Michigan Business Tax: One year later
Since the Michigan Business Tax's original passage one year ago, the tax has been at the center of much debate and study. While many new guidelines are in place, others are still being interpreted. Strategies for all are being studied. Here's a "one year later" look at where the MBT is at, what's being defined and points to consider for northern Michigan businesses.
Impacting northern Michigan
– Surcharge – Regional companies in northern Michigan are most
significantly affected by the 21.99 percent surcharge on their MBT
liability. This surcharge was added to the MBT as a revenue replacement for the state after the use tax on
services was repealed last fall. The surcharge affects businesses not
qualifying for the Small Business Tax Credit. In northern Michigan, the surcharge is especially impacting tourism, manufacturing and service- based businesses.
– Small Business Credit – The Small Business Credit under MBT has been enhanced and allows a preferential 1.8 percent tax rate on adjusted
business income. Businesses need to meet three tests to qualify: a) gross receipts less than $19,000,000 to $20,000,000; b) business income less than $1,300,000; and c) the highest paid officer or shareholder having compensation + allocated share of income less than or equal to $160,000 to $180,000.
– Property Tax Savings – Northern Michigan businesses will begin to see the effect of legislation enacted con- current with the MBT which reduced personal property tax rates.
Commercial personal property is reduced by 12 mills while industrial personal property is reduced by 24 mills for taxes levied after 2007. The MBT provides personal property tax savings through a 35 percent
refundable credit for industrial
Points to consider
– Small Business Credit Qualifications – Review the guidelines and consider planning strategies to qualify for the Alternative Small Business Credit. Paying the alternate 1.8 percent tax rate provides the most significant opportunity to reduce tax under MBT.
– Unitary Business Group – Review your relationships with other
businesses. New rules may require that a single return is filed for
multiple businesses based on
ownership and flow of value between the entities. Filing one return may limit a business' ability to qualify for the Small Business Credit.
– Accurate Industrial Classification – Businesses should assure that
property taxes are properly coded to maximize savings. The difference in tax savings between industrial and commercial designations is
significant. Classifications are
designated by the local assessor, and any disputes are handled through that entity.
– Evaluate Business Structure – Under the MBT, a Limited Liability
Company (LLC) may have greater tax benefits than an S Corporation. The MBT provides an adjustment to the income tax base for self-
employment income and a credit against tax for the earnings. An S Corporation, by nature of its
structure, does not generate self- employment income.
– Meet With Advisors – Planning strategies are evolving as the many aspects of the MBT are interpreted and further defined by the State. Every business is different and the implications of the MBT should be evaluated on a case-by-case basis. Businesses should be meeting with tax advisors to continue monitoring the MBT provisions and proactively planning for each situation.
Many issues have been raised and new guidelines continue to be put into place regarding the MBT. Last May, State Sen. Jason Allen and State Rep. Howard Walker hosted town hall meetings in northern Michigan to discuss the challenges that the MBT presents. Government offices, elected officials, business representatives and accounting professionals continue to address the evolving implications of the Michigan Business Tax. That debate will continue. We urge all to monitor the MBT developments and remain in communication with state leaders and business advisors.
Shelly K. Bedford, CPA, MST is a partner at Dennis, Gartland & Niergarth where she oversees the DGN tax department. A state tax specialist, Shelly has an extensive background working with closely-held and family-operated businesses.
James M. Taylor, CPA, CFP is a tax department supervisor at Dennis, Gartland & Niergarth, where he focuses on planning and tax services for business and individual clients.
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