Written by: Keith O. Frame, CPA

It seems I continually still see newspaper articles, editorials and letters to the editor in various publications referring to the Michigan tax overhaul as a “$1.8 billion dollar give-a-way to business”. Let’s investigate this claim.

If you work in Michigan as an employee of a business in Michigan, you pay State of Michigan income tax on your wages. It doesn’t matter if you make minimum wage or $1,000,000 per year, you pay tax at the statutory rate on the Michigan Form MI-1040 (currently 4.35%).

However, if you start your own business, grow it into a success, hire others and otherwise prosper, you have had the privilege of paying extra tax to the State of Michigan. The Michigan Business Tax (MBT) is (was) calculated in two different ways, generally applying a more favorable calculation to smaller businesses, but having an absolute cliff for larger or more profitable businesses where the tax liability, depending on several factors, could increase exponentially for a small increase in income. The more favorable calculation is a 1.8% tax on the taxable income of the business plus all wages and benefits paid on behalf of the owner and his family members.

Here is where businesses have been getting double taxed for years: most small businesses are organized as pass-through entities (S corporations, partnerships, LLC’s). These entities pay no tax at the federal level – their income is passed through and taxed on the tax returns of their owners. This treatment at the federal level has effectively been ignored in Michigan. These businesses still had to prepare an MBT return and pay any applicable tax.  

These pass-through entities prepare their federal tax return, passing the income through to their owners who include it on their federal tax returns. These same owners prepare their Michigan MI-1040 by starting with Adjusted Gross Income on their federal return which, of course, includes the income from the pass-through entity.

So, the unsuspecting business owner, perhaps in the same economic circumstances of someone in a similar field working as an employee for someone else, has had the privilege of paying a significantly higher tax rate. Two taxes on the same income – seems like that should be unconstitutional!

The tax overhaul eliminates the filing requirement for most pass-through entities and no longer results in double taxation in the State of Michigan. Only C corporations are subject to the new corporate income tax – all pass-through entities and individuals will pay tax at the Michigan individual income tax rate only. This creates basic fairness in the tax system that has not existed for 35 years.

Michigan has recently vaulted from near the bottom to near the top of best places to do business in the U.S. as a result of these changes according to the Tax Foundation. This is obviously great news for the State and will ultimately result in more revenue flowing into the State Treasury.

Basic economics still rule – if you want more of something – tax it less.

Written by: Heather Graham, CPA, CVA

Changes to the Michigan Employment Security Act, Effective for 2012

On December 19, 2011 the State of Michigan made several changes to the Michigan Employment Security Act. 

• The State issued $3.323 billion in revenue bonds and retired the debt due to the federal government for funds used to pay Michigan unemployment benefits.  The bonds are scheduled for a 10 year repayment.
• The repayment of the debt to the federal government will remove the credit reduction tax from the Federal Unemployment Tax computation. (Previously this was expected to be 1.2% on the first $7,000 of each employee’s wages.)
• Michigan unemployment wage base has been increased from $9,000 per employee to $9,500 for 2012.  The $9,500 wage base will continue until the Unemployment Insurance Trust Fund reaches a positive balance of $2.5 billion.
• There is a new component to the Michigan Unemployment Tax Rate Determination this year.  It is called the Obligation Assessment (OA).  The OA will be applied to all contributing employers until the revenue bonds are repaid.  According to the Department of Licensing and Regulatory Affairs, “the OA is structured to incorporate your experience rate and a base assessment of $42 per employee for 2012, and is currently estimated to be $63 per employee for 2013 and beyond.”  At this time, we have not yet seen this “calculation”.

It will be very important that you provide your payroll preparer with a copy of your annual Tax Rate Determination.  It is expected that your new state unemployment rate will be significantly higher than last year.

Employers must provide W-2s by January 31st so I would imagine most of you have received them by now.  There are a few things you should do when you receive these forms to be sure there are no problems.

• Check the amounts against your records to make sure the reported items are correct.  You do this by using your final pay stub of the year and compare the gross state and federal wages; local, state and federal income tax withheld and the Medicare and Social Security taxes withheld. 
• Check to make sure your social security number on the W-2 is correct.
• If you find an error – contact the employer right away so they can issue you a corrected W-2c (as well as the Social Security Administration).
• If you do not receive your W-2 and you can not get in touch with employer because they have went out of business or disappeared, you should just use your pay stubs or other records from that job and file a Form 4852 (the “Substitute for Form W-2 Wage and Tax Statement” with your tax returns.

Written by: Annette Clark, CPA

A new year brings new payroll tax changes that you need to be aware of if you are preparing your own payroll. If you need assistance or have any questions please contact us.

