Realtors Seek MBT Revisions
GRAND RAPIDS — The new Michigan Business Tax is going to have a negative impact on the value of commercial real estate, according to the Commercial Alliance of Realtors of West Michigan, which is now seeking changes in the new law that replaced the old Single Business Tax in December.
Stuart J. Kingma, president of CAR, said he has been authorized by the board "to work as part of a task force with our state legislators in Lansing to not only make them aware of the magnitude of these consequences, but also to put into motion some possible solutions to this problem."
Kingma said CAR is joining forces with members of the Michigan Association of Realtors based in Lansing, and the Commercial Board of Realtors representing the Detroit area plus other out-state regions.
Members of CAR and MAR have already met with state representatives Michael Sak, D-Grand Rapids, Paul Condino, D-Southfield, and Steve Bieda, D-Warren. Sak is the Speaker ProTempore, while Bieda chairs the Tax Policy Committee and Condino is vice chair. CAR also has met with State Sen. Mark Jansen, R-Gaines Township, who is a member of the Finance Committee.
Kingma, who is a vice president at The Wisinski Group in Grand Rapids, met with Sak and the other state representatives in Lansing several weeks ago, along with CAR members Sam Cummings of Second Story Properties and George Larimore of Grubb & Ellis|Paramount Commerce.
Sak said last week he has "bills being drafted right now" that would change the MBT corresponding to the problems described by the real estate group. During that discussion, he said, it became "clear that the MBT will be a significantly increased burden on the real estate industry compared to its predecessor."
Sad said the MBT was a "massive rewrite" of the state business tax law — "and there are issues out there, once businesses familiarize themselves with it."
In a written statement from CAR, Kingma said, "It is becoming very apparent that many people do not understand or have an awareness of how this tax negatively impacts property values in the state of Michigan, and furthermore, how this will negatively impact the ability to attract out-of-state investors and their investments."
CAR is asking the legislature to consider five modifications to the new tax, as it pertains to real estate investment and operations. Those modifications are:
** An unlimited carryforward of negative Adjusted Gross Receipts.
** Under the state, an inclusion of Real Estate in the definition of inventory for the purposes “purchases from other firms.”
** A reinstatement of the 10-year Investment Tax Credit Carryforward.
** Offering a "fresh start" for allowed depreciation beginning Jan. 1, 2008.
** Allowing Common Area Maintenance to be deducted from gross receipts in calculating the new tax. Common Area Maintenance is defined as “amounts received by a taxpayer that owns real property as a reimbursement for expenditures such as, but not limited to: property taxes, water and sewer charges, snowplowing and casualty insurance.”
Common Area Maintenance payments are "of no economic benefit to the landlord yet, under the MBT, it is taxed as revenue," according to the CAR announcement.
"Now you get taxed on everything that comes in the door, regardless of whether you make any money," said Kingma.
He said an unlimited carry-forward of negative adjusted gross receipts "allows real estate investors to spread the tax benefit of purchasing a building over future years of the project, rather than just the first year only as currently provided for under the MBT."
Kingma said that by spreading out the deduction, investors will be able to utilize all or most of the benefit and ultimately reduce their overall tax liability, similar to a manufacturer's annual purchase of materials.
If a property is sold at a loss, he said, "You can't even deduct for the fact that it’s a loss."
Dorothy Paris, a CPA with Hendon & Slate in Fremont, helped prepare accounting examples contained in the CAR announcement that show the difference between the old SBT and the new MBT. Her practice is focused on commercial real estate taxation.
She said commercial and residential real estate developers "have a production period, or a start-to-finish on their property, of a much longer cycle than manufacturers." The problem is that the acquisition of real estate is not included in the definition of inventory in the Internal Revenue code, or under the MBT.
"In the same way that a manufacturer buys steel and makes widgets," real estate developers "buy land and make a product to sell to the public."
Under the SBT, she said, a business was taxed on either gross receipts or net income, "whichever turned out to be a lesser tax, so this wasn't an issue."
The new MBT is a two-pronged structure that taxes both gross receipts, at 0.8 percent, and business income, at 4.95 percent.
Under the SBT there was an investment tax credit for purchases of buildings and furniture, which could be spread out over 10 years. Now, said Paris, "There is no carryforward" under the MBT: "You either have to be able to use it in the year you acquired the property or you lose it." That would apply in the case of a developer who did not have all units of an apartment complex leased before the end of the first year. The first year might not generate enough income to use up the investment tax credit; the remainder of the credit would be lost.
Paris said some of the proposals by CAR are designed to put landlords and developers on par with manufacturers under the MBT.
When the MBT was introduced, it was said to benefit manufacturers and small business the most.
Paris said it's not just real estate people affected by the change in the investment tax credit. She said it also affects people such as "the doctor who goes out and buys an office building to put his practice in."
"We asked for a simpler tax regime and we got one that's even more complicated than the old Single Business Tax. It's quite frustrating," said Paris.