• Interest income and dividends derived from obligations or securities of states other than Michigan;

• Taxes on or measured by net income, including the CIT;

• Carryback or carryover of a net operating loss, to the extent deducted for federal taxable income purposes; and

• Royalties, interest, or other expense paid to a related person for the use of an intangible asset, if the person is not included in the taxpayers’ unitary business group (with certain exceptions).

Deductions (to the extent included in federal taxable income):

• Dividends (including deemed dividends and Section 78 Gross Up) and royalties received from foreign persons;

• Interest income from U.S. obligations; and

• Eliminate any income or expenses from producing oil and gas to extent included in or deducted from federal taxable income.

Provisions Not Carried Over from the MBT

• A deduction for certain deferred tax liabilities (FAS 109 adjustments) are not permitted under the CIT;

• Certain income or losses attributable to another entity will not be included;

• Charitable contributions made to the Michigan Education Trust will no longer be deductible;

• Certain gains and/or income related to qualified affordable housing could no longer be deducted from business income; and

• No carryover of any tax net operating losses from the Business Income tax portion of the MBT are allowed.

Tax Credits: The CIT retains only one of the tax credits offered under the MBT, the small business alternative tax credit. To be eligible for this credit firms must have gross receipts of less than $20 million; adjusted business income of less than $1.3 million; and limited amounts of total of compensation and directors' fees paid or allocated to individual shareholders and officers. If eligible for this credit, taxpayers will be tax based at a rate of 1.8% of adjusted business income.

Appropriations Language: In order to avoid the potential for the CIT to become the subject of a recall petition, the new CIT statute includes a Department of Treasury appropriation in the amount of $100 for the implementation of the CIT. Obviously, it’s going to cost a lot more than $100 for Treasury to implement the CIT. So why have an inadequate appropriation amount included in the bill that creates a new tax?

This is a political maneuver that has become more or less standard procedure (an appropriation was also included in the MBT Act when it was enacted) ever since the repeal of the SBT was eligible to be placed on the ballot following a successful recall petition effort. Legislation that includes an appropriation is not subject to being brought up for a vote of the people via a recall petition.

MBT Filing Option: The new law amends the MBT Act by providing for the eventual repeal of the MBT. Beginning January 1, 2012, an MBT taxpayer will be defined to be only a person or unitary business group with a “certificated credit” that has elected to file under the MBT. These taxpayers will be required to pay a tax based on the greater of their MBT liability or a modified version of their tax liability had they filed under the CIT. Certain credit amounts that exceed the taxpayer's liability will be refunded. Once elected, taxpayers must continue filing MBT returns until all the certificated credits are exhausted. At that time the taxpayer will be required to begin filing CIT returns.

"Certificated credits” include:

• Brownfield Redevelopment Credits

• Early Stage Venture Capital Credit

• Farmland Preservation Credit

• Historic Preservation Credit

• Media Production Credit

• Media Infrastructure Credit

• Renaissance Zone Credit

• NASCAR Safety Credit

• NASCAR Speedway Credit  

• Credits for Photovoltaic Technology

• Employment Credit

• Anchor Company Payroll Credit

• Federal Government Employment Credit

• Anchor Company Taxable Value Credit

• Polycrystalline Silicon Manufacturing Credit

• Credits for High-Power Energy Batteries

• Hybrid Technology R&D Credit

The Ultimate Repeal of the MBT: The MBT Act will ultimately be repealed, once the Department of Treasury provides written notice to the Secretary of State that all certificated credits had been exhausted.

Financial Institutions Tax: As under the MBT, financial institutions will continue to be subject to a net capital tax. The tax rate is 0.29% (essentially the same as under the MBT) but the deduction for goodwill has been eliminated.

Insurance Company Tax: Under the CIT insurance companies will be subject to the same gross premiums tax (1.25% of gross premiums written on Michigan property or risks) that they were subject to under the MBT.

Flow-Through Entity Withholding Requirements

The idea of requiring withholding or estimated taxes for flow-through entities with nonresident individual partners or S corporation shareholders is not new. In fact, it was required under both the Single Business Tax (SBT) and the MBT. What is new to Michigan (and to the best of the author’s knowledge is only required in one other state – New Jersey) is the requirement for flow-through entities to withhold CIT taxes on non-individual owners, e.g., partnerships, LLCs or C corporations that have an ownership interest in a flow-through entity. These potentially multi-tiered withholding requirements, which are described below, add a layer of unnecessary complexity that only one other state requires.

