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MBT Repeal On May 25, 2011, Michigan Governor Rick Snyder signed into law a series of bills enacting a Michigan corporation income tax (CIT), eliminating the Michigan Business Tax (MBT) except in limited situations, and making significant changes to the individual income tax provisions. Highlights of the bills that affect business taxes. - The MBT is repealed for years beginning on or after January 1, 2012, unless the taxpayer elects to continue to file under the MBT provisions.
- A 6% income tax will be levied on C Corporations, very similar to the income tax portion of the MBT.
- S Corporations, LLCs, partnerships and individuals with business activities will not be subject to the Business Tax. Shareholders, partners, members and sole proprietors/rental property owners would pay only the individual income tax on business income.
- Unitary filing, nexus and sales-based apportionment provisions of the MBT are retained, but applied only to C Corporations.
- The only credit allowed under the Corporate Income Tax (CIT) is the Small Business Alternate Tax Credit.
- Businesses with fiscal years will file MBT returns through December 31, 2011, and, if applicable, Corporate Income Tax (CIT) for the remainder of their fiscal year after January 1, 2012.
Highlights of the bills that affect individual taxes. - The individual tax rate will be 4.35% for 2012 and drop to 4.25% thereafter.
- The standard personal exemption is fixed at $3,700 for 2012 and will be adjusted for inflation thereafter.
- Personal exemptions are phased out for single taxpayers with “household resources” (essentially household income without deduction for net business, rental or royalty losses) between $75,000 and $100,000, and married joint taxpayers between $150,000 and $200,000.
- The additional $600 exemption for children under age 19 is eliminated.
- The additional exemption for taxpayers over age 65 is eliminated.
- The city income tax credit and the credits for contributions to public entities, community foundations and homeless shelters/food banks are eliminated.
- The Michigan Earned Income Credit is reduced from 20% of the Federal EITC to 6% of the Federal EITC.
- Homestead property tax credits will be phased out beginning at $41,000 of “household resources” (essentially “household income” without deduction for net business, rental or royalty losses).
- Taxpayers are ineligible for the Homestead Property Tax Credit if the taxable value of their homestead is greater than $135,000.
Pensions and Social Security - Taxpayers born before 1946 will have no change in the treatment of their pension income. Social security and public sector pensions are fully exempt; private sector pensions are exempt up to $45,120 for single taxpayers and $90,240 for joint filers. Note that the birth date threshold is based on the eldest of a couple filing married joint, not on the birth date of each taxpayer.
- For taxpayers born between 1946 and 1952, federally taxable Social Security benefits will be exempt, but the exemption for public and private sector pensions will be limited the lesser of the pension income or $20,000 for a single filer and $40,000 for joint filers. However, the exemption is eliminated if “household resources” exceed $75,000 for a single filer and $150,000 for a joint filer. Once the taxpayer reaches age 67, the exemption is set at $20,000 and $40,000, which can offset non-pension income if pension income is less than the exemption amount.
- For taxpayers born after 1952, federally taxable Social Security benefits will be exempt, however all pension income is taxable until age 67. After reaching at 67, the exemption is limited to $20,000 for single filers, $40,000 for joint filers against all income including federally taxable Social Security. If federally taxable Social Security benefits exceed the exemption amount, the taxpayer can exempt all of the Social Security benefits. The exemption is eliminated if household resources exceed $75,000 for a single filer and $150,000 for a joint filer.
In summary, this means only one level of tax for S-Corporations, LLCs/Partnerships, and sole proprietors who were paying MBT. However it will also result in higher Michgian taxes for a significant number of individuals. If you are concerned or have questions about how this will affect your tax situation in 2012 and beyond, please call our office. We can help you with strategies to minimize any potential increases in tax. Health insurance reporting on W-2 You may have received an e-mail recently regarding repoting the cost of health insurance on the W-2. To clarify, this will be optional for 2011 and will not be taxable. The IRS has recently released a draft of the 2011 W-2 and included in the instructions are notes on health insurance reporting for Line 12 using Code DD. See page 3 of the following: http://www.irs.gov/pub/irs-utl/draft_w-2.pdf You’ll note that the instructions have in bold that the insurance amount “is not taxable”…no doubt in answer to the erroneous information floating around stating the opposite. Despite the inclusion of this in the instructions, per IRS Notice 2010-69 the reporting will not be mandatory in 2011. The Notice is available at: http://www.irs.gov/pub/irs-drop/n-2010-69.pdf While reporting is optional, it would be beneficial to have these health insurance amounts tracked in 2011 – whether reported or not. This will ensure a system is in place for 2012. Please contact someone from our office if you have any questions. Small Business Jobs Act of 2010 The Small Business Jobs Act of 2010 was signed into law on September 27. The Act, attempting to ease credit lending, includes $12 billion in tax cuts, most notable an increase in asset expensing and a continuation of bonus depreciation. Below is a brief summary of certain tax provisions in the Act applicable to most taxpayers and business. Please contact us if you would like to discuss any of these items in more detail. Increased Expensing Limitations for 2010 And 2011; Certain Real Property Treated as § 179 Property The Act increases the §179 expensing limitations to $500,000 (from $250,000) for tax years beginning in 2010 or 2011. The limitation for these taxable years is reduced (but not below zero) by the amount by which the cost of §179 property placed in service during the year exceeds $2,000,000. For taxable years beginning after 2011, the §179 amount reverts to $25,000, with a phase out beginning at $200,000. The Act provides an election, available for tax years beginning in 2010 or 2011, to treat “qualified real property” that is depreciable real property purchased for use in the active conduct of a trade or business and is not already included in the definition of § 179 property as § 179 property. The term “qualified real property” means qualified leasehold improvement property described in § 168(e)(6), qualified restaurant property described in § 168(e)(7) (without regard to the dates specified in subparagraph (A)(i) thereof), and qualified retail improvement property described in § 168(e)(8) (without regard to subparagraph (E) thereof).
