Monthly Archives: May 2011

Don’t Expect an Elton John Tribute Song to the Death of the MBT

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This is the last year for the Michigan Business Tax.  On January 1, 2012 Michigan C corporations will be subject to a 6% income tax.  Flow through entities such as S corporations, LLCs, and partnerships will no longer be subject to a business level tax.  The owners of flow through entities will pay tax on their business income on their personal returns, as they currently do. 

Michigan will therefore treat flow through entities as they are treated at the federal level.  At the federal level, C corporations pay income tax on their profits at the business level.  When the C corporation pays a dividend, buys back stock from its shareholders, or the shareholders sell their stock to a third party, the shareholders pay income tax at the personal level.  This is double taxation.

For flow through entities, the business does not pay a business level tax.  Instead, the profit flows through to the owner.  The owner pays tax on the annual business profit (whether or not distributed).  The owner will then be able to withdraw the profit from the business without paying tax.  Thus, there is only a single layer of tax.

Under the MBT, business owners of flow through entities were subjected to double taxation.  First, the business would pay MBT at the business level.  Then, business owners would pay tax on the business profit on their personal returns.  Double taxation for flow through entities under the MBT was even harsher than double taxation for C corporations at the federal level because, at the federal level, C corporation shareholders would not be subject to double taxation until they received cash through a dividend, share buyback, or sale of their stock.  Under the MBT, business owners paid two levels of taxation even if they did not take cash out of the business. 

Example: C corporation has profit of $200,000.  It pays corporate level tax of $61,000.  Let’s assume it pays $12,000 in MBT.  The shareholders do not pay a personal level tax under either federal law or MBT if they did not receive dividends or sell their stock to the corporation or to a third party.

Now assume the above corporation was an S corporation.  At the federal level, the shareholder pays personal income tax on the $200,000 of profit.  Assuming a 30% income tax rate, the shareholder pays tax of $60,000.  There is no business level federal tax.  At the state level, the S corporation still pays the $12,000 MBT, AND the shareholder pays personal income tax of $60,000 on the S corporation profit of $200,000.  The flow through business owner is subject to double tax even if the shareholder took no money out of the business.

Under the Corporate Income Tax (CIT), the business would not be subject to tax at the business level.  The shareholders would continue to be taxed on their personal returns.  The shareholders in this example saved $12,000 they previously paid in MBT.

The new CIT of 6% that applies only to C corporations will be very, very helpful to flow through entities. 

To say that CIT is much simpler than the MBT would be an understatement.  Here are some characteristics of the CIT:

  • C corporations with gross receipts under $350,000 are exempt from CIT
  • There is a small business credit for small business that effectively reduces the 6% tax rate to a 1.8% tax rate
    • To qualify, a business must have gross receipts of $20 million or less and have adjusted business income of $1.3 million or less
    • Adjusted business income is basically business profit plus shareholder/officer compensation
    • this credit existed under both the SBT and MBT and is retained for the CIT
  • Taxpayers who have certain credits can continue to file MBT returns to continue claiming these credits.

More to come on the new Michigan tax laws.  Stay tuned.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Michigan’s New Tax Rules on Pensions

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This post is the first of a series explaining the new Michigan tax laws which are about to be signed into law. 

Here, we’ll discuss the changes affecting pension income. 

Historically, Michigan allowed an exemption for pension income.  For those with private pensions (e.g., 401k plan from GM or an Individual Retirement Account), the State allowed a $45,120 exemption in 2010 ($90,240 for joint filers) from taxable income.  For public pensions (i.e., government pensions), the exemption was unlimited—there was no tax on public pension income regardless of amount.

The original plan was to subject seniors’ entire pension income to Michigan’s 4.35% income tax.  This caused a bit of a stir.  The pension tax, in its final form, applies different tax rules to three age ranges. 

The age ranges are:

  • Those born before 1946
  • Those born between 1946 and 1952
  • Those born after 1952

On a joint return, it is the year of birth of the older spouse that controls the tax treatment of both spouses’ pensions.

Born before 1946

Those born before 1946 will see no change in how their pension income is taxed.  Social Security income is fully exempt from Michigan tax.  Seems simple so far, but wait…

Born between 1946 and 1952

If a taxpayer is born between 1946 and 1952 and is under 67 years old, the exemption amounts are changed to $20,000 for a single return and $40,000 for a joint return regardless of whether the income is from a private or public pension.

If a taxpayer is born between 1946 and 1952 and is 67 years old or older, the exemption amounts remain at $20,000/$40,000 but apply to both pension and non-pension income.  This provision helps seniors because they now have a large exemption that can apply to non-pension income such as wages or business profit.

Social Security income is fully exempt from Michigan tax. 

