MBT - One Year Later
Initial Impacts, Interpretation of the new Michigan Business Tax
By Shelly K. Bedford, CPA, MST & James M. Taylor, CPA, CFP
As printed in the Traverse City Business News, August 2008
Background: Governor Jennifer M. Granholm signed the Michigan Business Tax (MBT) into law on July 12, 2007. Taking effect on January 1, 2008, the new MBT replaced the state’s Single Business Tax which expired on December 31, 2007. The MBT imposes a 4.95% tax on business income and a modified gross receipts tax at a rate of 0.8%.
Since the MBT’s original passage one year ago, the tax has been at the center of much debate and study. Businesses large and small throughout northern Michigan and the rest of the state are feeling the impact of the change. However, 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’s 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% 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 This surcharge was added to the MBT as a revenue replacement for the state after the use tax on services was repealed last fall.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% 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 concurrent 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% refundable credit for industrial personal property.
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% 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.
Under Consideration: Many issues have been raised and new guidelines continue to be put into place regarding the MBT. Last May, State Senator Jason Allen and State Representative 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.
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. Jim is a Certified Financial Planner, holds a Bachelor of Arts in organizational management from the University of Michigan and a Master of Accounting from Oakland University.