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Michigan Tax Reform. Taylor & Morgan, P.C August 16, 2011. Introduction. On May 25, 2011, Governor Snyder signed a series of bills related to tax reform. Give and Take Give: Replace the Michigan Business Tax with a Corporate Income Tax Take: Individual income tax changes.

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michigan tax reform

Michigan Tax Reform

Taylor & Morgan, P.C

August 16, 2011.

introduction
Introduction
  • On May 25, 2011, Governor Snyder signed a series of bills related to tax reform.
  • Give and Take
    • Give:
      • Replace the Michigan Business Tax with a Corporate Income Tax
    • Take:
      • Individual income tax changes
introduction1
Introduction
  • Corporate Income Tax
    • Who’s taxable?
    • Basic mechanics
    • Credits
who s taxable
Who’s taxable?
  • A crash course in the Federal taxation of certain business entities
    • A subchapter C Corporation: Taxable entity
    • A subchapter S Corporation: Pass-through entity
    • A partnership: Pass-through entity
    • A sole proprietorship: Disregarded entity
    • A Limited Liability Company: Pass-through/disregarded entity*
who s taxable1
Who’s taxable?
  • Federal taxation of a subchapter C Corporation

Dividend

ABC Plumbing, Inc.

who s taxable2
Who’s taxable?
  • Federal taxation of a pass-through entity

Distributive Share

ABC Plumbing,

LLC

who s taxable3
Who’s taxable?
  • Federal taxation of a pass-through entity

NOT

TAXED

Distribution

ABC Plumbing,

LLC

who s taxable4
Who’s taxable?
  • For the last 35 years, Michigan treated all business entities as taxable entities for SBT and MBT purposes.
  • In addition, Michigan taxed individuals with ownership interests in pass-through entities on their distributive share.
  • Result: Double-taxation
who s taxable5
Who’s taxable?
  • Historical taxation of a pass-through entity

Distributive Share

ABC Plumbing,

LLC

who s taxable6
Who’s taxable?
  • The MBT replacement taxes only subchapter C corporations
    • Michigan will follow Federal rules for determining who is taxable
    • Owners of LLCs, S corporations, and partnerships will no longer be double-taxed on the business entity’s profits
basic mechanics in general
Basic Mechanics – In General
  • State income taxes in general:

Tax base

X Apportionment factor

Apportioned tax base

X Tax rate

State income tax

basic mechanics new tax
Basic Mechanics – New Tax
  • Tax base:
    • Federal taxable income
    • +/– Bonus depreciation adjustment
    • + Domestic production activity deduction
    • + Interest on other state government obligations
    • + State income taxes
    • + Federal NOL carryover
    • – Dividend and interest income from foreign sources
    • + Related party expenses
    • – Interest on Federal obligations
    • – Michigan business losses incurred after 12/31/11
    • =Michigan taxable income before apportionment
basic mechanics new tax1
Basic Mechanics – New Tax
  • Apportionment:
    • Single sales factor
  • Tax rate:
    • 6.00%
credits under the old tax
Credits Under the Old Tax
  • Nonrefundable credits available under the Michigan Business Tax:
  • Compensation and investment credits
  • Research and development credit
  • Small business alternative credit
  • Gross receipts filing threshold credit
  • Community and education foundations credit
  • Homeless shelter/food bank credit
  • NASCAR speedway credit
  • Stadium credit
  • Start-up business credit
  • Public contribution credit
  • Arts and culture credit
  • Next energy business activity credit
  • Renaissance zone credit
  • Historic preservation credit
  • Low-grade hematite credit
  • Entrepreneurial credit
  • New motor vehicle dealer inventory credit
  • Large food retailer credit
  • Mid-size food retailer credit
  • Bottle deposit administration credit
  • MEGA federal contract credit
  • Biofuel infrastructure credit
  • Individual or family development account credit
  • Bonus depreciation credit
  • International Auto Show credit
  • Brownfield redevelopment credit
  • Private equity fund credit
credits under the old tax1
Credits Under the Old Tax
  • Refundable credits available under the Michigan Business Tax:
  • MEGA research and development credit
  • Personal property tax credit
  • Workers’ disability supplemental benefit credit
  • Next energy payroll credit
  • MEGA employment tax credit
  • Historic preservation credit
  • NASCAR safety credit
  • Hybrid technology research and development credit
  • Farmland preservation credit
  • MEGA federal contract credit
  • MEGA photovoltaic technology credit
  • Brownfield redevelopment credit
  • Film production credit
  • Anchor company payroll credit
  • Anchor company taxable value credit
credits under the new tax
Credits Under the New Tax
  • One nonrefundable credit available under the new Corporate Income Tax:
  • Small business alternative credit
credits under the new tax1
Credits Under the New Tax
  • No refundable credits available under the new Corporate Income Tax.
michigan business tax
Michigan Business Tax
  • Current Michigan Business Tax
    • Pay approximately 1% of gross receipts plus
    • 6% of net income

