July 2007

Michigan Implements Extensive Revision of State's Business Tax

On July 12, 2007, Michigan Governor Jennifer Granholm signed into law S.B. 94, also known as the Michigan Business Tax Act. The Act repeals the state’s single business tax (SBT) and replaces it with a new business tax based on business income and modified gross receipts. The newly enacted Michigan Business Tax (MBT) will take effect for all business activity that occurs on or after January 1, 2008.

OVERVIEW OF THE MICHIGAN BUSINESS TAX ACT

The Act defines a taxpayer as an individual, business entity, estate or trust that conducts “business activity” in the state. For multiple taxpayers to combine as a “unitary business group” for the purposes of filing a combined return, one of the group’s members must own or control more than 50% of the ownership interest of the other group members, and there must be a “flow of value” between or among the other members in the group. All transactions related to this “flow of value” must be eliminated from the calculation of the applicable tax base and the apportionment formula.

The apportionment formula under the MBT is based on 100% of a taxpayer’s Michigan sales, which is a significant change from the SBT formula’s basis of 92.5% of sales and 3.75% of payroll and property. Governor Granholm’s office estimates that Michigan businesses will receive a total tax savings of $150 million as a result of this change.

IMPACT ON SMALL BUSINESSES
The new MBT phases in tax liability for small businesses with Michigan-apportioned gross receipts between $350,000 and $700,000 through the use of a tax credit equal to the ratio of receipts in excess of $350,000 to $350,000. Small businesses with receipts of less than $350,000 are exempt from the MBT. This exemption does not apply to financial institutions and insurance companies.

ADDITIONAL TAX CREDITS
The Act retains a number of SBT tax credits, and institutes several new credits designed to promote economic development in the state. Some of the more prominent tax credits featured in the new law are as follows:

• a compensation tax credit equal to 0.37% of compensation earned in the state, capped at 65% of the taxpayer’s total tax liability;
• an investment credit equal to 2.9% times the difference of total depreciable tangible assets cost minus proceeds resulting from any sale of those assets, also capped at 65% of the taxpayer’s total tax liability;
• a research and development (R&D) credit equal to 1.9% of R&D expenses in the state, capped at 75% (including the compensation and investment credits outlined above) of the taxpayer’s total tax liability;
• an R&D credit equal to 30% (but capped at $300,000) of a minimum contribution of $350,000 to a business, engaged in R&D in the state, with less than 50 full-time employees or gross receipts under $10 million;
• a small business tax credit for qualified businesses (i.e., gross receipts of $20 million or less and adjusted business income of $1.3 million or less) equal to the amount of the tax that exceeds 1.8% of adjusted business income;
• an entrepreneurial tax credit for qualified businesses equal to 100% of the tax liability that can be attributed to increased employment in the state;
• a personal property tax credit for qualified industrial and commercial property that varies depending on the percentage of personal property tax paid; and
• a tax credit for charitable contributions of $50,000 or more made to a municipal or not-for-profit art, historical or zoological institution. The credit is equal to 50% of the donation, and capped at $100,000.

CONCLUSION
The Michigan Business Tax Act presents businesses with many tax saving opportunities. Contact the state and local tax (SALT) specialists at Cherry, Bekaert & Holland today to learn more about what you or your business can do to take full advantage of these provisions to maximize your tax savings beginning this year.

For more information, please contact:
John Corn
State and Local Tax
jcorn@cbh.com
866.859.9792

About Cherry, Bekaert & Holland, L.L.P. (CB&H)

As the Southeast’s accounting and consulting Firm of Choice, Cherry, Bekaert & Holland, L.L.P. (CB&H) is uniquely positioned to provide quality, cost-effective and value-added services to a diverse and successful client base. The Firm sets itself apart by delivering the extensive industry specialization and service opportunities of a national firm, but with the accessibility, service continuity and level of personal relationship expected from a local business. Ranked nationally among CPA firms, CB&H’s resource network stretches regionally across six states, including the large metro markets of Atlanta, Charlotte, Hampton Roads, Raleigh, Richmond, Tampa and Washington D.C., and nationally and internationally through an alliance with Baker Tilly International, a worldwide network of independent accounting firms.