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Thursday, 02 February 2012 09:31

Reorganizing company for tax purposes no simple undertaking

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WEST MICHIGAN — As small business owners adapt to a new tax system in Michigan, a recurring question Dan Lynn hears from clients is whether they should change how their business is organized.

Should they switch, for instance, from a c-corp to an s-corp or an LLC?

Daniel LynnA tax partner at the Grand Rapids office of Beane Garter LLP, Lynn advises clients to take a broader view of things. Business owners need to consider much more than how Michigan’s new corporate income tax will affect their company, Lynn said.

The change in Michigan’s business tax that came with the new year is probably not a compelling enough reason on its own for a business owner to alter how his or her company is organized.

“It’s a consideration, but there are a lot of considerations. You have to take everything into consideration,” Lynn said. “There are so many factors and circumstances to consider. What are you going to do with your business in the next five years?”

Michigan’s new business tax, enacted last spring by the Legislature and signed into law by Gov. Rick Snyder, took effect Jan. 1. It replaces the much-maligned Michigan Business Tax with a 6 percent corporate income tax levied on c-corporations.

Companies organized as s-corporations or LLCs — primarily small businesses — will not pay the corporate income tax. Instead, small business owners will pay taxes on their business earnings through the personal income tax.

Curtis RuppalCurtis Ruppal, a state and federal tax partner at Plante Moran PLLC in Grand Rapids, said some clients who own a business organized as a c-corporation have inquired about changing to lower their tax liability. By switching to an s-corporation or LLC, they would pay the 4.35 percent personal income tax, versus the 6 percent corporate income tax.

While that sounds simple, it’s not, and tax experts say much more needs to go into the equation of how a business is organized — including federal tax implications.

“We like to look at this on a holistic basis,” Ruppal said.

Business advocates who support the new tax hail the elimination of the double taxation on small business owners that occurred under the MBT, plus the adoption of a structure that’s simpler to understand and makes it easier for small business owners to compute their tax burden now and in the future.

Beginning with the present tax year, nearly 100,000 businesses will no longer have to file an annual tax return.

“The simplicity and fairness is important,” said David Jessup, director of government relations for the Small Business Association of Michigan. “It doesn’t take a team of accountants to figure out your liability.”

Among the many changes with the new business tax is how companies with offices in multiple states determine their Michigan tax liability. The MBT allowed them to use payroll, property and sales within the state to determine tax liability. The new tax only uses sales within Michigan, Lynn said.

The changes make Michigan’s business tax comparable to what’s used in many other states, he said.

“It puts us on an even keel,” Lynn said.

The new business tax did eliminate state tax credits that developers often used to make projects economically viable.

Businesses that received tax credits have the option of filing their taxes under the old MBT to get the full value, Ruppal said.

Manufacturers also saw a 35 percent personal property tax credit eliminated. SBAM’s Jessup said legislators this year likely will take up changing the personal property tax, which business advocates consider a disincentive for manufacturers to expand their operations in Michigan.

Backers of reforming the business tax argued that it was needed to improve the state’s business climate and drive job growth in Michigan. That outcome may prove hard to quantify, though a majority of SBAM members responding to a survey last summer said they would reinvest any savings into their business, Jessup said.

“We heard from our members that it will in fact create jobs and help small businesses grow,” he said.

While the comparative simplicity of the new tax may mean accountants like Lynn and Ruppal will spend less time crunching tax numbers for clients, they won’t have a lack of things to do.

Having a business tax that’s easier to understand means both business owners and their professional advisors can spend less time on tax compliance and focus more on long-term tax planning and “things that really improve their business,” Lynn said.

“I will find other value-added ways to plan with my clients,” he said.

Read 2017 times Last modified on Sunday, 12 August 2012 21:43

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