The past few years have seen big changes in Michigan and federal corporate tax codes that affect almost all firms doing business in the state. Here are four vital issues that should be on every Michigan business’ radar and what they could mean for your company.
Michigan state and local taxes
One of the biggest tax issues in every state is the idea of nexus. If a business has a “sufficient physical presence” in a state, it has established nexus and must collect and pay state taxes. Multiple levels of nexus exist, including income, sales and business tax.
While it seems relatively simple to determine, the Internet is changing things. Many states feel they’re missing out on taxing Web sales, often citing figures like the $450 billion spent on Cyber Monday. Because of this, these states are expanding the idea of nexus.
The concept isn’t new. The proposed federal Marketplace Fairness Act of 2013 seeks to level the playing field between brick-and-mortar companies and online businesses by enabling states to collect taxes from businesses with no physical presence in their state. Even though the act isn’t a law yet, states are expanding nexus and their tax rolls.
In California, a business has “factor” nexus if more than 25 percent of their total sales or more than $500,000 in sales are earned in that state. If either of those milestones is met, it must pay taxes even if the business has no physical presence there whatsoever. In New York, the state government says Amazon has nexus there because of its affiliate network.
The Michigan nexus interpretation is pretty straightforward. If a corporation (S or C) has been transacting business within the state for more than one day, it has established nexus and must pay state taxes at the corporate level for C-corps and shareholder level for S-corps.
This is a national issue because, more often than not, companies transact business across state lines. It’s also a potential land mine of confusion, given different and constantly changing state nexus interpretations. The Supreme Court must address this issue because some states’ actions contradict the Court’s previous rulings that establishing nexus requires a physical presence. Until then, companies must be diligent about understanding state tax liabilities everywhere they do business.
Consider the tax “trap.”
An Illinois-based law firm is using the state’s False Claims Act to “trap” Michigan businesses, entangling them in costly lawsuits.
The firm, Schad, Diamond & Shedden PC (previously Beeler, Schad & Diamond PC), buys something online or via phone from a company and has it shipped to Illinois. If the seller doesn’t include sales tax on the freight, the firm uses a whistleblower act to sue the seller.
It’s already happened to companies as large as Amway and Audiovox and as small as local wine merchants. If the state of Illinois picks up the lawsuit, the firm receives a portion of whatever monies the state collects … but if the law firm picks up the case, it receives every dollar that is collected. So far, estimates put the firm’s collections near the millions.
Many businesses would rather settle than go to trial, and several already have. But settling isn’t usually an option for smaller businesses with limited resources.
To avoid this scenario, consult your tax professional to make sure your business is fulfilling its state tax liability.
Affordable Care Act
The Affordable Care Act requires employers to report on the value and adoption of health coverage provided to employees. Reporting was supposed to start in 2014, but after a year delay, 2015 becomes the first filing year.
Any employer providing “minimal essential coverage” or self-insured health coverage must file an informational return on all covered employees by February 28, 2016 (March 31 if completed electronically). Your business size determines what information to provide.
Large companies
Employers with 50 or more full-time employees (known as Applicable Large Employers or ALEs) file Form 1095-C, reporting on what health coverage, if any, was offered. Large firms not offering health insurance must pay the IRS under the Employer Shared Responsibility Provisions.
Small businesses
If companies with less than 50 full-time employees are self-insured, they file Form 1095-B. And no matter how their health plans are structured, small businesses may have to report the value of the coverage on employee W-2 forms.
Grey area
For many businesses, determining their filing requirement is cut and dried. But for some, it’s not as simple. Companies with several part-time or seasonal employees, for example, may need assistance to learn if their full-time employee count rises to the ALE level.
Reporting and associated costs
The filing expense can be big in dollars and time.
Employers must report the minimum value insurance offered, whether it was affordable and whether they covered eligible full-time employees. They must also indicate whether employees accepted the coverage, declined it or are on COBRA.
The IRS needs this information for every month and requires forms be sent to employees by January 31, 2016. However, a 30-day extension is available.
Small companies may simply collect this information themselves. But it’s time consuming to contact several vendors and complete, file and send the forms to employees. Even for the smallest companies, reporting can require a good deal of effort.
Companies with many employees often hire outside help because they’re unable to complete this task internally. Even with assistance, it takes resources to file correctly and on time.
Non-compliance penalties
Employers not offering affordable coverage incur penalties of $3,000 per employee. Those offering no coverage pay $2,000 per employee. In addition, reporting mistakes like incorrect, incomplete or late returns incur penalties of about $200 per employee.
Exemptions
The IRS exempts the first 80 employees when calculating penalties. So if a company has 90 employees eligible for health coverage and didn’t offer any, the first 80 employees wouldn’t count toward penalties and the company would only pay on the remaining 10.
In 2016, the exemption will reduce to 30 employees.
Jump on 2016
While it’s late in the game for 2015 reporting, companies can get a head start on 2016 by seeking assistance, especially in determining filing eligibility status. Companies can also establish data collection systems and policies so future filings go smoothly.
