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• Tax Highlights

Take Your Mittens Off — Michigan Budget Bills Create a Warmer Business Climate?

On May 25, 2011 Michigan Governor Rick Snyder signed into legislation a series of tax bills resulting in major changes for Michigan business and individual taxpayers. The new laws will take effect January 1, 2012. The highlights of the legislation include eliminating the Michigan Business Tax (MBT) and replacing it with the Michigan corporation income tax (CIT), which is applied to C corporations only; elimination of many tax credits for businesses and individuals; and significant changes to the individual tax system including a delay in income tax rate reductions and elimination of several exemptions. This has been sold as a business-friendly tax package and, for many of our clients, we agree.

Governor Snyder believes the reforms are simple, fair, and efficient and will allow the state to be economically competitive. The goal of the legislation is job creation, which will be achieved through lower costs of the corporate structure. “This is a defining moment in Michigan's turnaround. The current tax system is riddled with inequities that are hostile to job growth. Eliminating these longstanding barriers will level the playing field for taxpayers, encourage entrepreneurship, and spur more investment in Michigan,” Snyder said. The following is a summary of the significant changes for business and individual taxpayers:

Corporate income tax (CIT)

• Applies only to C corporations and limited liability companies electing to be treated as corporations
• Filing obligation if the taxpayer is physically present more than one day during the year, gross receipts apportioned to Michigan are greater than $350,000, or the taxpayer has an ownership interest in a flow-through entity that has nexus with Michigan
• If a taxpayer’s only activity in the state is solicitation of orders of tangible personal property, the taxpayer will not be subject to the CIT 
• Tax base is defined as business income, which is federal taxable income not including bonus depreciation or domestic production activities deduction — what does this mean for assets where bonus depreciation was taken in prior years?
• Single sales factor apportionment formula
• Six percent tax rate
• Unitary business group filing requirement for corporations in a group under common control in which a member of the group has nexus in Michigan
• For taxpayers who have unused “certificated” credits or credit carryforwards, an option to continue filing under the MBT may be available
• Quarterly estimates under the CIT will be required if estimated tax is $500 or more

Individual income tax 

• Income tax rate will be frozen at 4.35% and lowered to 4.25% in 2013 (the individual tax rate was scheduled to be reduced in 2011) 
• Elimination or limitation of tax exemption for pension plan and social security income, depending on when the taxpayer was born
• Elimination of dependent-child deduction
• Elimination of most non-refundable credits
• Elimination of deductions for charitable contributions made from a qualified retirement plan/account
• Phaseout of the personal exemption 
• Non-resident owners of flow-through entities (i.e., partnerships and S corporations) will pay Michigan tax based on a single sales factor apportionment formula (previously, Michigan income was calculated based on a three-factor formula)

Other observations:

• Flow-through entities that are not subject to CIT may continue to be subject to the existing individual income tax withholding requirements if their activities exceed mere solicitation of orders of tangible personal property

This controversial legislation will no doubt impact both individuals and businesses. It remains to be determined what affect it will have on Michigan’s economy and whether the governor’s goals will be achieved. 

In order to help you deal with all these tax law changes and understand your filing obligations, please consult Laura Miller at  lmiller@BlackmanKallick.com or 312-980-3283, Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or 312-980-2995, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.