Section 703(4) of HB-4361 (H-1) requires, in part, that “every flow-through entity with business activity in this state that has more than $200,000 of business income in the tax year after allocation and apportionment … shall withhold a tax in an amount computed by applying the rate … [6.0%] to the distributive share of the business income of each member that is a corporation or that is a flow-through entity.”

Subsection (5) of this section of HB-4361 (H-1) goes to state that:

If a flow-through entity is subject to the withholding requirements of Subsection (4) then a member of that flow-through entity that is itself a flow-through entity shall withhold a tax on the distributive share on business income as described in subsection (4) of each of its members. The Department shall apply tax withheld by a flow-through entity on the distributive share on business income of a member flow-through entity to the withholding required of that member flow-through entity.

Under current law, a multistate taxpayer can elect to file under the provisions of the MTC rather than the requirements of the laws of states in which it has business activity. One of these provisions involves how to allocate business activity across states. The MTC allows a taxpayer to compute an apportionment factor by computing three separate factors, adding them together and dividing by three. The three factors are based on payroll, property, and sales, with each factor calculated by taking the amount of that factor attributable to the taxpayer within a state and dividing it by the total of that factor attributable to the taxpayer in all states. By dividing by three, the formula equally weights each of the factors. The MBT and the proposed CIT use only a sales factor, taking Michigan sales and dividing that amount by the taxpayer's total sales.

• The IIT tax rate is frozen at 4.35% for tax years 2011 and 2012

• The previous annual IIT rate reduction of .1% is repealed

• For 2013 and thereafter the income tax rate for individuals will be 4.25%

Elimination or Change to Several Current Exemptions

• The standard personal exemption for taxpayers and each dependent is frozen at $3,700 (the level under current law) through tax year 2012. Beginning in 2013, this exemption will again be adjusted annually for inflation occurring after 2012.

• The standard personal exemption will be phased-out for single taxpayers with “total household resources” between $75,000 and $100,000, and for married couples filing joint returns with total household resources between $150,000 and $200,000.

• The additional exemption allowed for each taxpayer age 65 and older is eliminated.

• The additional exemption per dependent child under the age of 19 is repealed.

• The additional exemption received by taxpayers whose unemployment compensation exceeds 50% of their AGI will be eliminated.

Modifications to the Definition of Individual Taxable Income

Deductions Related to Pension and Retirement Income: The following deductions related to pension and retirement income will be based on the age of the older spouse.

• For taxpayers born before 1946, there will be no change in the treatment of retirement or pension income. Public pensions, as well as social security benefits will continue to be completely exempt from taxation. A portion of pension and retirement income from private plans will continue to be exempt from tax ($45,120 for single filers and $90,240 for joint filers in tax year 2010, and adjusted for inflation). Seniors in this category will continue to be permitted to deduct a portion of interest, dividends, and capital gains they receive. Note: The private pension exemption will continue to be reduced by the amount of any compensation and retirement benefits received for services in the armed forces, as well as any public pension.
   
• For taxpayers born during the 1946 to 1952 period, the new law eliminates the current exemptions for retirement and pension income, although the exemptions for social security, railroad and military pension income under current law will be retained, while the taxpayer is less than 67 years of age. Until the taxpayer reached age 67, the new law allows a new exemption that will exempt a portion of pension and retirement income ($20,000 for a single return or $40,000 for a joint return), regardless of whether the income was from a public or private pension. Note: If total household resources exceeds $75,000 for a single return, or $150,000 for a joint return, the new law eliminates the $20,000/$40,000 public and private pension income exemptions.
  
  After the taxpayer reached age 67, the new law keeps the exemption amount the same, but will apply the exemption to all income, including retirement and nonretirement income. The new law also retains the full exemption for social security income. The law implies that the taxpayers in this age category will still be eligible to receive the standard personal exemption, regardless of age. Note: If total household resources exceeds $75,000 for a single return, or $150,000 for a joint return, the new law eliminates the $20,000/$40,000 exemption. Further, individuals claiming exemption for military or railroad pensions will not be eligible for the $20,000/$40,000 exemption.
  
  Effective January 1, 2012, senior citizens born after 1945 will no longer be permitted to deduct a portion of interest, dividends, and capital gains they receive.
   
• For taxpayers born after 1952, the new law eliminates any exemption of public or private pension or retirement income other than social security, military or railroad pension income until the taxpayer reached 67 years of age. Once the taxpayer reached age 67, the new law allows an exemption ($20,000 for a single return or $40,000 for a joint return) against all types of income, including social security income and other types of income (including retirement and nonretirement income).
  
