The MBT - a historical perspective
The Michigan Business Tax (MBT) was a dramatic broad tax reform that became effective January 1, 2008. Below is a summary of the nuances of this unique tax that effectively is repealed for most taxpayers effective December 31, 2011.
Modified gross receipts
The modified gross receipts tax (GRT) is imposed at 0.8 percent on a tax base composed of gross receipts less purchases from other firms. “Gross receipts” is defined as all receipts except those specifically excluded. There are many gross receipts exclusions, including exclusions for specific industries or taxpayers.
The subtraction for “purchases from other firms” includes acquired inventory, depreciable and amortizable assets, and other materials and supplies, such as repair parts and fuel. As with the definition of gross receipts, industry-specific provisions are provided, including provisions for staffing companies and construction subcontractor costs.
For tax year 2008, a taxpayer may deduct 65 percent of unused Single Business Tax (SBT) business losses that were incurred in tax years 2006 and 2007. Unused SBT business losses incurred before 2006 are not carried forward to the MBT.
Business income tax
The business income tax (BIT) is imposed at 4.95 percent. The tax base begins with federal taxable income related to business activity and is subject to specific adjustments. Additions to the tax base include, but are not limited to, municipal interest income from obligations of states other than Michigan, all income taxes deducted from federal taxable income, federal net operating loss carry backs and carry forwards, and certain related-party expenses. Subtractions from the tax base include, but are not limited to, interest income from U.S. obligations, net earnings from self-employment, and MBT loss carry forward.
The MBT surcharge is computed as a percentage of a taxpayer’s tax liability after apportionment and before credits. For taxpayers other than financial institutions and insurance companies, tax liability is the combination of the modified gross receipts tax and the business income tax. For such taxpayers, the surcharge rate is 21.99 percent and is capped for each tax year at $6,000,000.
Financial institutions are subject to a surcharge of 27.7 percent for tax years ending in 2008 and 23.4 percent for tax years ending after 2008. The $6,000,000 cap does not apply to financial institutions. Banks authorized to exercise only trust powers (i.e., trust banks) are not subject to the surcharge. Insurance companies are exempt from the surcharge.
The MBT is imposed on taxpayers who meet either one of two nexus tests. The first test requires that the taxpayer has a physical presence in Michigan for at least two days during the tax year. Physical presence can be established by a taxpayer’s employees, agents, or independent contractors. Under the second test, nexus is established if the taxpayer “actively solicits” sales in Michigan and has at least $350,000 of Michigan gross receipts. The second test is essentially an economic or market presence standard.
Taxpayer and unitary business group defined
“Taxpayer” is broadly defined as essentially all forms of legal business entities, individuals, estates, and trusts engaged in “business activity.” In addition, “taxpayer” includes multiple entities that are a “unitary business group.” For multiple entities to be considered a unitary business group, one of the members must directly or indirectly own or control more than 50 percent of the other members, and there must be a flow of value or integrated business activities or operations between or among the members. Intercompany transactions are eliminated in determining the MBT bases.
Apportionment of the tax base
Both the GRT and BIT bases are apportioned to Michigan based on a single factor formula of Michigan sales to total sales. A taxpayer must establish the right to apportion by being subject to tax in another state, as defined within the act.
Sales are generally sourced to the market state. For example, sales of tangible personal property are sourced to the ultimate destination point of the goods sold. Sales from the performance of services are sourced to the locations where the customer receives the benefit of the services. There are a number of provisions for specific industries or revenue sources.
For unitary business groups, all Michigan sales of the group are sourced to Michigan without regard to whether a particular group member has Michigan nexus. As with the tax base, intercompany transactions are eliminated in determining the apportionment sales factor for a unitary business group.
Small business exemption and tax phase-in
Taxpayers, other than financial institutions and insurance companies, with less than $350,000 of Michigan apportioned gross receipts, are exempt from the MBT. Taxpayers with at least $350,000 but less than $700,000 of Michigan apportioned gross receipts may claim a credit against the GRT and BIT that essentially phases in the tax based on the ratio of apportioned receipts in excess of $350,000 to $700,000.
Carryover of SBT credits
Generally, unused carry forward credits established under the SBT may be applied against the MBT for tax years 2008 and 2009, including unused investment tax credits. SBT credits for historic preservation and brownfield redevelopment are carried forward for the same period they would have been carried forward under the SBT. In addition, upon certification, Michigan Economic Growth Authority (MEGA) payroll credits may be claimed for the same period they could have been claimed under the SBT.
