New SBT Credits Now Available

January 28, 2005
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DETROIT — State lawmakers pretty much designed the benefit for small firms that make microchips and other high-tech devices.

But companies that produce potato chips, poker chips and chipped beef may also qualify for the tax credit.

Business owners, though, shouldn’t hesitate to find out whether they can get in on the most recent offering of Single Business Tax credits. Although the law allows credits to be claimed for up to five years, the tax itself is on track to be wiped from the books in four.

“No, they shouldn’t wait. This should be part of their business plan, ” said Donald Katz, a senior attorney in the Miller Canfield Business and Finance Group, from his downtown Detroit office.

Signed into law by Gov. Jennifer Granholm late last spring, Public Act 126 amended the SBT law to offer qualified start-ups tax credits equal to their liability. The credit is available this year, but it can’t be claimed until next year. Companies must meet some financial standards to qualify. For instance, publicly traded firms aren’t eligible.

A few of the major criteria for the credit are that a firm have:

  • Sales under $1 million in the year the credit is claimed.

  • Fewer than 25 full time equivalent employees.

  • Research and development expenses of at least 15 percent in the tax year the credit is being sought.

In addition, the Michigan Economic Development Corp. must certify a company each year in order for it to collect the SBT credit. The credit isn’t just for brand-new companies, either. A firm, say, three years old may also reap the benefit.

“If a company didn’t have any SBT tax liability during the last three years, it wouldprobably qualify,” said Katz.

“If they’re not sure, they can call us or look at the statute to find out if they qualify because it’s not just one criterion. They have to meet a whole host of them.”

But Katz added that he wasn’t aware of how the MEDC planned to evaluate the criteria, as the economic development agency hasn’t revealed its process so far.

“We haven’t gotten far enough along yet. There isn’t a lot of authority in it because it’s a fairly new statute,” he said.

There is a payment restriction, though, and violating it can erase the credit.

Any compensation, fees or shares paid to a shareholder, member of a limited liability company, officer, partner, owner, or shareholder of an S corporation can’t exceed $135,000 for the tax year in which the SBT credit is claimed.

The law also has additional qualification criteria for firms that do business in other states and for those that haven’t had any business activity in Michigan over the past few years.

Last year, Small Tech magazine ranked Michigan eighth in the nation for development of micro- and nanotechnology. Also last year, Avalon Research & Development, InforMD, and Progressive Outcomes, three small high-tech medical firms, opened their doors here.

Katz said Michigan has a strong track record of retaining graduates from its engineering, medicine, biotech, and computer sciences schools. He remembers the retention rate because it was close to an unheard of 90 percent.

“So I think that this law is kind of in consideration of that. I think the state said, ‘We have all these people that are likely to stay, so why don’t we give them some kind of mechanism to start their own businesses and generate some business activity on their own?’” said Katz.

“It doesn’t matter what the business is. But I think the target area obviously is biotech, computers, sciences, and the technology area just because that seems to be where most of the activity is.”

Zeroing in on the target even further, Katz felt that R&D companies would be the ones most likely to cash in on the SBT credit.

“The way the statute is structured, if someone is into potato chips and if they’re not making money in three years, they’re probably not going to be making them any more,” he said, offering an analogy.

“But R&D firms, on the other hand, spend a great deal of investment capital in the first three years and that is what this is geared towards — because they’re not going to have that kind of SBT liability, they’re not going to have a great deal of income.

“That’s why it kind of lends itself to the R&D type of start-ups.”    

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