June 2, 2011

Michigan Legislatures Passes Sweeping Changes to Michigan Tax Law

Michigan Legislatures Passes Sweeping Changes to Michigan Tax Law Tax & Business

With the purpose of bringing more jobs to Michigan, Governor Rick Snyder narrowly upheld his campaign promise to repeal the Michigan’s Business tax and simplify the Michigan Tax code. In its place, the New Corporate Income Tax will lower tax bills for small and mid-sized corporations doing business in Michigan and relieve most passthrough entities from paying corporate tax. House Bill 4361 takes effect on January 1, 2012 and makes sweeping changes to both the Michigan Corporate and Individual tax laws. Highlights of the changes include:

Corporate Tax:

Tax Rate Change:

  • The new bill imposes a corporate income tax at a rate of 6.0% on C Corporations. Passthrough entities, sole proprietors and other limited liability entities will not be taxed at the entity level in Michigan.
  • The Michigan Business Tax that imposed a 4.95% income tax, 0.8% modified gross receipts tax and a 22% surcharge on all business entities is repealed.

 Nexus and apportionment:

  • Nexus could be found if the corporation has physical presence in Michigan greater than one day a year, or active solicitation of sales in Michigan with $350,000 or more in Michigan-sourced gross receipts (the P.L 86-272 safe harbor is applicable).
  • Apportionment is based on gross receipts only, rather than the three factor formula.
  • Unitary businesses will be required to file combined reports rather than consolidated returns.

Pass through entities:

  • Owners of pass-through entities with a corporate partner that has nexus in Michigan would be subject to the corporate tax.
  • Pass-through entities with nexus will be required to withhold income tax on distributions to nonresident individuals.
  • Every Pass-through entity with over $200,000 in business income (after allocation and apportionment) will have an obligation to withhold on distributive shares of business income attributed to each partner who is a corporation or pass-through entity.

Other changes:

  • Fiscal year taxpayers would need to file a short year MBT return for periods ending December 31, 2011 and an initial short period CIT return for the period beginning January 1, 2012.
  • The Small Business Alternative Tax Credit is the only available credit on the Corporate Income Tax return. Corporations with long term certified credits (credits that extend beyond one year) may elect to utilize the Michigan Business Tax until the credits expire.
  • Business losses generated under the CIT are permitted to be carried forward 10 years. However, losses generated under the Michigan Business Tax cannot be used to offset Corporate Income Tax.

Individual Tax

Tax Rate:
  • The Individual tax rate will be 4.35% for 2012.
  • After 2012, the tax rate will freeze at 4.25%.

Pensions and social security:

  • A pension deduction will exist from Michigan State Income Tax. The amount of the deduction/exclusion will depend on the individual taxpayer’s date of birth.
  • The deduction cannot be utilized if the taxpayer excludes retirement benefits from services in the armed forces or retirement benefits from the Railroad Retirement Act of 1975.
  • Additionally, if the taxpayer has household resources that equal or exceed $75,000 (if single) and $150,000 (if married) the deduction is not available.
  • There will be a phase out for the Homestead Property Tax Credit. The original credit of $1,200 will be reduced based on taxable income. Taxpayers whose homestead taxable value exceeds $135,000 cannot take the credit.
Other Changes:
  • The Earned Income Credit is reduced from 20% to 6% of the Federal Credit.
  • The personal exemption phased-out for single taxpayers with total household resources of $75,000 to $100,000 and married taxpayers with total household resources of $150,000 to $200,000.
  • The additional exemption of $600 for each child under age 19 will be eliminated.
  • Senior citizens will no longer have an additional exemption.
  • Elimination of the additional exemption for taxpayers who had 50% of their adjusted gross income come from unemployment benefits.
  • Elimination of interest, dividend and capital gain exclusion for senior citizens born after 1945.
  • Elimination for the exclusion for IRA distributions used for qualified higher education expenses.
  • Elimination of the deductions for political contributions, qualified charitable distribution deduction and expenses disallowed under Internal Revenue Code Section 280C.
  • Elimination of the qualified investment credit.

The changes to the Michigan Tax Code, once enacted, are quite extensive. Please contact your Marcum SALT professional for more details on these changes.

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