Tax credits retained
Many of the tax credit incentives provided under the SBT have been retained within the MBT. Generally, the qualification requirements and credit benefits remain the same. Credits retained within the MBT include:
- Brownfield tax credits
- NextEnergy authority credit
- Community foundation contribution credit
- Personal property tax credit
- Early stage venture credit
- Public contribution credit
- Food bank and homeless shelter contribution credit
- Renaissance zone credit
- Hematite ore credit
- Small business/alternate tax credit
- Historic preservation credit
- Startup business credit
- Investment credit
- Workers’ disability compensation credit
- MEGA payroll credit
Changes to the investment tax credit, personal property tax, and small business/alternate tax credit are noted on the following page.
Compensation credit and investment credit
The MBT creates a new credit equal to 0.296 percent for tax year 2008, and 0.37 percent for tax years after 2008, of compensation, including benefits, paid to Michigan workers.
The investment credit is similar to the investment credit under the SBT. Costs paid or incurred related to Michigan depreciable or amortizable tangible assets are eligible for a credit equal to 2.32 percent for tax year 2008, and 2.9 percent for tax years after 2008. Credit recapture provisions are imposed for Michigan property disposed of or transferred outside of the state.
The combined compensation credit and investment credit are capped at 50 percent for tax year 2008, and 52 percent for tax years after 2008 of a taxpayer’s tax liability before the surcharge.
Research and development credit
A research and development credit is available for tax year 2008, equal to 1.52 percent of Michigan research and development costs. For tax year 2009 and after, the credit is 1.9 percent. The credit cap on the combination of the compensation, investment, and research and development credits is 65 percent for all tax years. The credit cap is calculated based on the tax liability computed before the MBT surcharge.
Alternate tax credit
Eligible taxpayers are allowed a credit that results in a total MBT liability of 1.8 percent of adjusted business income. To qualify, a taxpayer must have less than $20 million of gross receipts, less than $1.3 million of adjusted business income, and own no more than $180,000 of a distributive share of adjusted business income. The owner distributive share limitation also applies, with modification, to officers of C corporations. Similar to the SBT small business credit, there are provisions that phase out the credit. If a taxpayer exceeds any one of the three eligibility caps, the credit value is reduced to zero.
Personal property tax credit
The MBT provides a refundable credit of 35% of the Michigan personal property tax paid on industrial personal property. Lesser personal property tax credits also apply for telephone companies and natural gas personal property.
Other new credits
In addition to the credits noted above, the MBT contains new credits, including:
- Entrepreneurial credit
- Retailer (large) compensation credits
- Motor sports complex and sports facility credits
- Research and development contribution credit
- Motor vehicle dealer credit
- Bottle deposit expense credit
- Municipal and culture contribution credit
- Private equity fund management credit
Business taxation of financial institutions
Financial institutions are exempt from the GRT and BIT. Instead, financial institutions are subject to a tax on net capital at a rate of 0.235 percent. The tax base is equity determined in accordance with generally accepted accounting principles less goodwill and the average daily balance of U.S. and Michigan obligations. A subtraction from the tax base is also provided for regulatory capital of an insurance company subsidiary, subject to the insurance premiums tax noted below. The net capital tax is determined on a unitary group basis, and is subject to a single sales factor apportionment. Credits available to financial institutions are limited to the compensation credit, brownfield credit, historic preservation credit, renaissance zone credit, and MEGA payroll credit.
Business taxation of insurance companies
Insurance companies, like financial institutions, are exempt from the GRT and BIT. Insurance companies are subject to a 1.25 percent tax on gross direct premiums written on property or risk located or residing in Michigan. Insurance companies are precluded from the credits applicable to other taxpayers, except for the compensation credit, brownfield credit, historic preservation credit, renaissance zone credit, and MEGA payroll credit.
Direct personal property tax reduction
Personal property tax on industrial personal property is reduced by 24 mills for taxes levied after 2007. The 24-mill reduction combined with the industrial personal property tax credit discussed above resulted in annual industrial personal property tax reduction of 65 percent, assuming the state-wide average of approximately 52 mills before the reduction. Personal property tax on commercial personal property was reduced by 12 mills for taxes levied after 2007. The average annual savings on commercial personal property is approximately 23 percent.
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.