A Look at the MBT – Long-Awaited SBT Replacement

The long-awaited replacement tax for the Michigan Single Business Tax (SBT) has arrived. Michigan now has the Michigan Business Tax (MBT), which takes effect Jan. 1, 2008. Companies that are on a calendar year-end will file their first MBT return for the year ending Dec. 31, 2008. Those companies that are on a fiscal year will be covered by both taxes and will file on a transitioning basis.

Highlights of the MBT:

  • The MBT consists of two components, a modified gross receipts tax of 0.8 percent and a business income tax of 4.95 percent.
  • Unitary business groups will file a group MBT return
  • Sales from the performance of services are now sourced under a “market based” approach.
  • The MBT tax base will be apportioned based on a single sales factor.
  • Nexus rules, the connection that allows the states to impose a tax, have been broadened. Any activity in the state in excess of one day will create nexus and an MBT filing responsibility if the gross receipt threshold is met.
  • Several credits will be available under the MBT for qualifying taxpayers based on research and development expenses incurred in Michigan, compensation and personal property taxes.
  • Taxpayers with gross receipts allocated to Michigan that are less than $350,000 will not be required to file.
  • An alternative tax of 1.8 percent of adjusted business income will be available for qualifying small taxpayers.
  • Rules have changed for insurance companies.

Important Things To Consider In Preparing For MBT

Stay tuned: there is still more to come on the Michigan Business Tax. Technical corrections are expected out by December, along with some guidance or transition.

Check your personal property tax classifications. In addition to the credits provided for industrial personal property for MBT, the governor signed additional property tax relief exempting industrial personal property from the entire 18 mills of the local school tax and commercial property is exempt from 12 mills of the local school tax. Industrial personal property will also be exempt from the 6-mill State Education Tax.

Make sure your personal property taxes that have been assessed in 2007 are paid by Dec. 31, 2007 in order to qualify for existing SBT credits.

If you are considering the sale of a business or business assets, you may want to complete the transactions prior to Dec. 31, 2007 to avoid the 4.95 percent income tax on the sale under the MBT. Make sure your books and records segregate “purchases from other firms” as it will be a reduction for calculating modified gross receipts for the purposes of the tax. If you have a service business, make any necessary adjustments to your recordkeeping to capture the data necessary to apportion your MBT base. If you are involved with businesses with direct or indirect common control you may need to file a combined return under the new unitary rules.

Affiliates with Michigan customers of tangible personal property or who provide services that benefit customers in the Michigan market need to consider the impact of the MBT. If you think your business may be conducting research and experimentation activities, now is the time to find out. Qualifying activities may get you federal and state tax credits.

Stay tuned: there is still more to come on the Michigan Business Tax. Technical corrections are expected out by December, along with some guidance on transition.

Kevin McKervey and Suzanne Tuson are CPAs and shareholders with Clayton & McKervey, P.C., located in Southfield, Mich. They may be reached at [email protected] and [email protected]