On December 28, 2018, outgoing Michigan Governor Rick Snyder vetoed Michigan Senate Bill 1097 (SB 1097), Michigan Senate Bill 1170 (SB 1170), and Michigan Senate Bill 362 (SB 362). The bills contained tax-related proposals that would have: decoupled from the IRC Section 163(j) business interest limitation added by the federal Tax Cuts and Jobs Act (P.L. 115-97)(TCJA), created a flow-through entity tax in response to the TCJA's $10,000 cap on the federal deduction for state and local taxes paid, and revised the apportionment formula for financial institutions.

SB 1097

Under Michigan law, business interest expense is generally deductible in the year in which the interest is paid or accrued. For federal tax purposes, the TCJA limits deductible business interest expense to 30% of adjusted taxable income before depreciation, amortization, and depletion (before January 1, 2022), plus business interest income. Further, for federal income tax purposes, business interest not allowed as a deduction for any tax year may be carried forward indefinitely.

SB 1097 would have modified the definition of "federal taxable income" under Michigan's Corporate Income Tax (CIT) Act to decouple from IRC Section 163(j) by providing that federal taxable income would be calculated as if IRC Section 163(j) were not in effect. Thus, if the provision had been enacted, a full deduction of business interest expense for CIT purposes would have been allowed. Because the 2018 legislative session has ended, SB 1097 is now dead. In his veto message, Governor Snyder stated that, even though SB 1097 addressed Michigan business owners concerns over their increased Michigan tax liability, it did so in a manner inconsistent with the state budgetary practices.

With a new legislative session underway, a decoupling bill similar to SB 1097 will have to be introduced. It will be worth monitoring this development, as the make-up of the 2019 Michigan Legislature is largely the same as the 2018 Michigan Legislature. It is, however, unclear whether new Governor Gretchen Whitmer supports such a bill.

SB 1170

Michigan SB 1170 proposed to modify the Michigan Income Tax Act by adding a new Part 4, Chapter 18, which would, among other things, have levied a flow-through entity tax equal to the individual income tax rate on every flow-through entity that elected to pay the new flow-through entity tax and would have allowed individuals with flow through income to claim a credit to offset the tax paid at the flow-through entity level. This provision was intended as a work-around to the new federal limitation imposed upon the deductibility of state and local taxes paid by individuals. Currently, Michigan does not have a withholding tax requirement for flow-through entities. With a new legislative session underway, a flow-through entity tax bill similar to SB 1170 will have to be introduced.

SB 362

Michigan SB 362 proposed to amend Chapter 13 of the Michigan Income Tax Act to revise the apportionment formula for a financial institution with respect to gross business attributable to the foreign business of a controlled foreign corporation, and for a unitary business group of financial institutions that acquired or disposed of members during the tax year. In addition, SB 362 would have required the tax base to be calculated based on the close of the tax year-end balances, rather than a five-year average.

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