Tuesday, May 27, 2008

Michigan Business Tax Traps

The new Michigan Business Tax (MBT) wins the Olympic Gold Medal for complexity, so you don’t want to waste your time attempting to become an MBT expert. (That’s why God created CPAs… they love this kind of stuff). However there are three important tax facts you should know as they might apply to you.

  1. If your business’s gross receipts are less than $350,000, you don’t have to file an MBT return.
  2. PLANNING TIP: If your gross receipts are at the $350,000 threshold, talk with your CPA about the possibility of creating multiple entities. If there is no “flow of value” between these entities, then you might not have to group them for purposes of this Gross Receipts test and voila… not MBT tax!
  3. If you have a “family” partnership, family LLC or family S-Corp that has any business income (e.g. a condo that you periodically rent) you will have to include all the interest and dividends earned by the entity to determine if you exceed the $350,000 Gross Receipts test. It’s not uncommon for a family LLC to own a portfolio of securities and a home that it rents part of the year. The rent constitutes “business income” which makes all of its income subject to MBT. (Including the interest and dividends which could be exempt from MBT if the entity does not have any “business income”.)
  4. PLANNING TIP: If you’re in this situation, get the “portfolio income” assets out of the entity that is generating the “business income”. Again, talk to us or your CPA as to how this should be done.
  5. Make sure no officer, director, shareholder or member has $180,000, or more, of combined compensation, director’s fees and allocation of profits. If you exceed this cap, your tax will triple or quadruple. Here’s an example:

You client owns 100% of the Ypsi-Arbor Drive-In, a drive-in movie theater. (There really was such a business on Washtenaw Ave.) The theater grosses $500,000 and you receive a salary of $50,000. At the end of the year, the Company has “net income” of $300,000. The Company’s MBT tax will be $9,665.

Let’s assume the same facts but that you own1/3rd of the entity, your spouse owns ½ of the entity and the balance is owned by your child. At the end of the year, your allocation of compensation, directors fees and profits are shown below:

None of the owners or officers have Total Earnings of $180,000 or more. This means the Company receives the MBT Alternate Credit which reduces the tax to $2,314.
PLANNING TIP: Make sure you do all that you can to qualify for the Alternate Credit as it reduces your tax… in this case by over 75%!

As always, give us a call if you have any questions.

Bob Weins

NOTE: In May, legislation passed the Michigan Senate that would increase the Total Earning ceiling to $250,000.