Tax Updates for Illinois, Michigan, and Ohio  
Community Bank Advisor, 2008 Winter

Recent Changes to Michigan Business Tax for Financial Institutions

Under the Michigan Business Tax (MBT), financial institutions are subject to a franchise tax based on net capital. On December 4, 2007, Gov. Jennifer Granholm signed Public Act 145 of 2007, amending the Michigan Business Tax (MBT). Following are the changes that affect financial institutions:

• An MBT Surcharge was added at the rate of 27.7 percent for tax years ending in 2008, and 23.4 percent for tax years ending in 2009 and later; there is no limit or “cap” on the surcharge for financial institutions; financial institutions authorized to exercise only trust powers are not subject to the surcharge.
• All goodwill may be subtracted from the MBT base of a financial institution; previously, only goodwill incurred due to transactions after July 1, 2007 was eligible for deduction from the base.
• The deduction from the MBT base for U.S. and Michigan obligations was changed to one based on an average daily balance of the asset instead of book value at year end.
• Financial institutions are now eligible to take the MBT compensation credit; for 2008, this credit is computed as .296 percent of the taxpayer’s compensation in Michigan, subject to limitation; for later years, the rate goes to .370 percent.

On December 27, 2007, HB5125 was signed into law by Gov. Granholm. Under this act, financial institutions now qualify for the MBT renaissance zone credit.

Ohio Tax Update

There are no new Ohio tax issues directly affecting banks; however, your customers and non-bank affiliates may continue to be affected by Ohio’s tax reform which went into effect July 1, 2005.

The Ohio personal property tax and the Ohio corporate franchise tax (but not the bank franchise tax) are being phased out. The personal property tax applies to tangible personal property such as machinery, equipment, furniture, fixtures and inventory. This tax is being phased out over four years, with 2008 being the last year. The Ohio corporate franchise tax is being phased out over five years, with 2010 being the last year.

While the above taxes are being phased out, a new business tax on Ohio gross receipts is being phased in. The commercial activity tax (CAT) will increase from 0.156 percent to 0.208 percent on April 1, 2008. The CAT, although effective July 1, 2005, continues to catch many companies doing business in Ohio off-guard. The CAT will be fully implemented by April 1, 2009 at a rate of 0.26 percent of Ohio gross receipts.

Banks doing business in Ohio will continue to pay the bank franchise tax at 13 mils of apportioned net worth.

Illinois Tax Update

A change to the Illinois Tax Act was signed into law on January 11, 2008, repealing some of the changes made in the August 16, 2007 Tax Act.

The important aspects affecting banks are:

• Restoration of the interest expense deduction on federal note and bond investments
• Changes to the apportionment rules for investment income to a “fixed place of business” standard, in alignment with many other states
• Clarification that the dividend paid deduction disallowance for REITs applies only to captive REITs, beginning after December 31, 2008