After much clamoring, the Michigan legislature replaced the dreaded Michigan Single Business Tax (SBT) with the new Michigan Business Tax (MBT). The following is a brief summary of the new law as well as planning issues to be addressed.

The MBT takes effect January 1, 2008. Fiscal year taxpayers will have to file two short period returns: one to report their final SBT liability and the other to report their initial MBT liability. If you had an SBT loss carryover, you will still be able to use it to reduce your gross receipts tax base.

Under the new MBT, the tax is the sum of two components: (1) business income taxed at 4.95%; plus (2) modified gross receipts taxed at 0.8%. There are different tax rates for insurance companies and financial institutions. As with the SBT, there are many adjustments to business income and modified gross receipts to be made before the final amount is determined. These adjustments could influence whether a taxpayer chooses to be an LLC or a Subchapter S corporation.

Special provisions for small businesses

In addition to a general tax reduction for most businesses, special provisions for small businesses provide further tax relief. These include, among others: (1) companies with less than $350,000 in gross receipts will be exempt from tax; (2) alternative rates for companies with gross receipts between $350,000-$700,000; and (3) a reduction in the alternative tax rate (as under the SBT) from 2.0% to 1.8%.

Out of state companies operating in Michigan

One of the main objectives of the new tax regime was to capture more tax from those businesses based out of state but who conduct business in Michigan. A taxpayer will be subject to taxation if it has a physical presence for more than one day in a tax year or it actively solicits sales and has Michigan gross receipts of $350,000 or more. Also, the MBT now requires all taxpayers to file their MBT return showing income from its combined businesses both inside and outside Michigan. The amount subject to the MBT is based on the percentage of total sales that are made within Michigan. Taxpayers with operations and sales in multiple states must plan now to ensure they minimize their taxes.

Tax credits

The MBT also gives companies new tax credits and revises credits that already exist. There is a tax credit equal to .37% of compensation paid within Michigan and a 2.9% tax credit for certain investments made here. There is also an entrepreneurial tax credit for businesses with less than $25,000,000 in gross receipts if they add at least 20 new jobs and invest at least $1,250,000 in Michigan.

Finally, there was significant tax relief from the personal property tax. On average, the new personal property tax provides a tax cut of 65% for industrial property and a 35% tax credit may be applied to the remaining personal property tax liability. Cost segregation studies on owned real estate may result in greater tax savings due to these new tax rates and credits.

Service sales tax

As this article was being written, the Michigan legislature was also contemplating a “surcharge” to the MBT in order to pay for a repeal of the recently implemented sales tax on services. We will continue to monitor discussions and proposed revisions of this law at the state level and will keep you apprised of how any changes may impact you. Please check our website for an update to this article when this issue is resolved.

While most Michigan businesses will be afforded some tax relief under the new MBT, the exact amount will certainly vary. Proper tax and business planning strategies (including structuring of business operations), and timely implementation of these strategies, can improve tax-saving opportunities.

REASONS TO RETHINK YOUR TAXES:

• If you have significant capital investment in Michigan;
• If you have hired new employees in Michigan;
• If you have sales out of state or overseas; and/or
• If you have acquired or sold a business.

For further information regarding these matters, please contact Mr. Goldberg at 248.740.5664 or click here to send an email.