On May 25, 2011, Governor Snyder signed three tax bills into law that completely overhaul the Michigan business tax system. This will be the second comprehensive revision of Michigan business taxes in the past four years. These 2011 enactments will materially change both business and individual income tax law.
In general, the new law divides the current income tax act into separate parts for individual and business taxes and makes the following changes.
Business Tax Changes
The primary business tax changes made by the 2011 tax bills include the following:
- Imposition of a 6% corporate income tax ("CIT") on C corporations effective January 1, 2012.
- The new tax does not apply to sole proprietors or at the entity level to any flow-through entities such as partnerships, S corporations, or LLCs - this is a significant change from Michigan business taxes in place for more than 30 years.
- Repeal of the MBT effective December 31, 2011, for most taxpayers.
- Taxpayers with "certificated" credits can elect to continue to calculate their liability under the MBT in order to retain the benefit of such credits.
- Income from multistate activities apportioned based solely on a sales factor; amendment of certain existing election provisions (beginning January 1, 2011) to prohibit taxpayers from electing out of single sales factor apportionment methodology under the current MBT or the new CIT.
- Prospective elimination of all business tax credits except for the small business credit.
- Note that the "new" small business credit retains basically the same 1.8% alternative income tax that applied under both the MBT and the prior Single Business Tax.
- Mandatory combined filing for unitary business groups.
Note: The new bills include separate tax structures applicable to financial institutions and insurance companies that closely resemble the taxes applicable to such businesses under the MBT.
Individual Income Tax Changes
In addition to the more dramatic business tax changes, the tax bills also include changes to Michigan's individual income tax laws (generally effective January 1, 2012), including the following:
- Retention of the current 4.35% rate through December 31, 2012 (which defers the currently scheduled rate reduction to 4.25% until the 2013 tax year).
- Imposition of a phased-in state income tax on income from pensions and other retirement income.
- Elimination or limitation of other income tax benefits, exemptions, and credits, including exemptions allowed for a taxpayer's children.
- Business income reported on an individual return will be apportioned using a single sales factor instead of the current three factor formula.
The new law is intended to greatly "simplify" Michigan's tax structure by repealing the complex MBT for most taxpayers. However, even with the simpler tax, many areas of ambiguity remain; and there is a great need for guidance from the Michigan Department of Treasury with respect to how different provisions will be interpreted and administered. Moreover, because there remains an election to claim existing credits by calculating business tax liability under the prior MBT Act, many taxpayers may need to prepare alternate calculations in evaluating and planning for Michigan taxes.