  After reaching age 67 the new law allows a taxpayer to forgo the $20,000/$40,000 exemption for all income and instead deduct 100% of social security, military or railroad pension income. Under the new law, if a taxpayer elects to claim the $20,000/$40,000 exemption, they will not be allowed to claim either the deduction for Social Security income or the standard personal exemption. Taxpayers will not be eligible to receive the standard personal exemption once he or she turned age 67, unless the taxpayer elects to claim the 100% deduction for social security, military or railroad pension income.
  
  If a taxpayer elects the $20,000/$40,000 exemption and if total household resources exceed $75,000 for a single return, or $150,000 for a joint return, the new law will eliminate the $20,000/$40,000 exemption. If a taxpayer elects to exempt social security, military or railroad pension income, the personal exemption that is otherwise allowed will be subject to being phased-out for total household resources between $75,000 to $100,000 for single filers and $150,000 to $200,000 for joint filers.
  
  Effective January 1, 2012, senior citizens born after 1945 will no longer be permitted to deduct a portion of interest, dividends, and capital gains they receive.

New Pension and Retirement Withholding Requirements: Because of the recent changes to the taxability of pension payments and retirement benefits, the payers of these types of benefits will be required to withhold at a rate of 4.35% on the “taxable portion” of said benefits.

Michigan Supreme Court Review: The issue of whether or not the state can tax public employee pension income under the state constitution, along with several other issues, is currently being reviewed by the Michigan Supreme Court.

Other Changes to the Definition of Taxable Income: 

• Qualifying political contributions are no longer be deductible.

• Certain wages, which are not deductible under IRC Section 280C, will no longer be deductible.

• Distributions from certain individual retirement accounts used to pay qualified higher education expenses will no longer be deductible.

• Charitable contributions made from a qualified retirement plan or account will no longer be deductible.

• Reinvestments of gains made from certain investments certified by the Michigan Strategic Fund will no longer be deductible.

• Both gross income and related expenses from oil and gas production are removed if the gross income was subject to the severance tax.

• If deducted in determining Federal AGI, expenses incurred to produce nontaxable income will no longer be deducted from AGI a second time.

Additional Miscellaneous Changes

Business income reported under the individual income tax will be apportioned based on 100% of a sales factor, rather than the equally weighted, three-factor formula based on property, payroll, and sales under current law. However, rules for sourcing sales were not changed to conform to the CIT sourcing rules, which, if not changed, could cause flow-through entities with both individual and corporate owners significant problems.

Elimination of Most Individual Income Tax Credits

• Nonresident estates and trusts will no longer receive a credit related to reciprocity agreements with other states.

• For rehabilitation plans certified after January 1, 2012, the historical preservation credit will be eliminated.

• For agreements entered into after January 1, 2012, tax vouchers issued under provisions related to the Michigan Early Stage Venture Investment Act may no longer be applied toward a tax liability.

All non-refundable credits are eliminated, including:

• City Income tax credit

• College tuition credit.

• Community Foundation credit

• Donations to family development programs

• Film credit for wage withholding

• Homeless/Food Bank credit

• Medical savings account contributions

• Public contribution credit

• Vehicle donation credit

Changes to Refundable Credits

Michigan Earned Income Tax Credit: For tax years after 2011, the Michigan Earned Income Tax Credit is reduced from 20% to 6%.

Changes to the Homestead Property Tax Credit: For tax years beginning after 2011, taxpayers are no longer eligible for the credit, if the “taxable value” (for property tax purposes) of their homestead exceeds $135,000. Household income is replaced by “total household resources”, which excludes losses from business, rentals and royalties and also excludes net operating losses.

For senior claimants the full credit of 100% is available if total household resources are $21,000 or less. The amount of the credit is then reduced by 4% for each additional $1,000 until the total reaches $30,000. Between $30,000 and $41,000 seniors will receive 60% of the credit.

All non-senior claimants are eligible for a tax credit of 60% based on the following:

The credit will be phased-out starting at total household resources of $41,000 and is reduced by 10% for every $1,000 increment. Thus, the credit is eliminated once total household resources reach $50,000.

About the Author
B. D. Copping, CPA, MST, is the owner of Copping State & Local Tax Consulting (www.coppingsalt.com). B. D. chairs the MACPA’s State & Local Tax Task Force and has more than 30 years of multistate tax planning and consulting experience. He is a former Michigan Revenue Commissioner, “Big Four” SALT Practice Leader, SALT Director for Top Ten National CPA Firm, Director of Corporate Income Taxes for a Fortune 100 Company, frequent speaker at SALT conferences, and author of numerous tax articles and the first two editions of the 1,200 page CCH Multistate Tax Guide to Financial Institutions.