Wipfli Alerts & Updates: Michigan Legislation- Repeal of MBT and Significant Individual Tax Changes

May 23, 2011
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On May 17, 2011, the Michigan Legislature forwarded for Governor Snyder’s signature legislation to repeal the Michigan Business Tax (MBT) and replace it with a corporate income tax and to make major changes to the state's individual income tax law. Governor Synder is expected to sign the bills into law.

H4361 creates a new corporate income tax, levied on businesses taxed as C corporations under federal law. The new corporate income tax would be effective January 1, 2012. (This means fiscal-year taxpayers will have a final short-period return under the MBT and an initial short-period return under the corporate income tax.) Flow-through entities (S corporations, partnerships, and LLCs taxed as partnerships) will no longer be subject to an entity-level tax. The MBT taxing regime for insurance companies and financial institutions will be retained.

Business income will be apportioned using a single sales factor with no throwback provision and applying a flat 6% income tax rate. A combined return requirement for C corporations that make up a unitary group will be retained. The MBT one-day physical presence or active solicitation of sales nexus rules are retained subject to the limitations provided by Federal PL 86-272.

Virtually all MBT credits will be eliminated under the corporate income tax, with the exception of the alternate tax credit. Taxpayers eligible for this credit must have gross receipts of $20 million or less and adjusted business income of $1.3 million or less. The credit also places limits on the total compensation and directors’ fees to individual shareholders and officers.

H4361 also allows makes numerous changes to the individual income tax laws. The most notable are:

  • Elimination of or limitation placed on, depending on when taxpayer was born, the exemption from tax of pension plan and social security income
  • Postponement of scheduled individual income tax rate reductions

H4362 amends the Michigan Business Tax to allow certain taxpayers that wish to claim select credits allowed under current law to continue claiming those credits if they make an election to continue to file returns under a modified MBT. The certified credits are for incentives/programs where the taxpayer entered into an agreement that allows them to earn and/or use credits for tax years subsequent to January 1, 2012.

H4362 amends Michigan’s adoption of the Multistate Tax Compact (MTC) rules by eliminating the option to elect three-factor apportionment. Taxpayers will be required under the MBT and proposed corporate income tax to use the single-sales factor only for apportionment.

For additional information, please contact Greg Butler at (414) 431-9318 or gbutler@wipfli.com or your Wipfli relationship executive.

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This information is provided solely for general guidance and informational purposes only and does not create a business or professional-services relationship. Accordingly, this information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Before making any decision or taking any action, you should obtain appropriate professional guidance.

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