The cost of qualified real property that may be expensed is limited to $250,000 per year, and excess amounts would not be carried over to tax years beginning after 2011. Any amount not allowed to be carried over to a taxable year beginning after 2011 is treated as though no election had been made with respect to such amount. Excess amounts carried over from 2010 are treated as attributable to property placed in service on the first day of the taxpayer's last taxable year beginning in 2011. Additional First-year Depreciation for 50% of the Basis of Certain Qualified Property The Act extends for one year the § 168(k) special allowance of first-year depreciation equal to 50% of the adjusted basis of qualified property to include qualified property acquired before January 1, 2011, or acquired pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2011. Qualified property would have to be placed in service before January 1, 2011 (before January 1, 2012 for certain property). Increase in Amount Allowed as Deduction for Start-Up Expenditures in 2010 The Act, for 2010 only, increases the amount of start-up expenditures a taxpayer can elect to deduct from $5,000 to $10,000 and increase the deduction phase-out threshold such that the $10,000 is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000.
Effective for amounts paid or incurred in taxable years beginning after December 31, 2009. Deduction for Health Insurance Costs in Computing Self-Employment Taxes in 2010 The Act creates a special rule for taxable years beginning in 2010 that allows the deduction under §162(l) for health insurance costs of self-employed individuals to be taken into account in determining net earnings from self-employment, within the meaning of § 1402(a), for purposes of the tax on self-employment income. Effective for taxable years beginning after December 31, 2009 Temporary Exclusion of 100 Percent of Gain on Certain Small Business Stock
Section 1202 provides that individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. The amount of gain eligible for the exclusion by an individual with respect to any corporation is the greater of (1) 10 times the taxpayer's basis in the stock or (2) $10 million. To qualify as a small business, when the stock is issued, the gross assets of the corporation may not exceed $50 million. The corporation also must meet certain active trade or business requirements.
The percentage exclusion for qualified small business stock acquired after February 17, 2009, and before January 1, 2011, is increased to 75%. As a result of the increased exclusion, gain from the sale of this qualified small business stock held at least five years is taxed at effective rates of seven percent under the regular tax and 12.88% under the alternative minimum tax.
The Act provides that, for qualified small business stock acquired after the September 27, 2010 date of the enactment and before January 1, 2011, the percentage exclusion is increased to 100% and the minimum tax preference does not apply.
Effective for stock acquired after September 27, 2010 Five Year Carryback of General Business Credit of Eligible Small Business The Act extends the carryback period for eligible small business credits from one to five years. Generally, effective for credits determined in the taxpayer's first taxable year beginning after December 31, 2009. General Business Credit of Eligible Small Business Not Subject to Alternative Minimum Tax The Act provides that the tentative minimum tax is treated as being zero for eligible small business credits. Thus, an eligible small business credit may offset both regular and alternative minimum tax liability. Effective for credits determined in a taxpayer's first taxable year beginning after December 31, 2009 Temporary Reduction in Recognition Period for Built-in Gains Tax For taxable years beginning in 2011, the Act provides that for purposes of computing the built-in gains tax, the “recognition period” is the five-year period beginning with the first day of the first taxable year for which the corporation was an S corporation. Effective for taxable years beginning after December 31, 2010. Information Reporting for Rental Property Expense Payments Under the Act, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC)to the IRS and to the service provider. Exceptions to the reporting requirement are allowed for (i) members of the military or employees of the intelligence community who rent their principal residence on a temporary basis, (ii) individuals who receive only minimal amounts of rental income (as determined by the Secretary in accordance with regulations), and (iii) individuals for whom the requirements would cause hardship (as determined by the Secretary in accordance with regulations).
Effective for payments made after December 31, 2010.
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