Ask the advisors: Addressing your MBT questions
We've all heard about the negative points regarding the new Michigan Business Tax (MBT). Are there any positive changes?
Although they appeal to a fairly small percentage of taxpayers, there are some favorable aspects of the MBT. For instance, under the Single Business Tax, businesses with less than $350,000 in gross receipts were not subject to the tax. Those with $350,001 were subject to tax on their entire business activities. This was commonly referred to as a "cliff." The MBT provides a credit that essentially results in a phase-in of the tax for those with gross receipts between $350,000 and $700,000.
Another tax relief extended to smaller businesses is the expansion of the "small business credit." The MBT expands the threshold amounts to $20 million in gross receipts, $1.3 million in net income and owner/officer net income of less than $180,000. The result is that a small business pays only 1.8 percent on net income plus owner/officer wages.
Further, since the MBT is intended to encourage employment in Michigan, a credit is extended to taxpayers for wages paid in Michigan. Although "compensation in this state" is not yet clearly defined, it is generally concluded that cash wages, accrued pensions, profit sharing and insurance benefits paid to Michigan residents will qualify for the credit.
What if your company has sales in other states, do you still have to pay MBT?
For purposes of the MBT, a taxpayer is subject to tax in Michigan if the taxpayer has substantial nexus in Michigan. Substantial nexus is defined to mean either a physical presence in the state for more than one day during the tax year or engaging in active solicitation for sales with gross receipts of $350,000 or more from Michigan. Treasury has interpreted this to mean an activity as common as making Internet sales.
Let's use the example of a small clothing manufacturer located outside Michigan that specializes in hunting gear. If the company was to sell direct to customers via its web site (i.e., active solicitation) and it had more than $350,000 in sales to residents of Michigan, the taxpayer would be subject to the tax. Alternatively, if a representative of the company attended a trade show or otherwise conducted business inside Michigan for more than one day, it would also be subject to tax.
The important thing to remember is that the benefits of the MBT are always fact specific. Schedule a visit with your tax professional to assess your situation and understand your business' circumstances.
Any advice in this communication is not intended or written by Rehmann to be used, and cannot be used by a client or any other person or entity for the purpose of:(I) avoiding penalties that may be imposed on any taxpayer or;(II) promoting, marketing or recommending to another party any matters addressed herein. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Kerry Nelson, CPA is a senior tax manager with Rehmann. She draws from over 15 years of Public Accounting knowledge, providing accounting and tax services to family-owned and closely held businesses, their shareholders and officers. She is located in the Traverse City office. Contact Kerry at 231.946.8927 or by emailing email@example.com.
Laura Macke, CPA, MST is a senior tax manager with Rehmann. Her areas of expertise include Tax Compliance, Tax Planning, Fiduciary, Estate & Gift Tax and Oil & Gas Taxation. She is located in the Traverse City office. Contact Laura at 231.946.8097 or by emailing firstname.lastname@example.org.