Michigan Enacts Corporate Income Tax, Replacing the Michigan Business Tax

On May 25, 2011, Michigan Governor Rick Snyder signed into law sweeping changes to the state’s current corporate tax structure. Effective January 1, 2012, House Bill 4361 (“HB 4361”) and House Bill 4362 (“HB 4362”) mandate the repeal of the Michigan Business Tax (MBT) and replace it with a corporate income tax.

The enactment of this legislation implements extensive changes for business taxpayers in Michigan. Specifically, the new law imposes a 6% tax on the profits of corporations and unitary business groups with operations in the state. Certain flow-through entities such as S corporations and partnerships will not be subject to corporate income tax at the entity level. In lieu of the 6% corporate income tax, financial institutions are subject to an increased franchise tax at a rate of 0.29% of the franchise tax base allocated or apportioned to Michigan. Most insurance companies are subject to a tax of 1.25% on gross direct premiums written on property or risk located in Michigan with some exclusions.

The new corporate income tax requires unitary business groups to file combined tax returns. Transactions between entities included in a unitary business group are eliminated from the corporate income tax base and the apportionment formulas. Businesses subject to the tax and that have multistate operations are required to calculate their income apportioned to Michigan using a formula based on a 100% sales factor.

The new law implements additional withholding requirements that are not in place under the MBT. Flow-through entities, with more than $200,000 in business income from activities conducted in the state, are now required to withhold corporate income tax from the distributive share of each member that is a corporation. Flow-through entities are also required to withhold individual income tax for all nonresident members based on their distributive share after apportionment. In addition, individual income tax withholding is required by all persons dispensing pensions or annuity payments.

It is important to note that the new law permits certain businesses with available certificated credits or unused carryforwards under the MBT system to utilize these credits, with the caveat that the taxpayer would have to pay MBT or the corporate income tax, whichever is greater based on the use of the credits.

The recently enacted legislation reflects a momentous overhaul of the Michigan tax system. The new system implements numerous tax changes that have a wide-ranging effect on businesses operating in Michigan. Considerable analysis and planning may be required to ensure taxpayers are in compliance with the new law. Additionally, it is anticipated that over the next several months, information, interpretations and further clarification will be forthcoming from the Michigan Department of Treasury.