Tax Effect of the New Michigan Business Tax on Businesses Organized as S-corporations

On January 1, 2008 the Michigan Business Tax (MBT) became effective for all companies doing business in Michigan with gross receipts of more than $350,000.  The MBT is comprised of three taxes, (1) a 4.95% business income tax (BIT), (2) a 0.80% modified gross receipts tax (GRT) and a 21.99% MBT “surcharge.”  The MBT surcharge was added via amendment in December 2007 and is calculated by multiplying the 21.99% surcharge rate times the sum of the BIT and GRT to arrive at the total MBT liability.

Since its enactment on July 12, 2007, the MBT has been amended twenty times, ten amendments in 2008 alone, and more are expected.  However, if not addressed, current MBT legislation imposes an additional burden on companies operating as S-corporations that will likely cause a significant increase in your 2008 MBT liability.  One manner of offsetting the impact of the MBT on S-corporations is to pay out most or all of the business’s income as bonuses to shareholders.  Although paying bonuses will result in 2.90% of additional Federal payroll taxes (employee and employer portion of Medicare taxes), it has no Federal or State tax effect to individual shareholders, avoids the 4.95% MBT business income tax, reduces the 21.99% MBT surcharge and increases the compensation credit against the MBT liability. 

We will continue to monitor MBT legislative developments and its effect on your business throughout the remainder of the year.  We will also keep you abreast of any significant changes in the MBT and any further tax planning opportunities that may arise.  In the meantime, please do not hesitate to contact us with any questions regarding this issue.