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Michigan Business Tax Reform

The latest on Michigan's tax reform

On May 26, 2011 Governor Rick Snyder signed tax reform bills HB 4361 and HB 4362 into law, which replaces the Michigan Business Tax with a 6 percent corporate income tax. In addition, it eliminates many of the individual income tax deductions and credits.

What follows is an overview of the major changes contained within the bills:

  • The effective repeal of the Michigan Business Tax (MBT) takes place on December 31, 2011 except for certificated credit holders electing into the MBT.
  • There will be replacement of the Michigan Business with a 6 percent Corporate Income Tax (CIT). The CIT applies only to companies that file as “C” corporations.
  • S corporations, partnerships (general, limited, LLP), sole proprietorships, trusts, and LLCs that have not elected to be taxed as C corporations (flow-through entities) will no longer be subject to a direct business tax.
  • Certificated credit holders may elect into being subject to MBT in lieu of CIT. These holders include those that have received, been approved to receive, or been assigned Brownfield, historic preservation, MEGA payroll, film production and infrastructure, and other specific credits not fully claimed or paid prior to January 1, 2012.
  • A variety of individual income tax (IIT) deductions and credits will be eliminated or modified.
  • The individual income tax rate is frozen at 4.35 percent until January 1, 2013. It will then be frozen at a lowered rate of 4.25 percent.
  • There is a three-tiered system that ultimately determines whether or not retirement income is taxed. Individuals born prior to 1946 (age 67 or older as of December 31, 2011) will continue to receive the current retirement income exemptions, the personal exemption, Social Security exemption and the exemption for dividends, interest, and capital gains.
  • Taxpayers born between 1946 and 1952 (age 60 to 66 as of December 31, 2011) will have a $20,000 single and $40,000 married joint retirement income exemption, which is in addition to the personal exemption and Social Security exemption until age 67. At age 67 and after, they will receive a $20,000 single and $40,000 married joint senior exemption against all income, in addition to the personal and Social Security exemptions.
  • Individuals born after 1952 (age 59 or younger as of December 31, 2011) will receive the personal exemption and Social Security exemption until they turn age 67. At age 67 and after, they will have a choice of either (1) a $20,000 single and $40,000 married joint senior exemption against all income, or (2) the personal and Social Security exemptions.
  • Military pensions continue to be exempt.
  • The Earned Income Tax Credit is retained at a rate of 6 percent of the federal credit.

The new law goes into effect on January 1, 2012.

Potential changes ahead include:

  • Technical clean-up of CIT
  • Repeal of the personal property tax ($1.1-$1.4 billion dollars collected today)
  • MBT technical clarifications – Senate Bill 369
  • Prohibition of Single Business Tax (SBT) on investment entities – Senate Bill 368

For the most recent updates on Michigan Tax Reform, visit our blog.

If you are interested in reviewing more detail of the new law taking effect in 2012, please feel free to review the presentation from our recent in-person seminar series.