News from W&J

Michigan Governor Signs Legislation Replacing MBT with CIT and Revising Individual Income Taxes

On May 25, 2011, Governor Rick Snyder signed legislation that repeals the Michigan Business Tax (MBT) and replaces it with a corporate income tax (CIT).  Additionally it makes major changes to the state's individual income tax law by eliminating numerous individual income tax credits, deductions and exemptions as well as changing future income tax rates.  The new legislation will be effective January 1, 2012

New corporate income tax

 Effective January 1, 2012, the state's MBT will be replaced by a CIT imposed on businesses organized as C corporations under federal law. Sole proprietorships and pass-through entities such as partnerships, S corporations and limited liability companies currently taxed at the entity level under the MBT will not be required to pay taxes or file returns under the CIT. The term “corporation” under the CIT does not include an insurance company or a financial institution.

Tax rate: The rate of the CIT will be 6% of the income tax base, which is the corporation's federal taxable income, as modified for Michigan purposes, after allocation and apportionment. Taxpayers will not be required to file a return if their liability is less than $100. As under the MBT, taxpayers with apportioned gross receipts of less than $350,000 will not be required to file a return, but take note that the CIT will not contain the filing threshold credit currently available under the MBT.

Apportionment: The CIT will apportion business activity across states using only the ratio of Michigan sales to total sales (as is currently done with the MBT).

Unitary filing requirement: The CIT also retains the MBT's unitary filing requirements for corporations under common control.

Tax credits: The CIT will not retain any of the tax credits offered under the MBT with the exception of the alternate tax credit. Taxpayers eligible for this credit must have gross receipts of $20 million or less and adjusted business income of $1.3 million or less. The credit also places limits on the total compensation and director's fees to individual shareholders and officers. If a taxpayer qualifies for the credit, the taxpayer will receive a credit for the difference between the CIT liability and 1.8% of adjusted business income.

Bonus depreciation and domestic production deduction: Under the CIT, federal taxable income is to be calculated for Michigan purposes as if bonus depreciation and the domestic producers deduction were not in effect.

MBT repeal

There is a bill that allows taxpayers to continue to claim select MBT credits. In addition there is the option for certain taxpayers to continue to file under the MBT if they seek to claim certain credits.

The bill provides that the MBT Act will be repealed once the Secretary of State receives a written notice from the Department of Treasury that all certificated credits had been exhausted.

Multistate Tax Compact

The law was amended to provide that businesses subject to the new CIT or the MBT no longer have the option of using the apportionment factor provided by the Multistate Tax Compact if they operate in other states. A loophole in the current law allowed some firms to continue apportioning based on property, payroll and sales even after the MBT required all companies to apportion based only on sales. As a result, all taxpayers will now be required to use the 100%-sales factor apportionment.

Individual income tax 

There were extensive changes to the income tax levied on individuals. The changes are effective January 1, 2012 unless otherwise stated.

Income tax rate: The income tax rate levied in future years is altered. Under current law, the tax rate is scheduled to be reduced from 4.35% to 4.25% effective October 1, 2011. The rate is then scheduled to drop another 0.1 percentage point each subsequent October 1 until October 1, 2015 when the rate is to decline 0.05 percentage point, to 3.9%. As a result of the new legislation, it keeps the tax rate at 4.35% through January 1, 2013, and then lowers the rate to 4.25% where it would remain.

Personal exemption amount: The bill fixes the standard personal exemption for taxpayers and each dependent at $3,700 (the amount under current law) through tax year 2012. Beginning in 2013, the exemption will again be adjusted annually for inflation occurring after 2012.

The standard personal exemption will be phased out for single taxpayers with household resources between $75,000 and $100,000 and for married couples filing joint returns with household resources between $150,000 and $200,000.

The additional $1,800 exemption allowed for taxpayers and dependents whom are deaf, paraplegic, quadriplegic, hemiplegic, blind, or totally and permanently disabled is retained.

The additional $1,800 exemption allowed for each taxpayer age 65 and older, and each dependent of the taxpayer, is eliminated. The additional $1,800 exemption received by taxpayers whose unemployment compensation exceeds 50% of their adjusted gross income is eliminated.

Retirement income taxed: For taxpayers born before 1946, there will be no change in the treatment of retirement or pension income. Public pensions, as well as Social Security benefits and several other categories of income, would be completely exempt from taxation. A portion of pension and retirement income from private plans will continue to be exempt from tax ($45,120 for single filers and $90,240 for joint filers in tax year 2010, and adjusted for inflation), although the private pension exemption will continue to be reduced by the amount of any compensation and retirement benefits received for services in the armed forces as well as any public pension. However, the bill also reduces the private exemption by the amount of any retirement or pension benefits received under the Federal Railroad Retirement Act of 1974.

