MICHIGAN BUSINESS TAX
On July 12, 2007, the Michigan Business Tax (MBT) was signed into law by Governor Jennifer Granholm. The MBT imposes two taxes on taxpayers other than financial institutions and insurance companies – a modified gross receipts tax and a business income tax. In addition, personal property tax relief is granted for Michigan commercial and industrial personal property.
A summary of the taxes associated with the MBT is given below.
For the purposes of the discussion, the term “taxpayer” is broadly defined as essentially all forms of legal business entities, individuals, estates and trusts engaged in “business activity.” In addition, “taxpayer” includes multiple entities that are a “unitary business group.” To be considered a unitary business group (i.e., one taxpayer), one of the members must directly or indirectly own or control more than 50% of the other members and there must be a flow of value or integrated business activities or operations between or among the members. Intercompany transactions are eliminated in determining the MBT bases.
MODIFIED GROSS RECEIPTS TAX
The modified gross receipts tax (GRT) is imposed at 0.8% on a tax base composed of gross receipts less purchases from other firms. “Gross receipts” is defined as all receipts except those specifically excluded. The subtraction for “purchases from other firms” includes acquired inventory, depreciable and amortizable assets and other materials and supplies, such as repair parts and fuel. As with the definition of gross receipts, industry-specific provisions are provided, including provisions for staffing companies and construction subcontractor costs.
For tax year 2008, a taxpayer may deduct 65% of unused SBT business losses that were incurred in tax years 2006 and 2007. Unused SBT business losses incurred before 2006 are not carried forward to the MBT.
BUSINESS INCOME TAX
The business income tax (BIT) is imposed at 4.95%. The tax base begins with federal taxable income related to business activity and is subject to specific adjustments. Additions to the tax base include, but are not limited to, municipal interest income from obligations of states other than Michigan, all income taxes deducted from federal taxable income, federal net operating loss carrybacks and carryforwards and certain related-party expenses. Subtractions from the tax base include, but are not limited to, interest income from U.S. obligations, net earnings from self-employment and MBT loss carryforward.
NEXUS STANDARD
The MBT is imposed on taxpayers who meet either one of two nexus tests. The first test requires that the taxpayer have physical presence (established by a taxpayer’s employees, agents or independent contractors) in Michigan for at least two days during the tax year. Under the second test, nexus is established if the taxpayer “actively solicits” sales in Michigan and has at least $350,000 of Michigan gross receipts.
APPORTIONMENT OF THE TAX BASE
Both the GRT and BIT bases are apportioned to Michigan based on a single factor formula of Michigan sales to total sales. A taxpayer must establish the right to apportion by being subject to tax in another state, as defined within the act. For unitary business groups, all Michigan sales of the group are sourced to Michigan without regard to whether a particular group member has Michigan nexus.
SMALL BUSINESS EXEMPITON AND TAX PHASE-IN
Taxpayers, other than financial institutions and insurance companies, with less than $350,000 of Michigan apportioned gross receipts, are exempt from the MBT. Taxpayers with at least $350,000 but less than $700,000 of Michigan apportioned gross receipts may claim a credit against the GRT and BIT that essentially phases in the tax based on the ratio of apportioned receipts in excess of $350,000 to $350,000.
CREDITS
Carryover of SBT Credits
Generally, unused carryforward credits established under the SBT may be applied against the MBT for tax years 2008 and 2009, including unused investment tax credits. In addition, SBT credits for historic preservation, Brownfield redevelopment and Michigan Economic Growth Authority (MEGA) payroll credits are carried forward.
Tax Credits Retained
Many of the tax credit incentives provided under the SBT have been retained within the MBT. Generally, the qualification requirements and credit benefits remain the same. Credits retained within the MBT include:
- Brownfield credit
- Community foundation contribution credit
- Early stage venture credit
- Food bank and homeless shelter contribution credit
- Hematite ore credit
- Historic preservation credit
- Investment credit
- MEGA payroll credit
- Next energy authority credit
- Personal property tax credit
- Public contribution credit
- Renaissance zone credit
- Small business/alternate tax credit
- Startup business credit
- Workers disability compensation credit
Compensation Credit and Investment Credit
The compensation credit is set at 0.37% of compensation, including benefits, paid to Michigan workers. Costs paid or incurred related to depreciable or amortizable tangible personal property placed in service in Michigan are eligible for an investment credit equal to 2.9% of such costs. The combined compensation credit and investment credit are capped at 65% of a taxpayer’s tax liability.
Research and Development Credit
A research and development credit is available equal to 1.9% of Michigan research and development costs.
Alternate Tax Credit
Eligible taxpayers are allowed a credit that results in a total MBT liability of 1.8% of adjusted business income. To qualify, a taxpayer must have less than $20 million of gross receipts, less than $1.3 million of adjusted business income and no owner that has more than $180,000 of a distributive share of adjusted business income.
Personal Property Tax Credit
The MBT retain the refundable SBT credit for Michigan personal property tax paid on industrial personal property and the credit percentage is increased to 35% of tax paid on personal property assessed after 2007. Telephone companies and natural gas personal property are eligible for lesser personal property tax credits.
Other New Credits
In addition to the MBT credits discussed above, available new credits include:
- Entrepreneurial credit
- Motor sports complex and sports facility credits
- Motor vehicle dealer credit
- Municipal and culture contribution credit
- Retailer (large) compensation credits
- Research and development contribution credit
BUSINESS TAXATION OF FINANCIAL INSTITUTIONS
Financial institutions are exempt from the GRT and BIT. Instead, financial institutions are subject to a tax on net capital at a rate of 0.235%. The tax base is equity determined in accordance with generally accepted accounting principles less goodwill related to transactions occurring after July 1, 2007. A limited number of credits are available.
BUSINESS TAXATION OF INSURANCE COMPANIES
Insurance companies, like financial institutions, are exempt from the GRT and BIT. Insurance companies are subject to a 1.25% tax on gross direct premiums written on property or risk located or residing in Michigan. The SBT credits specific to insurance companies are generally applicable under the MBT.
DIRECT PERSONAL PROPERTY TAX REDUCTION
Industrial Personal Property
Personal property tax on industrial personal property is reduced by 24 mills (6 mill state education tax and 18 mill local school tax) for taxes levied after 2007. This combined with the industrial personal property tax credit results in an average annual industrial personal property tax reduction of 65%, assuming approximately 52 mills before the reduction.
Commercial Personal Property
Personal property tax on commercial personal property is reduced by 12 mills (related to local school tax) for taxes levied after 2007. The average annual savings on commercial personal property is approximately 23%.
Source: Plante & Moran Salt Tax Alert, July 2007