Net income defined as income after all expenses including officer compensation

c corporations
“C” Corporations
  • “C” corporations pay a federal income tax while “S” corporations and LLC’s pass income to shareholder(s)
  • Corporate Tax Rates
    • $0 to $50,000 15%
    • $50,000-$75,000 25%
    • $75,000-$100,000 34%

Professional Corporations – all net income taxed at 34%

2011 strategy c corporations
2011 Strategy - “C” Corporations
  • Check corporate tax bracket
    • If net income $50,000 or below, consider leaving in corporation and paying 6% Michigan Business Tax plus 15% corporate rate
    • If net income above $50,000, consider officer bonus to bring net income back to $50,000
2012 strategy c corporations
2012 Strategy - “C” Corporations
  • If “C” corporation consider electing “S” corporation status
    • Issues
    • 1) does taxpayer have net operating loss carry forward that would be lost with “S” election?
    • 2) is taxpayer attempting to accumulate dollars inside corporation at lower corporate tax rates rather than personal tax rates
2011 strategy s corporations and llc s
2011 Strategy - “S” Corporations and LLC’s

If shareholder is over social security limit, bonus net income to shareholder:

  • Cost -2.9% Medicare tax
  • Savings 6% Michigan Business Tax
2012 strategy s corporations and llc s
2012 Strategy - “S” Corporations and LLC’s
  • Not subject to Michigan Business Tax in 2012
  • No tax on Gross Receipts
  • No tax on Net Income
  • Consider leaving income in “S” corporation and reducing bonus. This saves Medicare Tax if over Social Security Limit of 2.9%
  • May Impact Estimates for 2012
introduction2
Introduction
  • Individual Income Tax
    • Significant changes
    • Pension deduction changes
    • Homestead property tax credit modifications
significant changes
Significant Changes
  • The new law contains the following changes:
    • Keep the rate at 4.35% through 2012 and freeze the rate at 4.25%
    • Restrict and restructure the retirement exemptions
    • Eliminate the dividends, and capital gains exemption received by seniors born after 1945
    • Eliminate the special exemption for seniors and the unemployed
    • Personal exemption phase-out for individuals with greater than $75,000 of income and married couples with $150,000 of income.
significant changes1
Significant Changes
  • Eliminate the child deduction
  • Eliminate miscellaneous deductions, including those for political contributions and charity prizes
  • Eliminate several credits, include the city income tax credit, the public contribution credit, and the community foundation credit.
  • Reduce the earned income credit from 20% to 6%
  • Modify the homestead property tax credit
pension deduction changes
Pension Deduction Changes
  • Currently, Michigan allows individuals to deduct the following from adjusted gross income:
    • Social security benefits
    • Retirement or pension benefits received from certain government retirement systems
    • Retirement or pension benefits received from other retirement systems, not to exceed $45,120 for a single return (in 2010) and $90,140 for a joint return (in 2010)
pension deduction changes1
Pension Deduction Changes
  • The legislation phases in changes to pension deduction
  • For individuals born before 1946:
    • No changes
pension deduction changes2
Pension Deduction Changes
  • For individuals born in 1946 through 1952:
    • Prior to reaching age 67, these individuals may deduct retirement or pension benefits of $20,000 for a single return and $40,000 for a joint return.
    • After reaching age 67, these individuals receive a deduction of $20,000 for a single return and $40,000 for a joint return. This deduction is not limited to retirement benefits received. It is not allowed if total household resources exceed $75,000 for a single return or $150,000 for a joint return.
pension deduction changes3
Pension Deduction Changes
  • For individuals born after 1952:
    • After reaching age 67, these individuals may take a deduction of $20,000 for a single return and $40,000 for a joint return. This deduction is not limited to retirement benefits received. If a person takes this deduction, that person may not deduct social security benefits received during the year and may not take the personal exemption. This deduction is not allowed if total household resources exceed $75,000 for a single return or $150,000 for a joint return.
homestead property tax credit
Homestead Property Tax Credit
  • Currently, taxpayers receive a credit for homestead property taxes computed as follows:
    • 60% of property taxes levied
    • Less: 3.5% of household income
    • =Tax credit before limitation
  • Limitations
    • Credit cannot exceed $1,200
    • Credit is phased-out for taxpayers with total household income between $73,650 and $82,650
homestead property tax credit1
Homestead Property Tax Credit
  • The new law keeps the Homestead Property Tax, but makes the following changes:
    • Adds a taxable value limitation of $135,000
    • Credit phase-out begins when household resources exceed $41,000 and ends at $50,000
    • Allows senior citizens with total household resources of $30,000 or less to increase the percentage of property taxes available for the credit.
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