The $20,000/$40,000 exemption amounts are completely phased out if Household Resources exceed $75,000 on a single return or $150,000 on a joint return.

Born after 1952

If a taxpayer is born after 1952 and is under 67 years old, the new law eliminates any exemption of private or public pension.  Social Security income is still exempt from Michigan tax.

If a taxpayer is born after 1952 and is 67 years old or older, the new law allows the $20,000/$40,000 exemption for ALL types of income—public and private pensions, non-retirement income, and Social Security income. 

Under this provision, Social Security income has to be sheltered by the $20,000/$40,000 exemption amounts.

Example:  It is 2020, John is 67 years old and he was born in 1953.  John has $15,000 in Social Security Income and $30,000 in private pension income.  John is married so he is entitled to a $40,000 exemption.  John must use $15,000 of his exemption to shelter his Social Security income.  John has a $25,000 remaining exemption to shelter his $30,000 pension income.  John will pay tax on the remaining $5,000 pension income.

If John was born in 1952, his Social Security income would be exempt from tax without having to use his $40,000 exemption.  Thus, his full $40,000 exemption would fully shelter his $30,000 pension income.

The $20,000/$40,000 exemption amounts are completely phased out if Household Resources exceed $75,000 on a single return or $150,000 on a joint return.

Tax simplification!!!

There’s a lot more in this new law to cover.  Stay tuned for more updates.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

State of Michigan Offering Tax Amnesty between May 15, 2011 and June 30, 2011

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The Michigan Tax Amnesty program provides a 45 day period for taxpayers to settle tax liabilities with the State for tax periods ending on or before December 31, 2009.  The Amnesty allows taxpayers to avoid civil and criminal penalties and criminal prosecution by the Michigan Department of Treasury.  The 45 day periods begins May 15 and ends June 30 of this year.

One rather large caveat is that the Amnesty requires FULL payment of all taxes and interest during the Amnesty period (i.e., between May 15 and June 30 of this year).

Example:  ABC Inc owes MBT tax of $30,000, interest of $5,000 and penalty of $3,000.  Under the Amnesty, ABC Inc can settle its tax liability for the tax and interest amounts due $35,000.  It can avoid the $3,000 penalty.  However, the full $35,000 must be paid by June 30, 2011.

Failure to pay all of the tax and interest due will result in Amnesty being denied.  When Amnesty is denied, penalties will not be waived and criminal prosecution may be sought.  Basically, the State will continue to pursue taxpayers as it was doing before the Amnesty application was filed.

The Amnesty is available for personal and business taxpayers who have eligible tax liabilities.  Eligible tax liabilities include:

  • underreported tax liabilities
  • non-reported tax liabilities
  • overstated deductions, credits, or exemptions
  • failure to file Michigan tax returns
  • delinquent payment of past taxes due
  • taxpayers who have received a final tax due notice
  • local (i.e., city county) taxes, including real and personal property taxes, do NOT qualify for Amnesty.

A taxpayer who is eligible to participate in the Amnesty but does not do so will be subject to tax, accumulated interest, and penalty due.  Civil penalties will not be waived and criminal prosecution may be sought.

To obtain Amnesty, a taxpayer must submit the following:

  • a completed Tax Amnesty Application (Form 3855)
  • all un-filed tax returns for which Amnesty is being sought
  • amended returns if applicable
  • a completed Registration for Michigan Taxes, if you operate a business that has not registered for Michigan taxes
  • FULL PAYMENT OF ALL TAXES AND INTEREST DUE

 

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Expanded 1099 Requirements Finally Repealed

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On April 14, the President signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.  This law repealed both the expanded 1099 reporting requirements mandated by last year’s new health care law and also the 1099 reporting requirements imposed on taxpayers who receive rental income which was mandated by last year’s Small Business Jobs Act.

Last year’s health care law expanded the 1099 reporting requirements to include all payments from businesses totaling $600 or more in a year to a single recipient for purchases of property.  The term “property” had a broad meaning and would require businesses to issue SUBSTANTAIILY MORE 1099s.  This expanded 1099 requirement was going to become effective January 1, 2012 but is now repealed.

Last year’s Small Business Jobs Act added a new 1099 reporting requirement to people who rent out real estate.  The Jobs Act required landlords to issue 1099s to vendors who provided them with services if the amount paid to the vendor was at least $600.  Landlords would have started to issue 1099s to repair companies, utility companies, lawyers, accountants, etc.  This law was going to become effective this year (January 1, 2011), but is now repealed.

One provision that was NOT repealed was the increased penalties associated with not filing 1099s that are currently required by law and for filing 1099s with incorrect information.  The penalties have essentially doubled and range from $30 per incorrect/late 1099 to $100 per incorrect/late 1099.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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