Legislation signed into law earlier this year by Gov. Rick Snyder has repealed the Michigan Business Tax (MBT) and enacted a Corporate Income Tax (CIT) in its place. As a result, Michigan businesses will face a new set of income tax rules effective Jan. 1, 2012. This article highlights several key aspects of the new rules, including planning opportunities that every business owner should consider.

C corporations with the requisite business activities in Michigan, other than those with less than $350,000 in apportioned gross receipts or less than or equal to $100 of CIT liability, will have a CIT filing requirement. Flow-through entities such as partnerships and S corporations are not subject to the new CIT, nor are sole proprietorships.

• Planning opportunity – Where otherwise prudent, profitable Michigan flow-through entities should defer income out of 2011 and accelerate deductions into 2011 to minimize their MBT. Permanent savings will result since flow-through entities are not subject to an entity-level state income tax after 2011.

• Planning opportunity – Many C corporations can reduce or eliminate their Michigan income tax liability by changing their entity classification to that of an S corporation, if eligible. However, state taxes are only one of several factors that should be considered with respect to entity classification changes. Proceed cautiously here with the consultation of your tax adviser.

Requisite business activities in Michigan consist of either a physical presence in Michigan for greater than one day per year, or active solicitation of sales in Michigan resulting in apportioned gross receipts of $350,000 or more. C corporations are deemed to have the requisite business activities in Michigan for CIT purposes by virtue of ownership in a flow-through entity with the requisite business activities in Michigan.

Income subject to the new CIT is determined in a similar fashion to the business income tax base component of the expiring MBT. Provisions for federal decoupling, unitary filing and apportionment remain generally unchanged. Likewise, the new CIT rate (6 percent) is nearly identical to the business income tax rate of the expiring MBT when the surcharge is considered.

New CIT net operating losses are allowed a 10-year carry forward period. However, business loss carry forwards generated in MBT years cannot be carried forward and applied against business income under the new CIT—unused carry forwards will expire as of Dec. 31, 2011.

• Planning opportunity – Where otherwise prudent, taxpayers with business losses from 2011 and prior years should accelerate income and defer deductions to maximize utilization of losses that will otherwise expire.

With the exception of the alternative small business credit, there are generally no credits surviving from the old MBT, nor provisions for any new credits. Eligibility and computation of the small business credit is consistent with the expiring MBT rules.

• Planning opportunity – Taxpayers considering capital acquisitions will benefit from making purchases in 2011 vs. 2012. The 2011 purchases are eligible for both a deduction from gross receipts and the investment tax credit under the expiring MBT. There is no commensurate incentive under the new CIT for capital acquisitions.

• Planning opportunity – Industrial personal property tax payments should be remitted before Dec. 31, 2011 to receive the expiring credit.

Other transition considerations include:

• Taxpayers can elect to continue to file and pay under the expiring MBT rules rather than the new CIT rules if they hold certificated credits (e.g., Brownfield, MEGA and others)  with terms extending beyond 2011.

• Fiscal year taxpayers should file a final short period MBT return for the period ending Dec. 31, 2011, and (if subject to the new tax)) an initial short period CIT return for the period beginning Jan. 1, 2012. Income for the fiscal year can be allocated between the short periods ratably, or each short period can be accounted for separately.

• There is no prior-year safe harbor for estimated tax payments in 2012 only; otherwise, the estimated payment rules under the expiring MBT will remain unchanged.

• Investment tax credits from SBT and MBT years will not be subject to recapture under the CIT.

Gov. Snyder enacted the new CIT in an effort to make the Michigan income tax simpler and more equitable for businesses. Politics aside, there are opportunities to be had and pitfalls to avoid, especially during the transition period. Be sure to discuss how your business will be impacted by the conversion from the expiring MBT to the new CIT with your tax adviser.

		Dan Warmels, CPA is a founding partner of Warmels & Comstock, PLLC, an East Lansing-based public accounting firm. He works with small to medium-sized businesses and individuals in tax planning and tax return preparation. He is also accredited in business valuations. Mike Dean, CPA is a partner with Warmels & Comstock, PLLC. He has provided tax and business advisory services to Michigan companies for the past seven years, focusing on privately held enterprises in the manufacturing, technology and service sectors.