Michigan Business Tax Act

By: Margaret P. Amsden, CPA, MST and Suzanne T. Tuson, CPA, MST

The long awaited replacement for the Michigan Single Business Tax ("SBT") has arrived; the Michigan Business Tax ("MBT") begins January 1, 2008. Companies with a calendar year end will file their first MBT return for the year ending December 31, 2008. Those companies on a fiscal year end will be covered by both taxes and will file on a transitionary basis.


It was represented by many that the new MBT would be simpler than the SBT. After reading, and then rereading the new law, it is very clear that the MBT is complex and the simplification efforts were not achieved. In their efforts to increase the credits available to businesses, legislators have also added complicated limitations and eligibility requirements. For instance, a credit is available for wages paid, but a portion of those same wages may be eligible for a research expense credit. Taxpayers will be forced to determine how to allocate expenses to maximize the credit received.

Much has been published on the "winners" and "losers" of this legislation. The intended winners included the manufacturing community and small businesses, such as companies that produce in Michigan and ship outside of the borders of the state. Initial detailed calculations support the intention that these sectors should benefit from this new legislation. However, we must point out that it is difficult to make generalizations about who the winners and losers are under this new tax regime due to the complexities in the calculation of the new tax. We also must point out that there may be hidden increased costs to implementing this new legislation, including the fees associated with obtaining the data needed to make the new tax calculations.

We are expecting clarifications, corrections, and administrative guidance on the MBT and will keep you Informed.

Here are the highlights of the MBT:

  • The MBT consists of two components: a modified gross receipts tax of .8 percent and a business income tax of 4.95 percent
  • Unitary business groups will file a group MBT return. A unitary business group is a group of US persons, other than a foreign operating entity, which are commonly controlled directly or indirectly by more than 50 percent ownership with voting rights, and whose business operations are integrated with, dependent upon, or contribute to each other
  • Sales from the performance of services are now sourced under a "market based" approach. Services are sourced where the customer receives the benefit
  • The MBT tax base will be apportioned based on a single sales factor
  • Nexus rules, the connection that allows the states to impose a tax, have been broadened. Any activity in the State of Michigan in excess of one day will create nexus and an MBT filing responsibility
  • Under certain circumstances, a foreign or non-Michigan taxpayer may only be subject to the modified gross receipts portion of the tax. Michigan still must follow PL 86-272 in order to impose the income tax component of the MBT
  • The following credits will be available under the MBT for qualifying taxpayers:
    • 1.9 percent of qualifying research and development limited to a 75 percent reduction of the MBT
    • 37 percent of Michigan compensation including health and pension benefits
    • 35 percent of personal property taxes paid on industrial personal property
  • Taxpayers with gross receipts allocated to Michigan that are less than $350,000 will not be required to file
  • An alternative tax of 1.8 percent of adjusted business income will be available for qualifying small taxpayers

Important things to consider in preparing for MBT:

  • Check your personal property tax classifications! In addition to the credits provided for industrial personal property for MBT, the governor signed additional property tax relief exempting industrial personal property from the entire 18-mills of the local school tax and commercial property is exempt from 12-mills of the local school tax. Industrial personal property will also be exempt from the 6-mill State Education Tax
  • Personal property taxes on industrial property assessed in 2007 must be paid in 2007 to qualify for the 15 percent 2007 SBT credit. This means December bills must be paid prior to December 31, 2007
  • If you are considering the sale of a business or business assets, you may want to complete the transactions prior to December 31, 2007, to avoid the 4.95 percent income tax on the sale under the MBT
  • Make sure your books and records segregate "purchases from other firms" as it will be a reduction for calculating modified gross receipts for the purposes of the tax. Purchases from other firms is defined as inventory acquired during the year, including freight, shipping, delivery or engineering charges included in the original contract price of the inventory; assets, including costs of fabrication and installation that is eligible for depreciation, materials, supplies, including repair parts, and fuel to the extent they are not already included in inventory or asset purchases
  • If you are a service business, be sure to discuss the new sourcing rules with your tax advisor so that you can make any necessary adjustments to your recordkeeping to capture the data necessary to apportion your MBT base
  • If you are involved with businesses with direct or indirect common control, you should discuss with your tax advisor whether you will need to file a combined return under the new unitary rules. This could impact your ability to obtain credits that you would otherwise qualify for
  • Investment activities that may be engaged in through a partnership or limited liability company are considered business activities under the new MBT. There are no casual transaction exceptions in the new law
  • Foreign affiliates with business visitors will likely meet the new one day nexus standard
  • Affiliates with Michigan customers of tangible personal property or who provide services that benefit customers in the Michigan market need to consider the impact of the MBT
  • If you think your business may be conducting research and experimentation activities, now is the time to find out. Qualifying activities may get you federal and state tax credits

There is still more to come on the new MBT. Technical corrections are expected out by December 2007 along with some guidance on transition. If you have any questions regarding this new act, please contact Suzanne Tuson or Margaret Amsden at 248.208.8860.

Aug 07

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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