Resource Articles Back to Article List

Income Tax Changes for Businesses in Michigan

As of January 1, 2012, the Michigan Business Tax (MBT) has been repealed and replaced with the Corporate Income Tax (CIT). The following is an overview of filing requirements, how the tax is calculated, and important dates as they relate to the CIT.

Filing Requirements – There are similar transition issues and cut-off filing requirements for fiscal year taxpayers as there was with the MBT. This tax is levied on businesses that are formed as C Corporations under federal law. Sole proprietorships and pass-through entities, such as partnerships, S Corporations, and limited liability companies taxed as a partnership, would not be required to file or pay tax under the new CIT. Also if a C Corporation’s tax liability is less than $100 or if their apportioned gross receipts are less than $350,000, it will not be required to file. The CIT does not exempt: 1) nonprofit housing corporations; 2) income from the production of agricultural goods, and a variety of other activities related to farmers’ co-op corporations; 3) income from services of an attorney-in-fact to a reciprocal insurer; or 4) the proportion of the tax base attributable to a multiple employer welfare arrangement that only provides dental benefits.

Rates and Tax Base – The tax rate on business income is 6%. The starting point for business income is federal taxable income calculated as if Section 168(k) (bonus depreciation) and Section 199 (domestic production deduction) of the Internal Revenue code are not in effect. There are certain adjustments that are then made similar to the MBT business income adjustments. The CIT does not have a gross receipts tax similar to the MBT.

Estimates – Taxpayers expecting an annual liability exceeding $800 must file quarterly estimates. For the 2012 tax year, payments must be computed on the actual CIT tax base. Estimates cannot be based on the prior year’s tax.

Business Losses – The new law only allows business losses to be deducted if they were incurred after December 31, 2011. These losses are available to be deducted from business income for the next 10 taxable years.

Credits – The CIT eliminates all but one credit familiar to Michigan taxpayers – the Alternate Tax Credit. Certain taxpayers with certificated credits will be allowed to calculate their tax both under the MBT and the CIT and file using the form with the greater tax liability. The Alternate Tax Credit is not allowed for taxpayers with gross receipts over $20 million or adjusted business income of over $1.3 million. The disqualifier for gross receipts is phased out as gross receipts exceed $19 million. The credit also places a limit of $180,000 of total compensation and directors’ fees paid to individual shareholders and officers. The disqualifier for compensation phases out between $160,000 and $180,000. The eligible taxpayer would receive a credit for the difference between the CIT liability and 1.8% of adjusted business income. The definition of “adjusted business income”, “shareholder”, and “active shareholder” are the same as those in the MBT.

Unitary Groups – The CIT retains the MBT’s unitary filing requirements for C Corporations under common control.

Nexus – The nexus standard used under the MBT will remain the same under the CIT. A taxpayer has substantial nexus in Michigan and is subject to the tax if the taxpayer has a physical presence in this state for a period of more than one day during the tax year; if the taxpayer actively solicits sales in this state and has sales of $350,000 or more sourced to Michigan; or if the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly or indirectly through one or more other flow-through entities, that has substantial nexus in this state.

Apportionment – As with the MBT, the CIT will apportion business income by using only the ratio of Michigan sales to total sales. Sales between unitary group members must be eliminated in calculating the sales factor. House Bill 4479 amended the Multistate Tax Compact to remove the option of using the three factor formula.

Insurance Companies – The CIT would include a tax on insurance companies that is identical to the tax calculation under the MBT.

Financial Institutions – The CIT also includes a tax on financial institutions that is the same as the net capital tax calculated under the MBT, and the 0.29% tax rate under the CIT approximately equals the rate paid under the MBT. The CIT, however, will not allow financial institutions to deduct goodwill.

Financial Accounting – Unlike the MBT there is no current provision for an offsetting asset to the booking of the deferred CIT payable.

Due Date – Returns for fiscal years ending in 2012 will be due the same date as the 2012 calendar year returns, which is April 30, 2013. Any tax due, however, must be paid by the original due date, which is the last day of the fourth month after the end of the fiscal year.

This is intended to be a summary (and should not be considered all inclusive) of the recent tax law changes that were put into effect and to make you aware of their tax benefits. Please contact us if you have any questions regarding the recent tax law changes or any other matters.

IRS Circular 230 Disclosure – As required by IRS rules, although this written communication may address certain tax issues, the issuer of this document did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this document use this document’s written tax advice for that purpose. Nor may it be used to promote, market or recommend to another party any transaction or matter addressed herein.

AHP Download this Article