For taxpayers born during the 1946 to 1952 period, the bill eliminates the current exemptions for retirement and pension income, although the exemptions for social security income and several other types of income exempt under current law will be retained while the taxpayer is less than 67 years of age. Until the taxpayer reaches age 67, the bill allows a new exemption that exempts a portion of pension and retirement income ($20,000 for a single return or $40,000 for a joint return), regardless of whether the income is from a public or private pension. After the taxpayer reaches age 67, the bill keeps the exemption amount the same, but applies the exemption to all income, including retirement and nonretirement income. However, the bill retains the full exemption for Social Security income and select other types of income excluded under current law. Regardless of age, if total household resources exceed $75,000 for a single return, or $150,000 for a joint return, the bill eliminates the $20,000/$40,000 exemption.

For taxpayers born after 1952, the bill eliminates any exemption of public or private pension or retirement income other than Social Security income and certain other types of income until the taxpayer reaches 67 years of age. Once the taxpayer reaches age 67, the bill allows an exemption ($20,000 for a single return or $40,000 for a joint return) against all types of income, including Social Security income and other types of income (including retirement and nonretirement income). The bill allows a taxpayer to forgo the $20,000/$40,000 exemption and instead deduct 100% of Social Security income. Under the bill, if a taxpayer elects to claim the $20,000/$40,000 exemption, they will not be allowed to claim either the deduction for Social Security Income or the standard personal exemption. Regardless of age, if total household resources exceeds $75,000 for a single return, or $150,000 for a joint return, the bill will eliminate the $20,000/$40,000 exemption.

Elimination of certain deductions: The law eliminates a number of deductions currently allowed, including political contributions; wages included in federal adjusted gross income not deductible under IRC §280C ; distributions from certain individual retirement accounts used to pay qualified higher education expenses; and charitable contributions made from a qualified retirement plan or account. Also, taxpayers will no longer receive an additional $600 exemption per dependent child under the age of 19.

Elimination of nonrefundable tax credits:   The law also eliminates most credits available under the individual income tax and makes substantial changes to the remaining credits. Credits eliminated or changed under the new law include:

·         Nonresident estates and trusts will no longer receive a credit related to reciprocity agreements with other states.

·         All nonrefundable credits are eliminated, including: (1) the City Income Tax Credit; (2) the Public Contribution Credit, for contributions to public entities such as state universities, public libraries, and the state museum; (3) the Community Foundation Credit, for contributions to qualified community foundations; (4) the Homeless/Food Bank Credit, for contributions made to homeless shelters, food banks and food kitchens; (5) the College Tuition Credit, which provides a credit equal to 8% of tuition costs for residents attending a university or college that increased its tuition from the prior year by less than the rate of inflation; (6) the Vehicle Donation Credit, which provides a credit for automobiles donated to qualified organizations; and (7) the credit for contributions to individual and/or family development accounts.

·         A number of changes are made to the Homestead Property Tax Credit. Taxpayers will no longer be eligible for the credit if the taxable value of their homestead exceeds $135,000. The credit will be phased out starting at total household resources of $41,000 and be eliminated once total household resources reached $50,000. Under current law, the phase-out does not begin until household income exceeds $73,650. Under current law, the credit equals some percentage of the property taxes that exceed 3.5% of household income, regardless of income. The applicable percentage varies, with most taxpayers receiving 60%, while seniors and disabled individuals are able to receive 100%. The bill continues that applicable percentage for nonseniors. But for seniors, the bill provides that for taxpayers with income of $21,000 or less, the bill makes the applicable percentage 100%, phasing it down in four percentage point increments for every $1,000 of household resources until the applicable percentage declined to 60% at household resources of $30,000.

·         For rehabilitation plans certified after January 1, 2012, the historical preservation credit is eliminated.

·         For agreements entered into after January 1, 2012, tax vouchers issued under provisions related to the Michigan Early Stage Venture Investment Act can no longer be applied toward tax liability.

·         For tax years after 2011, the Michigan Earned Income Tax Credit will be reduced for tax years beginning after December 31, 2011 to 6% of the federal credit under IRC §32 .

·         Qualified investments made after December 31, 2011 in qualified businesses will no longer be eligible for a credit certificate from the Michigan Strategic Fund.

Bingo winnings taxable: The bill eliminates section 11 of the Traxler-McCauley-Law-Bowman Bingo Act, which bars imposition of a state or local tax on proceeds and prizes won in State of Michigan regulated bin, raffle or charity games.