass-through entities also have to learn new withholding tax rules under the CIT. If the pass-through entity has more than $200,000 of allocated and apportioned business income in a tax year, it must withhold tax at the 6% corporate tax rate on the distributive share of business income of each owner that is a corporation or pass-through entity. The rules for withholding on nonresident individual owners remain the same.

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