Lawyers prepare for possible end of MBT, tax incentives

by Mike Scott
Legal News

The tax code for Michigan-based businesses has not yet changed, but the proposals made by Governor Rick Snyder are forcing many business owners to touch base with their lawyers for advice on possible next steps.

Gov. Snyder announced in February that he hopes to cut business taxes by $1.8 billion by switching from the widely unpopular Michigan Business Tax (MBT) to a new 6 percent tax on corporate income, a flat tax that would affect only “large” companies.

The budget proposal he submitted to the State Legislature also would eliminate many tax incentives that have been provided to specific types of businesses or other programs such as Brownfield redevelopment sites.

Area lawyers are currently reviewing with their Michigan-based business clients what the existing proposals put forth by Gov. Rick Snyder are all about. And clients have been calling lawyers to get a better understanding of what the changes could mean and particularly how they impact a company’s tax rate, the timing of such a change, and what they should be doing from an information gathering standpoint, said Valerie Brader, a member of the Business Practice group with Bodman in Detroit.

“We have been working with them for awhile now and letting them know what could happen if the law is changed and how the proposals read now,” she said. “If you aren’t talking to your clients about this issue right now, chances are they are calling you.”

The impact of the elimination of many tax incentives could adversely affect certain developmental projects, namely those related to reusing existing buildings or upgrading contaminated properties, Brader said. Many of those projects may not happen now although the impact of the state Office of Urban Initiative, which Snyder has said he will establish, has not yet been finalized.

Thomas Christy, a partner with Garan Lucow Miller in Troy, has had casual conversations with business clients about the possible impact of such tax structural changes, but there is little he or his clients can do until legislative decisions are made. His phone has not been ringing regularly with clients looking for feedback on the governor’s proposed business tax adjustments.

In fact, most clients are still worried about finalizing their corporate tax returns for fiscal year 2010 before they want to address possible tax changes in the years ahead, he said.

“We’re taking a wait-and-see approach because at this time any changes that may be made are beyond our control,” Christy said.

He does have a client in the film and entertainment industry that is discouraged about the possibility of movie and film credits being permanently eliminated or significantly scaled back, but the impact of other tax credits possibly disappearing is uncertain, Christy said.

“Honestly, the big question is how this will impact the revenue (generating) abilities of clients and that won’t be known for awhile until decisions are made,” Christy said.
On the flip side, a simpler tax structure likely to result from the elimination of the MBT will make it easier for lawyers to explain what the potential tax bill would be, Brader said.

“There is no way to easily estimate what the potential impact would be under the existing MBT, and when you told clients that they would often get frustrated,” Brader said. “It will be easier because we won’t have to tell them that such a question can be best answered by their CPAs anymore.”

It is difficult to know if the elimination of the MBT would have the intended impact that Snyder is hoping for – mainly the attraction of new business investment from outside the state, Brader said. If so, that could mean more revenue opportunities for area law firms.

“It’s speculative at this point, but that is the hope, that there will be new investment,” Brader said. “I think (all law firms) believe this could be a good opportunity.”
What some business owners might forget is that the state would actually be in worse shape had the MBT not replaced the Single Business Tax on Jan. 1, 2008, according to Christy. Under the SBT, the generation of tax revenue was based on total receipts, a fact that would have even further crippled the state’s economy in 2009 and 2010 given the severe nature of the recession.

“If the SBT had still been around, we would really be getting killed right now,” Christy said. “(It may be) true (that) some businesses feel the MBT does not serve the state’s best interests, but it could be worse.”

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