Federal ‘tax extender’ legislation
So-called “tax extender” legislation – aimed at generating business investment – has been an annual cycle of uncertainty for some time. The bill package contains several valuable items for businesses, including research and employment tax credits, faster equipment depreciation and more.
The breaks are already in place but require annual renewal from Congress. During the past two years, renewals have been passed in December, making for nightmarish end-of-year tax planning.
This year, Congress renewed the provisions again, but with a twist: some of the provisions were made permanent, while others were placed into effect for several years. Thanks to these changes, businesses will now know their tax costs with certainty. Here are some highlights of the 2015 tax extenders:
Permanent extensions
The Code Section 179 expense election allows businesses to expense up to $500,000 of qualifying fixed asset additions like equipment, furniture and more. It’s not new, but upon expiration in 2015, the threshold decreased to just $25,000. Now permanent, businesses can expense equipment immediately and receive a write-off, saving one-third on taxes. For Michigan manufacturers and tool makers buying expensive machines, this means they don’t have to delay decisions like many did for most of 2015.
Similarly, the permanent extension of the research and development (R&D) credit enables technology, pharmaceutical and other companies to invest in R&D with certainty. Absent this 20 percent credit, many firms scaled back or postponed investments, but they can now move forward knowing the credits are there.
Several other extensions were made permanent as well, chief among them being the credit for employing active-duty members of the uniformed services.
Five-year extensions
As an alternative to the Section 179 provision, the bonus depreciation credit allows businesses to deduct half of the cost of new property and equipment in the first year and the rest over its useful life. It’s a 50 percent credit from 2015 to 2017, 40 percent in 2018 and 30 percent in 2019, with the credit expiring in 2020. The five-year lifespan means Michigan manufacturers, farmers and other large equipment buyers can now make more well-informed business decisions.
Other five-year extensions include the Work Opportunity Tax Credit for hiring long-term unemployed individuals and $3.5 billion of new markets credits annually.
Two-year extensions
Several credits were extended for two years, including delays on taxing high-end “Cadillac” health care plans and medical devices. Others include credits for railroad track maintenance, expensing mine safety equipment and more.
Long-sought tax certainty
Our tax policies drive our economy, so when companies don’t know the rules, they can’t really play the game.
The annual renewal cycle for these credits made business planning difficult. With limited cash, would it go toward taxes or new equipment?
But these extensions provide more certainty over time, allowing businesses to better operate. It’s the best business tax credit scenario in the past 10 to 15 years and, hopefully, will spur growth.
Tangible property regulations and property capitalization
Tangible property regulations, commonly referred to as “repair regulations,” impact virtually all taxpayers that acquire, produce or improve tangible property.
But what is tangible property?
Anything you can touch, feel or see. A pencil is “tangible property” — and so are parking lot light poles, new windows, even fuel. As you can imagine, then, these regulations impact nearly every business.
During the past couple of years, big changes have prompted businesses to re-examine whether an expenditure should be deducted or capitalized – a decision that can heavily impact a company’s bottom line. The items a business purchases to support its operations – as well as how and when these items are used – are the key drivers behind this decision.
Considering the enormous variability of expenses across many businesses, things can get tricky quickly. And the ripple effect can be widespread.
For example, the deduct/capitalize decision could reduce net income if a company has a policy to write off the maximum amount possible for tax purposes. A lack of net income would be concerning for a firm’s lenders, insurers and such. So the decisions companies make about their policies and expense thresholds affect more than taxes – they can extend to insurance, bonding, investment and more.
Michigan businesses owners can prepare for this by spending time with advisers discussing what they buy most, how they use it and when. While the regulations are generally found to be taxpayer friendly, taking advantage of them can require significant internal changes to business practices and purchase decisions.
For instance, capitalization policies may need to be put in place. Landlord/tenant leases could require modifications. And tax depreciation schedules may require review and alterations to verify asset class lives and determine if past capitalized items must be written off.
Compliance often means filing at least one change in accounting method. In addition, companies have to determine and file annual new elections, like the “de minimis” safe harbor election to write off items costing a certain amount or less (i.e., qualified items $5,000 or less).
These regulations are comprehensive and present a significant planning opportunity. Determining the right elections to match business goals and making the needed internal changes is no small undertaking. Additionally, there’s still ambiguity around these regulations that will only become clearer through audits and court cases, which is why it’s best to consult tangible property regulations professionals.
2016 and beyond
Even with additional clarity around some issues, the U.S. tax environment remains complex. As a result of the new laws discussed here, companies operating in Michigan may make some big changes in the near future. Accounting practices, benefit offerings, purchase decisions and more could be affected.
Today more than ever, it’s smart business to seek professional guidance in navigating the evolving tax landscape. Be sure to work with your advisers to help prepare your business for 2016 and beyond.
Sam Hodges is a tax principal with Rehmann, www.rehmann.com, focusing on state and local tax issues. He advises clients domestically and abroad on multistate tax issues including tax planning and tax dispute resolution and represents clients in the Michigan Tax Tribunal.
