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Michigan Legislature Reaches Conceptual Agreement for SBT Replacement Tax
SALT Tax Alert, June 15, 2007
Our goal is to inform clients and friends of the most current information available on Michigan’s SBT replacement. Additional communication will be provided as the legislation develops.
On Wednesday, June 13, Governor Granholm and leaders from both the House and Senate announced a conceptual agreement for the Michigan Business Tax (MBT) which will replace the Single Business Tax (SBT). The Single Business Tax is currently scheduled to expire on December 31, 2007, and no replacement tax is currently in place. The MBT is intended to be revenue neutral for the state, as it’s projected to produce approximately the same $1.9 billion in revenue currently generated under the SBT.
This conceptual agreement describes the basic framework of the MBT. Highlights include the following:
Replacement Taxes
- A margin tax will be imposed at a rate under .8 percent. The tax base will be computed by subtracting inventory purchases from sales. The subtraction is only available for purchases of inventory. As such, service businesses aren’t permitted to deduct the cost of labor in determining their tax base.
- An income tax will be imposed at a rate of less than 5 percent. The tax will apply to all persons conducting business activities including individuals, partnerships, S corporations, and C corporations.
- Capital stock tax for banks. The rate of tax was not disclosed. Under the previous Senate Plan, the rate was .225 percent of net capital, and under the House Plan, the rate was .44 percent of net capital.
- Increase insurance premiums tax to 1.25 percent, plus credits.
Personal Property Tax Relief
- Industrial personal property taxes will be reduced by approximately 65 percent. Industrial personal property includes all machinery and equipment, furniture and fixtures, and dies on industrial real property. Industrial real property includes the following:
- Property used in manufacturing or processing.
- Certain property used for utility sites.
- Property used for removal or processing of gravel, stone, or mineral ores.
- Commercial personal property taxes will be reduced by approximately 23 percent. Commercial personal property includes all equipment, furniture, and fixtures on commercial real property as well as outdoor advertising signs and billboards. Commercial real property includes property used for commercial purposes, whether wholesale, retail, or service.
- Telephone credit corresponding to commercial personal property.
Credits
- Investment and compensation credits capped at 65 percent of liability. The credit rates weren’t disclosed. Under the previous House Plan, the investment credit was equal to 3.3 percent of depreciable assets acquired and located in Michigan. The compensation credit was equal to .56 percent of all compensation paid to Michigan employees. Under the House plan, compensation did not include guaranteed payments made by partnerships to its partners. For federal income tax purposes, partners in a partnership aren’t considered employees.
- R&D credit capped at 75 percent of liability. The credit rate was not disclosed. Under the previous House Plan, the rate was 4 percent of Michigan research and development expenses.
- ME-2 Entrepreneurial credit.
Small Business Treatment
- Allow qualifying firms to pay a 1.8 percent tax on adjusted business income.
- Increase officer compensation disqualifiers to ($160,000- $180,000).
- Increase gross receipts threshold phase-out to $18-20 million.
- Increase aggregate business income disqualifier to $1.3 million.
- Allow flow-through entities to access the compensation credit.
Draft bills detailing the MBT are expected to be released sometime next week. A more detailed analysis will be provided once draft legislation has been introduced.
Our website contains the latest developments regarding this historic tax replacement. If you have any other questions, please contact Curtis Ruppal at 616.643.4069 or Bob Hartman at 248.223.3310.
Plante & Moran will sponsor seven seminars to provide clients and friends an overview of the new law and its implications on specific industries. These seminars will be scheduled approximately three to four weeks after the law is enacted in the following locations:
- Grand Rapids
- Kalamazoo
- Lansing
- Novi
- Toledo
- Traverse City
- Troy
If you’re interested in attending one of these sessions, please call Angela Williams at 248.223.3320, 800.827.1280, or visit our website.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.
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