By: William J. Barnes, CPA, CVA, MST
Michigan Gov. Rick Snyder has recently signed legislation to adopt a corporate income tax and substantially revise the personal income tax by lowering the rate, curtailing deductions and exemptions, and eliminating credits.
The corporate income tax (“CIT”) is effective January 1, 2012, and the Michigan Business Tax (“MBT”) is repealed after all certificated credits and any carryforward have been claimed. We discussed the personal income tax changes in last week’s blog. The major corporate changes are discussed below:
Income Tax Base
The CIT is a 6 % tax on apportioned and allocated income of a C Corporation with $350,000 or more of apportioned gross receipts. In contrast to the MBT, sole proprietors and flow-through entities will not be subject to CIT. This will be a welcome relief for many small businesses. However, flow-through entities, owned by corporations or individuals, will need to comply with new withholding requirements. Flow-through entities not owned by corporations will pay tax on apportioned business income based on a single factor under the individual income tax system.
The tax base for the CIT is federal taxable income subject to the following addition and subtraction adjustments:
• bonus depreciation is added back;
• the federal domestic production activities deduction is added back;
• interest and dividends from other states’ obligations are added back;
• taxes measured by net income are added back;
• net operating loss carrybacks or carryovers are added back;
• dividends and royalties received from persons other than U.S. persons and foreign operating entities may be deducted;
• royalty, interest, or other expenses paid to a related person for use of an intangible asset if the person is not included in the taxpayer’s unitary business group are added back;
• interest income from U.S. obligations may be subtracted; and
• for tax years beginning after 2011, income and expenses from producing oil and gas subject to the severance tax are eliminated. With the exception of the oil and gas income and expenses adjustment, these adjustments are substantially similar to those made under the MBT.
Additionally, a ten-year operating loss carryforward is available for losses created under the CIT. Loss carryforwards under the MBT system are not carried forward and are lost.
Apportionment
The CIT will use a single sales apportionment factor. Unitary Business Groups will include all sales in Michigan in the sales factor regardless if any of the entities have nexus in Michigan. Sales between members of a unitary group will be eliminated in the calculation of the sales factor. A taxpayer with direct or indirect ownership of a flow- through entity would apportion the business income that is directly attributable to the business activity of the flow-through entity by using an apportionment formula based on the business activity of the flow-through.
Credits
Taxpayers with gross receipts that do not exceed $20 million and with adjusted business income that does not exceed $1.3 million may claim a credit equal to the amount by which the tax exceeds 1.8% of adjusted business income. The credit is phased out based on a sliding scale for compensation ranging from $160,000 to $180,000. This provision is similar to one under the MBT. All other credits that were applicable under the MBT have been eliminated.
Corporations can elect to continue filing the MBT return if they have unused “certified” credits or credit carryforwards. Certified credits are credits granted before January 1, 2012 under the MBT Act. They include the Michigan Economic Growth Authority, Renaissance Zone, Brownfield Redevelopment, Film Production and Battery credits.
Taxpayers not subject to the CIT that have these credits can also elect to continue filing the MBT return in order to receive the credit. The election will apply to an entire unitary group, not just the entity with the credits.
The election is made with the first tax year ending after December 31, 2011. Taxpayers that make this election will not file a CIT return. Additionally, taxpayers making the election must continue to file an MBT return until the credit and unused credit carryforward is exhausted. While the MBT return is filed, taxpayers must still pay the greater amount of tax due under the MBT or CIT, after taking into account the credit. Taxpayers considering this election should plan carefully and consider future events that may impact their tax base.
Summary
The Governor believes the CIT is simpler and fairer than the MBT regime. The changes reduce Michigan business tax revenues by approximately 80 percent by eliminating the taxation of all business entities other than C Corporations. These changes will certainly be unpopular with most individual taxpayers in Michigan, given their tax liabilities are likely to increase. The goal of the legislation is to create jobs by reducing the corporate tax structure. Time will tell if these changes will help Michigan’s fragile economy.