Financial Reporting Alert: 07-3: Michigan Enacts Business Tax Replacement for Single Business Tax
July 30, 2007
On July 12, 2007, Governor Jennifer Granholm signed into law the new Michigan Business Tax (the “MBT Act”), which provides a comprehensive restructuring of Michigan’s principal business tax regime. Although the effective date of the MBT is January 1, 2008, certain effects of the change should be reflected in the financial statements of the first interim or annual reporting period that includes July 12, 2007 .
The MBT Act replaces the Michigan Single Business Tax (SBT) that is scheduled to expire at the end of 2007. The change in tax law has financial reporting implications for most entities with operations in Michigan. Key aspects of the MBT Act are summarized below.
Does Statement 109 Apply?
The main provision of the MBT Act imposes a new two-part tax on business income and modified gross receipts, collectively referred to as the BIT/GRT tax. The BIT/GRT tax should be accounted for as an income tax in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes . The BIT/GRT tax is effective beginning January 1, 2008. However, as required by paragraph 27 of Statement 109, all effects of a tax law change should be accounted for in the period of the law’s enactment (i.e., the reporting period that includes July 12, 2007). This is consistent with paragraph 20 of APB Opinion No. 28, Interim Financial Reporting , which states, in part, “The effect of a change in tax laws or rates on a deferred tax liability or asset shall not be apportioned among interim periods through an adjustment of the annual effective tax rate.” Accordingly, companies will be required to include the effect of the change in tax law in the reporting period that includes July 12, 2007.
For example, calendar year-end companies will be required to include the effect of the change in the tax law in income from continuing operations in the quarter ending September 30, 2007.
The Business Income and Modified Gross Receipts Tax
The BIT/GRT tax is based on the apportioned business income and apportioned modified gross receipts of every taxpayer with substantial nexus in Michigan. A taxpayer subject to the BIT/GRT tax calculation would have substantial nexus for purposes of the imposition of these taxes if either of the following exists:
- The taxpayer has physical presence in Michigan for more than one day during the tax year.
- The taxpayer actively solicits sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan.
See Appendix below for tax calculation.
Other Provisions of the MBT Act
The MBT Act also includes the following other significant features, which are not addressed in this alert:
- A franchise tax, applicable to “financial institutions,” at a rate of 0.235 percent on net capital.
- A premiums tax, applicable to “insurance companies,” at a rate of 1.25 percent of gross direct premiums
- Adoption of unitary concepts for purposes of determining both aspects of the BIT/GRT tax calculation.A 100 percent sales-based apportionment factor for both aspects of the BIT/GRT tax calculation
- Significant credits for engaging in Michigan-based activity.
- A 24 mill exemption on industrial personal property and a 12 mill exemption on commercial personal property that apply to property taxes levied after December 31, 2007.
Appendix — BIT/GRT Tax Calculation
The BIT Tax Calculation
The business income component of the BIT/GRT tax calculation is imposed at a rate of 4.95 percent on a taxpayer’s apportioned business income tax base. Business income tax base means that part of federal taxable income is derived from business activity subject to various preapportionment adjustments, most of which are consistent with adjustments required in other jurisdictions that impose a net income tax. However, some noteworthy adjustments include the following:
- An addback for royalty and interest expense paid to related parties (not otherwise included in a unitary business group).
- A deduction for partnerships equal to 100 percent of any earnings that are net earnings from self-employment except to the extent that those net earnings represent a reasonable return on capital.
To the extent that a business income loss is generated, the available business loss may be carried forward and deducted from the post-apportionment business income tax base of a taxpayer. The business loss carry forward is limited to 10 years.
The GRT Tax Calculation
The modified gross receipts component of the BIT/GRT tax calculation is imposed at a rate of 0.80 percent on a taxpayer’s apportioned modified gross receipts tax base. A taxpayer’s modified gross receipts tax base is defined as “gross receipts less purchases from other firms before apportionment.” The law defines gross receipts as “the entire amount received by the taxpayer from any activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others.”
Note that the MBT Act definition of gross receipts closely tracks the definition of gross receipts found in the presently applicable SBT. The new law also incorporates the laundry list of exclusions from gross receipts provided under the SBT and adds several additional exclusions. One exclusion is the amount charged by a professional employer organization (PEO) that represents the actual cost of wages, salaries, related benefits, and taxes paid by the PEO to or on behalf of a covered employee under a professional employer arrangement.
The term “purchases from other firms” is statutorily defined to include inventory acquired (plus any shipping or other charges included in the contract price); assets eligible for depreciation, amortization, or accelerated cost recovery; and purchased materials and supplies (including repair parts and fuel). As applied, this concept of purchases from other firms could have unique consequences because qualifying expenditures appear to be fully recognized in the year incurred (year 1). Specifically, inventory purchases, as opposed to cost of goods sold, and the entire asset cost, not just depreciation, would appear to be deductible in year 1. Further, there appears to be no provision in the law to carry forward these expenditures to the extent they exceed year-1 gross receipts. Thus, hypothetically, a taxpayer with qualifying expenditures exceeding its gross receipts in year 1 would appear to have no measure of gross receipts in that year and also would have no ability to offset gross receipts in subsequent periods for the excess year-1 expenditures. For taxpayers that qualify as “staffing companies,” the compensation cost of supplying personnel to customers is also treated as a purchase from other firms. Certain taxpayers (construction contractors, generally) may include services purchased for a construction project under a contract specific to that project in their computation of purchases from other firms.
For the 2008 tax year, the new law provides for a deduction equal to 65 percent of any remaining business loss carryforward calculated under the SBT that was actually incurred in the 2006 or 2007 tax year to the extent not deducted in tax years beginning before January 1, 2008. If the taxpayer is a unitary business group, this business loss carryforward attributable to any person included in the group may only be deducted against the modified gross receipts tax base of that person calculated on a separate entity basis as if that person was not included in the group.