Michigan Businesses Face Major Tax Changes in 2012

2012 brings another year of change to how the State of Michigan taxes Michigan businesses.  Beginning January 1, 2012 Michigan businesses are subject to the new Corporate Income Tax (CIT) which replaces the Michigan Business Tax.  The CIT is a simpler 6% tax applied to income.   The CIT applies only to C Corporations that have $350,000 or more of gross receipts.  The CIT retains the Small Business Credit which reduces the effective tax rate for businesses with gross receipts of $20 million or less and adjusted business income of $1.3 million or less.

The CIT does not apply to the wide variety of entities  taxed under the former Michigan Business Tax, such as S corporations, partnerships, and LLCs.   However, the shareholders, partners and members of pass-through entities (S corporations, partnerships, and LLCs) will be taxed on their pass-through distributions and  income under the Individual Income Tax.  The individual income tax rate is 4.35% for 2012 while the CIT rate for C corporations is a flat 6% (lower if the business qualifies for the Small Business Credit).  The difference between these tax rates is one more factor affecting the decision of which entity is right for your business.

In addition to Corporate Income Tax, some businesses are also subject to sales and use tax.  Businesses that sell, lease or rent tangible personal property to the final consumer are required to remit sales tax.  Use tax is a companion to the sales tax and imposed on the use, storage or consumption of taxable property and services where no sales tax has been paid.  Sales and use tax can be complicated and it is important to understand how those taxes apply to your business so that the required taxes are paid, and to avoid fines and penalties for failure to comply.

If you have sales or do business in states other than Michigan, it is important to understand how those states’ taxes apply to you.  How much connection with a given state will trigger tax requirements in that State?  How is your businesses income apportioned between the states in which you do business?  How are internet sales taxed?  In these difficult economic times, states are incentivized to collect as much revenue as possible, which often leads to more state tax audits and enforcement.

Each year the State of Michigan audits a substantial number of businesses to determine if those businesses have paid all necessary state taxes.  Your accountant can be a good resource for helping you respond to a state tax audit.