•  Michigan unemployment wage base has increased from $9,000 per employee to $9,500 for 2012. 
• The Federal Unemployment tax rate for 2012 will be 1.8% on the first $7,000 earned by each employee. That rate is made up of the base rate of .6% plus 1.2% credit reduction tax.  The additional 1.2% is considered a 4^th quarter liability. As long as the State of Michigan fails to repay the federal government for federal unemployment benefits this amount will increase by .3% each year. This will be the 4^th year for Michigan.   If your UIA “actual reserve” is positive figure you should complete Form UIA 1110 to receive a credit for a portion of this excess tax on your Michigan unemployment return.
• The Social Security wage base has increased from $106,800 in 2011 to $110,100 in 2012.
• For wages paid from January 1, 2012 to February 29, 2012 the social security rate used to calculate employee’s withholding is 4.2%. The company match is still at 6.2%.  Unless the government extends this tax provision it return to 6.2% for the remained of the year.  We will keep you posted.
• The elective deferral limit for employees who participate in 401(k), 403(b) and most 457 plans increased from $16,500 to $17,000 for 2012.

You must have a hard copy receipt for every single dollar you contribute to a church or charity in order to claim a tax deduction on Schedule A.  Charitable contribution deductions will not be allowed for any monetary contributions by cash or check unless the donor maintains a record of the contribution.  The record must be in the form of:

• an actual cancelled check
• a bank record (i.e. a copy of the front of the check included on your monthly bank statement)
• an entry on a bank or credit card statement indicating a credit or debit card charge
• a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

December 31, 2011 is just around the corner, so it is time to plan.  Here are a few tips!

1. Check your paycheck withholding.  The majority of Americans get a tax refund check, so why not get it all throughout the year instead?
2. There are plenty of tax calculators out there to help you estimate your taxes for next year to help you pair down your withholding if you are overpaying or to increase your withholding if you owe.
3. Be sure you are keeping all tax-related records for at least 3 years.  Scanning these documents and storing them as a PDF can help keep things organized and safe.
4. Check your paychecks against your W-2 to make sure they add up.
5. Don’t forget to donate to charities.
6. Chances are good that a long-term investment will be taxed at a lower rate than short-term investments.
7. Maximize your retirement plan contributions.

Call us today for assistance with all your tax needs!

Tune in to CMU Public Television at 7:30 p.m. Thursday, Nov. 17, for a new episode of its “Ask the Specialists” series. “Ask The CPAs” is hosted by Robert F. Murray & Company’s Mike Harter and features professional advice from MC Kostrzewa & Company’s CPA Michael Kostrzewa and Robert F. Murray & Company’s CPA Paul B. Murray. Viewers can call in during the program at 800-727-9268, email brook2c@cmich.edu before the show, or tweet the production crew at @WCMU_AskThe. More information at wcmu.org.

The Michigan Department of Treasury has issued the 2012 pension withholding guide for personal income withholding tax purposes. Effective January 1, 2012, administrators of pension and retirement benefits are required to withhold income tax on taxable payments. Qualified pension and retirement benefits include most payments reported on Form 1099-R for federal tax purposes. For example, defined benefit pensions, IRA distributions, and most payments from defined contribution plans are included. However, on the other hand, payments received before the recipient could retire under plan provisions or benefits from 401(k), 457, or 403(b) plans attributable to employee contributions alone are not considered pension and retirement benefits.
Taxpayers are required to complete Form MI W-4P (Withholding Certificate for Michigan Pension or Annuity Payments) for each pension or annuity.

View complete article: http://www.edkisscorni.com/blog/view/537

Michigan sales and use tax audits are on the rise.  Many Michigan taxpayers are facing these audits and because of this, the MACPA is offering a Sales and Use Tax seminar on October 28, 2011 in Grand Rapids.

Click here for more information.

Some of the topics covered will be the ten year audit, audit techniques, vendor liability, interstate trucking, bundled transactions, transfer of title or ownership, discounts, installation charges, delivery charges and sales of a service.

Feel free to call us if you have any questions!  We are here to help!

Here is a great KIP TIP from Cameron Huddleston, Contributing Editor, Kiplinger.com, regarding monitoring your elderly parents’ mail.

Financial scams are everywhere we turn. Elderly people are bombarded with donation solicitations in the mail. Now mind you, the majority of these solicitations are legitimate organizations, lobbying groups and political parties, but it can be very overwhelming with the volume that elderly people receive.

To help your parents, start by asking them which organizations matter most to them and try to develop a giving plan for only those groups. The next step is to register your parents with the Direct Marketing Association and removing their names from its national mailing list. This is free if you register on-line. This will not stop all solicitations, but at least slow it down a bit.

http://www.kiplinger.com/columns/kiptips/archives/why-you-should-monitor-your-elderly-parents-mail.html