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Small Businesses OK With MBT
GRAND RAPIDS — At a recent forum on the new Michigan Business Tax, accountants reviewed the pros and cons of the new law — but mostly the cons, especially its complications. One even likened it to "SBT2."
Edward S. Kisscorni, one of the leading business tax experts in Michigan, had some positive things to say about the new tax law. It has been said that manufacturing companies will be one of the "winners" under the new law, but Kisscorni said, "The real winner is small business."
Kisscorni, director of state and local taxation in the Grand Rapids accounting firm of Echelbarger, Himebaugh, Tamm & Co. PC, was one of four panelists at the Grand Rapids Area Chamber of Commerce forum at the GVSU Eberhard Center in September. He is a frequent speaker on state and local tax issues in Michigan, and has dealt with the former Single Business Tax since its inception. He has been part of all the SBT and sales/use tax seminars over the last 20 years for the Michigan Association of Certified Public Accountants. He has also spoken extensively for the Michigan State Chamber of Commerce and other business groups.
Kisskorni gives several reasons why the new state business tax law is an improvement for small business:
An individual or business with $350,000 or less in gross receipts is not subject to the MBT and doesn't even have to file. That part is unchanged from the Single Business Tax. But what is different is what the accounting industry in Michigan calls a "smoothing credit." Under the SBT, an individual or company that had gross receipts over $350,000 — even one dollar over — was "over the cliff" and subject to the full tax. The new MBT provides a credit mechanism that applies the tax gradually between $350,000 and $700,000, at which point it is in full effect.
Small Business Credit
"This is very much like the credit under the SBT but greatly enhanced," said Kisskorni.
If a company qualifies for the Small Business Credit, the tax rate is 1.8 percent of adjusted business income, which Kisscorni calls "a huge advantage" over being subjected to the full MBT, which is a 4.95 percent tax on business income and 0.8 percent tax on modified gross receipts.
To qualify for the Small Business Credit:
- Gross receipts must be less than $20 million. Under the SBT, the maximum was $10 million in gross receipts.
- Adjusted business income may not exceed $1.3 million (profit plus compensation paid to officers and shareholders).
- No individual shareholder or officer may receive total compensation of more than $180,000. To qualify for 100 percent of the Small Business Credit, total compensation cannot exceed $160,000. More than $160,000 and up to $180,000, the credit is phased out.
Kisscorni said that last disqualifier is a "trap" in the new law, which was also in the old SBT: "The trap is total compensation paid to officers and shareholders," he said.
"A lot of times, a $20,000 bonus could result in $50,000 in additional tax because it knocks you out of the Small Business Credit."
Ronald J. Kaley, another tax professional from Echelbarger, Himebaugh, Tamm & Co., provided the following hypothetical example of a company that did not qualify for the Small Business Credit under the SBT but does under the new Michigan Business Tax.
The hypothetical company — call it Hypothet Inc. — is a retail business, which entails a commercial personal property classification. The state this year lowered the personal property tax rate on Michigan businesses, which is also part of the reason many businesses will pay less tax next year. (A company with an industrial personal property classification would be taxed at an even lower rate.)
Hypothet had $15 million in total gross receipts, paid $2 million in compensation and benefits, spent $430,000 for capital assets, and ended the year with $150,000 in business income. None of the officers or shareholders got more than $160,000 in total compensation. Hypothet would have paid $11,000 in personal property tax, prior to the Personal Property Tax Reform, and another $27,933 under the former SBT, for a combined total of $38,933 in state tax.
With all numbers remaining the same in 2008 except for its new personal property tax rate, Hypothet would pay the state a total of $12,700: $4,230 under the new MBT and $8,470 under the new personal property tax rate. Qualifying for the Small Business Credit and a lower personal property tax rate would help reduce Hypothet’s state tax bill in 2008 by $26,233.
Kisscorni said there are also "a variety of new credits" in the new MBT "to encourage economic development and innovation. A few of these credits include a credit for research and development.”
Kisscorni said there is also a "brand new" entrepreneurial credit for small businesses, although it is "very complicated."
"Giving these tax breaks to small business makes economic sense because jobs and innovation and creativity all incubate within small businesses," said Kisscorni.