MICHIGAN BUSINESS TAX (MBT)

FACTS AT A GLANCE

1.  OVERVIEW

• Signed into law by Governor Granholm on July 12, 2007 to become effective January 1, 2008
• Replaced the Michigan Single Business Tax
• Unitary business group filing requirement
• Single sales factor apportionment
• Separate rules apply to insurance companies and financial institutions (details of which are not included in this summary)
• Tax is imposed on taxpayers with business activity
• Taxpayer defined as a person or a Unitary business group
• Person is broadly defined to cover essentially all forms of legal business entities
• Business activity is defined as transfer of title to property, rental or property, or performance of services
• Business activity does not include an employee rendering services for an employer nor services as a corporate director
• Taxpayers (individual taxpayers or Unitary groups) with less than $350,000 in gross receipts are exempted from the MBT
• MBT is a two-prong tax:  Modified Gross Receipts Tax & Business Income Tax

2.  MODIFIED GROSS RECEIPTS TAX

• Start with gross receipts from all activities
• Deduct “purchases from other firms”
• “Purchases from other firms” includes inventory, assets eligible for depreciation and amortization, and various materials and supplies including fuel and repair parts normally included in Cost of Goods Sold
• 65% of Single Business Tax business losses incurred and carried forward during tax year 2006 and 2007 can be deducted from gross receipts; any unused balance is lost forever
• Gross receipts between members of a Unitary group can be excluded
• Proceeds from the sale of capital assets under IRC 1221(a) and land used in a trade or business are excluded from gross receipts to the extent of federal tax basis in the assets (the capital gain only is taxed)
• Additional exclusions from gross receipts include the following: refunds from returned merchandise; cash, in-kind, and trade discounts; federal, state, and local tax refunds; security deposits; payment on the principal portion of loans; and value of property received in a like-kind exchange
• After gross receipts have been reduced by the above items, the result (modified gross receipts) is multiplied by the tax rate of 0.8%

3.  BUSINESS INCOME TAX

• Begins with taxable income from federal tax return
• Additions to taxable income include tax-exempt interest and dividend income from obligations issued by states and municipalities outside of Michigan, taxes on or measured by income, Michigan Business Tax, and federal net operations loss carry-forwards on carry-backs
• Subtractions include interest income from U.S. obligations, self-employment net earnings (except to the extent the earnings represents a reasonable return on capital), and MBT business loss carry-forwards from prior years
• The result (business income tax base) is multiplied by a tax rate of 4.95%

4.  SURCHARGE

• Changes to the MBT law signed by Governor Granholm on December 1, 2007 imposed a 21.99% surcharge on the aggregate of the Modified Gross Receipts Tax and the Business Income Tax, as defined above
• Total surcharge for any taxpayer is limited to $6 million per year
• Surcharge may be abandoned after 2016 if personal income growth exceeds 0% in any 1 or the 3 calendar years immediately preceding 2017

5.  UNITARY BUSINESS GROUPS

• Two-prong test must be met:  Common Ownership and Activities/operations
• Common Ownership is met if one group member owns or controls, directly or indirectly, greater than 50% of ownership interest
• Activities or Operations test is met if the activities or operations of the business result in a flow of value between or among persons in the group, or are integrated with, dependent upon, or contribute to each other

6.  CREDITS

• Generally, credit carry-forwards from the Single Business Tax may be carried forward to MBT years 2008 and 2009 only; any credits remaining after that are lost forever
• Compensation credit provides for a credit equal to 0.296% of the taxpayer’s Michigan compensation, which includes certain benefits but excludes payroll taxes and workers compensation insurance (credit rate increases to 0.37% after 2008 tax year)
• Investment Tax Credit generally provides for credit equal to 2.32% of the cost of tangible assets that are depreciable or amortizable (credit rate increases to 2.90% after 2008 tax year)
• Total of compensation credit and Investment Tax Credit may not exceed 50% of the taxpayer’s tax liability for 2008, computed prior to the surtax; may not exceed 52% of the taxpayer’s tax liability for years after 2008, computed prior to the surtax
• A “Smoothing Credit” is available to taxpayers with gross receipts greater than $350,000 but less than $700,000 to mitigate the “cliff” effect
• An alternate Tax Credit is available for taxpayers with less than $20 million in gross receipts, less than $1.3 million of adjusted business income (adjusted fro inflation), and no owner or C corporation officer has more than a $180,000 share of adjusted business income
• Gross receipts for calculation of Alternate tax credit begin to phase out at $19 million; owner of C corporation office limits begin to phase out at $160,000
• Effect of the Alternate Tax Credit is that adjusted business income is taxed at 1.8% in lieu of computation of Modified Gross Receipts Tax and Business Income Tax; there is no surtax calculation for taxpayers qualifying for the full Alternate Tax Credit
• A refundable Industrial Property tax credit is available to those taxpayers possessing Industrial Facility Exemption Certificates; credit is equal to 35% of tax actually paid during the year on personal property tax levied after December 31,2007
• Generally, in order to obtain in Industrial Facility Exemption Certificate for personal property, the underlying real property must also be designated as exempt industrial

7.  MISCELLANEOUS

• Taxpayers with liabilities in excess of $800 must file and pay quarterly estimated tax payments, due on the 15^th day of the 4^th, 7^th, 10^th and 13^th month following the beginning of the taxpayer’s year
• Quarterly estimates must total at least 85% of the total liability for the year or penalties and interest will be imposed
• Due date for filing the annual return is the 30^th day of the 4^th month following the close of the tax year
• Unitary groups are to file only one return for all members
• Taxpayers may not use the prior year Single Business Tax liability as a safe harbor for payment of the Michigan Business Tax Estimates for 2008; i.e., taxpayers must calculate their liabilities for their first MBT year based on actual or estimated operating results, and make quarterly payments as necessary
• Taxpayers with a year end other than December 31 will have to file two Michigan returns covering their fiscal year ending in the 2008, a final Single Business Tax return for the period from the first day of their fiscal year in 2007 through December 31, 2007, in addition to a Michigan Business Tax return for period from January 1, 2008 through their fiscal year ending date of 2008
• If state revenue from the MBT is $500 million more than that collected under the SBT (approximately $1.9 billion), then 50% of the excess will be refunded to taxpayers and the other 50% will be deposited to the state budget stabilization fund
• As the new MBT law, as amended, is only three months old, further interpretation of the statues will be needed to address many open issues
• MBT annual tax forms are not expected to be released until January 2009
• Fiscal year taxpayers are granted an automatic extension of time to file their MBT returns for their year ending in 2008, until April 30, 2009, although there is no extension of time for payment of tax
• Quarterly estimated tax payment vouchers for MBT, otherwise known as Forms 4548, are now available on the State of Michigan website
• An MBT Estimator is also available on the State of Michigan website at www.mi.gov/taxes, following the links for Michigan Business Tax and MBT Estimator

The information provided in the “Facts at a Glance” is only a general summary and is being distributed with the understanding that Kutas & Associates, P.C., is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matter and, accordingly, assumes no liability whatsoever in connection with its use.