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Focus on State & Local Taxation: Michigan and Connecticut Increase Tax Rates

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If your company has operations in Michigan and Connecticut, be aware that recently passed legislation in these states will change your tax burden.
June 3, 2011

If your company has operations in Michigan and Connecticut, be aware that recently passed legislation in these states will change your tax burden.

In Michigan:

On May 12, 2011, the Michigan Legislature approved Governor Synder's plan to repeal the Michigan Business Tax (MBT) and replace it with a corporate income tax.

Effective January 1, 2012, the state's MBT will be replaced by a corporate income tax (CIT) imposed only on businesses organized as C corporations under federal law.

Sole proprietorships and pass-through entities such as partnerships, S corporations and limited liability companies currently taxed at the entity level under the MBT would not be required to pay taxes or file returns under the CIT. The term “corporation” under the CIT would not include an insurance company or a financial institution.

The rate of the CIT would be 6% of the income tax base, which is the corporation's federal taxable income, as modified for Michigan purposes, after allocation and apportionment. Taxpayers would not be required to file a return if their liability is less than $100. Under the MBT, taxpayers with apportioned gross receipts of less than $350,000 would not be required to file a return.

The CIT would apportion business activity across states using only the ratio of Michigan sales to total sales (as is currently done with the MBT). The CIT also retains the MBT’s unitary filing requirements for corporations under common control.

The CIT will not retain any of the tax credits offered under the MBT with the exception of the alternate tax credit. Taxpayers eligible for this credit must have gross receipts of $20 million or less and adjusted business income of $1.3 million or less.

The credit also places limits on the total compensation and director's fees to individual shareholders and officers. If a taxpayer qualifies for the credit, the taxpayer will receive a credit for the difference between the CIT liability and 1.8% of adjusted business income.

In Connecticut:

On May 4, 2011, Connecticut Governor Dannel Malloy signed the state budget bill, which raises multiple tax rates and requires sales tax collection by remote sellers.

The budget passed assumes that an agreement will be reached with state employee unions concerning wage concessions and savings.

The corporation tax surcharge, which was set to expire at the end of the 2011 income year, is increased to 20% (currently 10%) and extended to the 2012 and 2013 income years. Companies whose tax liability does not exceed the $250 minimum tax are not subject to the surcharge.

In addition, companies with gross income for the income year of less than $100 million, except those filing combined or unitary returns, are not subject to the surcharge. For the 2011 and 2012 income years, corporations are allowed to offset additional tax liability by adding employees.

The bill increases the marginal personal income tax rates. The number of tax brackets are increased from the current three brackets (3%, 5% and 6.5%) to six brackets (3%, 5%, 5.5%, 6%, 6.5% and 6.7%) and is retroactive to January 1, 2011.

The existing 5% bracket is split into four brackets. The bill phases out the 3% income tax bracket starting with taxpayers with Connecticut adjusted gross incomes (AGI) over $100,500 for joint filers, $56,500 for singles, $78,500 for heads of household, and $50,250 for married couples filing separately and moving the phased-out taxable income to the 5% bracket.

For taxpayers whose annual AGI exceeds specified thresholds, a recapture provision is phased in, which requires taxpayers with higher incomes to add specified amounts to their tax liability figured using the marginal rates. The bill also increases the flat income tax rate for trusts and estates from 6.5% to 6.7%.

As of July 1, 2011, the budget increases the following base sales tax rates: general sales and use tax, room occupancy tax, motor vehicle rental or lease tax.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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