What is the Michigan Business Tax?

Prior to Michigan Business Tax (MBT), there is Single Business Tax (SBT) that was in effect since 1976. SBT applied a modified VAT or Value Added Tax, and it focused more on the ‘benefits obtained’ for the tax payers as opposed to ‘ability to pay’ standard. But eventually the SBT was abolished because of the following reasons – The method of adding VAT led to negative insight – as the individuals are used to deducting from the base not adding to it. Also, companies lost. SBT was also blamed for the declining Michigan economy during that time and it also gave the impression that Michigan requires unreasonably high business taxes.

Michigan Business Tax replaced SBT and it has the following features:

  1. New tax base of gross receipts less purchases and income balances and shift a portion of the weight of the capability to pay (income) while keeping an established base.
  2. Significant personal property tax assistance tackles a major business distress.
  3. MBT tax credits offer incentives to firms so they will be encouraged to invest in the state, consequently bringing more jobs for the residents, and to carry out development and research in the state of Michigan.
  4. There are particular conditions to decrease tax liabilities for small business to assist them to develop.

Under MBT, the general tax base has modified gross receipts taxed at 0.8 percent and the business income is taxes at 4.95 percent. Insurance companies are taxed at 1.25 percent on direct premiums and other financial institutions have a franchise tax at 0.235 percent on net capital.

MBT Apportionment

Both the Modified Gross Receipt Tax and the Business Income Tax are allocated to MI based on sales. The apportionment aspect equals a business’ sales in the state of Michigan divided by the total sales in all locations. There are no throwback sales in MBT and the sales are traced to another state if that state has authority to tax even if that state doesn’t commonly do so.

Modified Gross Receipts Base

Under MBT, the Modified Gross Receipts Base is the tax payers gross receipts less purchases from other companies prior to apportionment. “Purchasing from other companies” means the inventory obtained within the year, it also pertains to assets that are depreciable within the year and it also refers to the supplies and materials, including fuel, parts and repairs.

Business Income Tax Base

Under MBT, Business Income tax Base’s starting point is the federal taxable income from business activity. It includes non-corporate firms and unitary groups.

Unitary groups file a combined tax return, while adding tax bases of members of the unit and applies combined apportionment percentage. Insurance companies, financial institutions and operating units cannot participate in unitary groups.

Insurance Company Tax

Instead of either business income taxes and modified gross receipts. Insurance company tax has a 1.25 percent gross direct premiums applied to property or risk located in the state of Michigan. There is no apportionment as only premiums on property and Michigan risks are taxed.

Financial Institution Tax

Under MBT, financial institution tax is restricted to thrift banks, savings and loans, and banks. It is also limited to firms possessed directly or indirectly by a financial organization, and financial institution tax is also limited to a unitary business set of these units.

Personal Property Tax Relief

Exemptions under personal property tax relief include 12 – 24 education mills, averaging to 23% cut on commercial personal property. There is a 35 percent credit that is refundable for the outstanding industrial personal property tax for those that are exempt from 24 education mills and firms. MBT also offers a personal property tax decrease of 65% on average for industrial property. By allocating a portion of the MBT to the school aid fund, schools in general are protected. There are no reductions to the village, township, city and county property taxes and this decreases the burden on mobile capital.

Special Provisions for Small Businesses

Small business or companies that have $350,000 or below gross receipts are tax exempted. There are absolute tax liability set up for $350,000 – $700,000 in gross receipts via credit. MBT also allows eligible companies to pay 1.8 percent on adjusted business taxable income and increases alternate tax officer payment disqualifier removed to $160,000 – $180,000. Double gross receipts remove to $19 – 20 million. To entice or encourage business owners to invest in Michigan, MBT offer business credit.

Credits Provided by MBT:

  1. Investment Tax Credit – this is for 2.9 % of Michigan investment
  2. Compensation Credit – this is for 0.37 % of Michigan investment
  3. R and D Credit – this is for 1.9 % of Michigan research and developments costs.

The total sum of investment and compensation credit cannot be greater than 52 % of MTB liability and the total sum of the 3 credits cannot be more than 65 % of the MTB liability.

Surcharge on MTB

Under MTB, the surcharge is 21.99 percent of tax before credits. All of the major credits have been decreased. Changes are estimated $100 million tax decrease in FY 08, income neutral in regards to substituting service tax. For financial institutions, the surcharge is 27.7 percent for 2008 and 23. This is a 4 percent from 2009 onwards. Also, there will be no surcharge on insurance company tax and the surcharge expires in 2017.

The entities that will pay more under MBT are the profitable firms, FIRE, companies that operate in MI but have small property or payroll and companies without much personal property. On the other hand, those that will pay less under MBT are small businesses with $10 – $20 million of gross receipts, also small businesses below $10 million with income to owners above $115,000, manufacturing companies and Michigan multi-state companies.

MBT has a prompt to make sure that it would not represent a huge tax elevation. If revenues go over the trigger, 60 percent of the excess are refunded to the tax payers and 40 percent will be deposited to BSF.