Blog : Taxation

Michigan Corporate Income Tax and Business Entity Conversions

The new Michigan Corporate Income Tax (CIT), which replaced the previous Michigan Business Tax (which replaced the Michigan Single Business Tax) was applauded by the business community in Michigan as drastically simplifying the corporate tax system.  The CIT taxes C corporations at a rate of 6%, while federal pass-through entities (LLCs, S corporations, etc.) are not required to pay a business-level income tax.

While it may seem advantageous to avoid the 6% CIT by simply converting all C corporations to S Corporations or LLCs, there are many tax and non-tax considerations to think through before completing a business entity conversion.  To help C corporation owners and professional advisors decide whether or not to convert, the State of Michigan (in conjunction with the State Bar of Michigan) has created a comprehensive guide available at the State’s website:

Issues to Consider Before Electing to Convert From a C Corporation to a Limited Liability Company or Before Electing S Corporation Status

If you own a C Corporation and would like additional information about whether or not a business entity conversion makes sense for your company, please contact Jeffery A. Jacobson at 231.722.5405 or jaj@parmenterlaw.com

Changes in Michigan Business Tax System

By William J. Meier, PARMENTER O’TOOLE

On May 25, 2011, Governor Rick Snyder signed into law House Bill 4361, which eliminated the Michigan Business Tax (MBT) and replaced it with a 6% corporate income tax.  Other changes were made to recover the anticipated lost revenue including the elimination of certain business tax incentives, the inclusion of pension income for personal income tax purposes, and the cancellation of future income tax rate reductions.

Business Tax Changes

The MBT was primarily based on gross revenue instead of income.  This system led to results that many economists and business leaders considered unfair and harmful to Michigan businesses.  In particular, the MBT taxed businesses with higher sales and lower profits more than businesses with lower sales and higher profits.

The new 6% business income tax will apply only to Subchapter C corporations, which generally include publicly traded corporations and some privately held corporations.  The tax will not apply to Subchapter S corporations, limited liability companies, sole proprietorships or other business entities.  It is anticipated that most businesses will either pay no business tax or will see their taxes reduced.  A few may pay higher taxes.

To help offset the expected loss of revenue, the new tax plan eliminates or reduces certain business tax credits such as brownfield re-development, film, and renaissance zones.  Tax incentives that have already been approved will remain in effect as will the 21st Century Jobs Fund which are used to attract businesses to Michigan.

Planning Opportunity

Corporations that are currently taxed under Subchapter C may want to analyze whether converting to Subchapter S is beneficial.  There are several tax and legal issues involved in converting a corporation to Subchapter S. If you have any questions regarding this, please give us a call.

 

Michigan Business Tax Relief to Contractors

The Governor recently signed an amendment to the Michigan Business Tax Act (MBT) to revise the definition of “Purchases from other firms” as it applies to general contractors, heavy construction contractors, and special trade contractors.  “Purchases from other firms” now includes payments for materials that were deducted in determining the cost of goods sold.  Therefore, these payments are excluded from the calculation of the gross receipts tax base required by the MBT.

The MBT is in part a tax imposed on the modified gross receipts tax base, after allocation or apportionment to the State at a rate of 0.8%.  The tax base is a taxpayer’s gross receipts less purchases from other firms before apportionment.  Specifically, the amendment allows the following to be included in “purchases from other firms” for the contractors:

  1. Payments to subcontractors for a construction project under a contract specific to that project;
  2. To the extent not deducted under other provisions of the act allowing deductions for materials and supplies, payments for materials deducted as purchases in determining the cost of goods sold for the purpose of calculating total income on the taxpayer’s federal income tax.

Payments to subcontractors for a construction project under a contract specific to that project are limited to contractors that do not qualify for a credit under Section 417 of the MBT.  Section 417 allows a credit against the MBT for any taxpayer with gross receipts that do not exceed $20 million and with adjusted business income minus the loss adjustment that does not exceed $1.3 million as adjusted annually for inflation.

Payments for materials deducted as purchases in determining the cost of goods sold are limited to the extent the payments were not deducted under provisions allowing deductions for materials and supplies.  This could include repair parts, fuel, and inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price for that inventory.

This bill would be retroactive and effective for taxes levied after December 31, 2007.

* Jeff Jacobsonis an associate attorney with Parmenter O’Toole in Muskegon, Michigan.  Parmenter O’Toole is a full-service business and real estate law firm with extensive experience in the area of construction law.  The comments in this article are not intended to be a substitute for legal guidance or advice for a specific situation.  You should obtain informed legal counsel to assist in your decisions relating to any issues which may be raised in this article.  For additional information regarding the above topic, or any other legal issues you may have, Mr. Jacobson can be reached at (231) 722-1621 or jaj@parmenterlaw.com.

California Pushing Internet Tax

California has enacted new requirements on its businesses that purchase from the internet. The must register to pay “use” tax, which is a sales tax on items purchase over the Internet, from catalogs, and over the telephone. If the seller does not collect sales tax, the business must report the sale and pay use tax.

Most states already have this requirement, and so does California, but the new law requires registration and a separate return. If the businesses that are required to register under the law (i.e. businesses that gross in excess $100,000) fail to register, the State can estimate the amount of use tax for the business and charge interest and penalties for non-payment. Also, they will look back to 2007 to collect those taxes. Amazon.com and Overstock.com are currently challenging the constitutionality of the law.

Click here for more information.

If you have questions, contact Jeffery Jacobson.

IRS Issues New Form for First Time Home Buyer’s Tax Credit

The Internal Revenue Service released the new form that eligible homebuyers need to claim the first-time homebuyer credit this tax season and announced processing of those tax returns will begin in mid-February. The IRS also announced new documentation requirements to deter fraud related to the first-time homebuyer credit. Click here to see more information and get the Form.

Questions contact Jeffery Jacobson

Tax Credit for COBRA Premium Payments Paid for Unemployed Individuals

COBRA provides certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees.

The American Recovery and Reinvestment Act of 2009 established a tax credit for an employer-provided subsidy for employees who involuntarily lose their jobs during the period beginning Sept. 1, 2008, and ending Dec. 31, 2009. The IRS issued a news release Feb. 26 outlining information for employers. Individuals who qualify for the COBRA subsidy premium should follow the following link for more information: http://www.irs.gov/newsroom/article/0,,id=204505,00.html

IRS Help for Small Businesses

The IRS announced today that qualifying small businesses may now carry back net operating losses (NOLs) for five years, instead of the limited two year period normally allowed. This will allow some small businesses to receive refunds for prior years by allowing them to spread out their unused NOLs over a longer period of time. The IRS stated that with the economic downturn and the new law, the IRS expects record numbers of small businesses to be eligible for the refunds. The IRS is putting in special steps to ensure timely processing of these refunds to help small businesses during this difficult period. The business may apply for an accelerated refund, which will allow the IRS to process the refund quickly. However, these refunds will be subject to later review by the IRS. To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years. For more information see