Written By: Tina Powell, CPA
Most of you may have heard that there is a new tax in town. Effective January 1, 2012, the Michigan Corporate Income Tax (CIT) replaces the unpopular Michigan Business Tax (MBT.) It is estimated that it will relieve 95,000 Michigan businesses from the burden of filing a business return and paying business taxes.
The CIT applies only to C corporations and entities taxed as C corporations for federal income tax purpose (for example, a limited liability company that checks-the-box to be taxed as a corporation.) A C corporation will be exempt from the CIT if its Michigan annual gross receipts are less than $350,000 or its CIT liability is less than $100. C corporations with an ownership or beneficial interest in a flow-through entity with Michigan nexus will also be subject to the CIT.
For those of you who do business in multiple states, gross receipts will be apportioned based on the ratio of Michigan sales to total sales.
The CIT is equal to 6% of the federal taxable income subject to specified additions and subtractions.
Since the CIT will apply only to C corporations, businesses that are taxed as C corporations may want to consider converting to an S corporation or another type of “pass-through” entity. This conversion could help reduce the business’s effective income tax rate, and it might also help to reduce the owner’s payroll or self-employment taxes. However, several tax and business issues should be considered before pursuing such a conversion.
A downside to the CIT is that all of the tax credits and deductions that were available under the MBT are no longer available. One exception is the small business alternative tax credit. The credit will allow qualified small businesses to pay tax at a rate of 1.8% of adjusted business income instead of 6%. This credit will be available to C corporations with gross receipts of less than $20 million and adjusted business income of $1.3 million or less, and officers’ and owners’ compensation that does not exceed $180,000 per individual. The credit will be subject to phase-out for gross receipts between $19 million and $20 million and officers’ and owners’ compensation between $160,000 and $180,000 per individual.
Another downside is that there are no provisions for the use of net operating losses incurred during years that the MBT was in effect (2008-2011.)
The MBT is gone, or is it? Actually, some businesses may have select credits available under the MBT and if they elect, they may continue to file under the MBT, rather than the CIT. But beware, if you were filing as a unitary group, and if one member of the group elects to continue to file under the MBT, ALL members must continue to file under the MBT. Additionally, the CIT retains unitary filing requirements for C corporations under common control. Unitary groups are required to file a combined return.
Fiscal-year taxpayers will have a short year for both 2011 and 2012. A fiscal-year taxpayer will likely be allowed to file its first return on April 30, 2013, the same as a calendar-year taxpayer.