Tuesday, September 11, 2007

Michigan Business Tax and FAS 109

I get lots of emails from the Michigan Association of Certified Public Accountants. Here is an excerpt from one I got yesterday:

Senate Bill 687, introduced in late August, proposes a technical fix to the new Michigan Business Tax as it relates to FAS 109. Due to the mechanics of the accounting rules under GAAP, many companies in Michigan are facing an adverse earnings impact in the current calendar quarter from the implementation of the MBT. GAAP requires that a tax expense be recognized for book purposes when book income exceeds income reports on a tax return. Many people doing business in Michigan that have recorded such “deferred tax” liability in prior years are now facing the requirement of adjusting their liability for the MBT by recording a one-time increase in their tax expense that will have the effect of lowering their earnings in 2007. Senate Bill 687, which met successful passage in the State Senate on August 30, would prevent calendar-year companies from recording a charge to earnings in their current calendar quarter. As long as this proposal is enacted by the end of September, companies will not be forced to adjust their liability.

So what does this mean? The current Michigan Single Business Tax (SBT) is not an income tax. Therefore, the expense from it does not get reported in the line item "Provision for income taxes" that would show up just before "Net Income." Instead, it is reported as a component of selling, general and administrative expenses.

However, the new MBT, unlike SBT, is partially based on income. When you have taxes based on income, you become subject to FAS 109, Accounting for Income Taxes. FAS 109 is what explains how to calculate deferred tax assets and liabilities for temporary differences between financial and tax income. The common deferred tax item is accelerated depreciation for tax purposes.

Here is the big problem as I see it: Assuming that S Corporation and LLCs are going to have to pay this tax, they will, if material, have to start reporting deferred tax assets and liabilities for the income tax portion of the MBT, and the income tax portion of the MBT will be reported in the provision line in the income statement.

I'm not excited about this.

1 comment:

Anonymous said...

Yeah, that shit really pisses me off.