Important Tax Reforms in Michigan and Pennsylvania
Two of Ohio’s neighboring states, Michigan and Pennsylvania, have recently enacted noteworthy tax legislation.
Michigan Partnership Reporting
On July 19, Governor Gretchen Whitmer signed into law Senate Bill 248, which creates a means of reporting federal changes to a partnership’s income resulting from a partnership-level audit or administrative adjustment request.
The enacted bill creates a new Chapter 18 in the Michigan Income Tax Act requiring partnerships and partners to report final federal adjustments within 90 days after the final determination date. A partnership may also make an irrevocable election to report such adjustments at the partnership level. Chapter 18 specifies that the election is made by a state partnership representative who has the authority to act on behalf of the partnership and its direct and indirect partners. The state partnership representative for a reviewed year is the same as the partnership’s federal representative unless the partnership designates someone else in writing.
If an election is not made, a partnership has 90 days to file a federal adjustments report, report to each of its direct partners their distributive shares of the final federal adjustments, and submit payment on behalf of those nonresident partners who were part of a previously filed composite return. The direct partners not included in this payment have an additional 90 days to report their shares of the adjustments and pay any tax due resulting therefrom, plus any penalty and interest.
Alternatively, if an election under Chapter 18 is made by the partnership, the partnership will report any changes from the federal adjustment at the partnership level, and consent to be subject to any necessary enforcement actions. The partnership has 90 days from the final determination date to file a completed federal adjustments report and notify the Department of its election. It then has an additional 90 days to determine and make its tax payment. That payment will exclude the distributive shares of adjustments for partners not subject to tax under the Income Tax Act.
The bill also extends from 120 days to 180 days from the final determination date the time required for filing an amended return by partners impacted by federal adjustments. The bill exempts from the amended return provisions the reporting of a partnership federal adjustment required to be reported under the new Chapter 18 (regardless of whether an election is made). If a taxpayer, including a partnership that was subject to federal adjustments, timely submits its federal adjustments report or amended return, the Michigan Department of Treasury may not assess additional tax, interest, and penalties arising from those adjustments after the limitations period expires.
The enacted bill applies retroactively to tax years that began on or after January 1, 2018.
Pennsylvania Tax Reform
On July 8, Governor Tom Wolf signed H.B. 1342 (“the Act”) into law, an omnibus tax bill that reduces the corporate tax rate and makes a number of other tax reforms.
Pennsylvania’s current 9.99% rate for the corporate net income tax will be reduced to 8.99% for tax year 2023, after which it will phase down by one half of a percentage point each year until it reaches 4.99% for the 2031 tax year, where it will remain, barring subsequent legislation.
The Act changes the sales factor sourcing rule, implementing market-based sourcing for sales of intangibles. Such receipts as those from patents, royalties, franchise agreements, securities, and loan interest will be sourced based on the location of the marketplace where the purchaser either receives or uses the intangible property, much like Pennsylvania’s market-based sourcing rule for sales of tangible personal property, real property, and services. This will be a change from the current, cost-of-performance sourcing rule for intangibles.
The new law also codifies the economic nexus standards that were issued as a Revenue tax policy in Corporation Tax Bulletin No. 2019-04. The Act creates a rebuttable presumption that a corporation with $500,000 or more of sales sourced to the state has substantial nexus for the Corporate Net Income Tax without regard to physical presence.
For Personal Income Tax (“PIT”), the state version of the Internal Revenue Code (“I.R.C.”) § 179 expense deduction, allowing capital items to be deducted in the year placed in service rather than over their depreciable lives, increases from $25,000 to conformity with the current I.R.C., which allows $1,080,000 in 2022. Pennsylvania’s § 179 limit will continue to conform with federal law. The new law also conforms Pennsylvania’s PIT to I.R.C. § 1031, allowing the deferral of gain from the sale of real property if the proceeds are reinvested in a similar property as part of a qualifying like kind exchange.
In addition to those significant changes, there are some modernizing changes made to the Insurance Premiums Tax and peer-to-peer car sharing services will be subject to the Sales and Use Tax. A person (including a business) that facilitates peer-to-peer car sharing, including the collection of payments from the purchasers to transmit to the car owners, is classified as a type of marketplace facilitator under the Act, and subject to Pennsylvania’s marketplace facilitator tax collection requirements.
Credits and Incentives Updates
The Act increases the specified tax expenditure, or cap, placed on a number of credits offered by Pennsylvania law.
The annual cap of the Research and Development (R&D) Tax Credit is increased from $55 million to $60 million. The 20% carve-out for small businesses applies to the additional $5 million, increasing the small business set-aside to $12 million dollars.
The Film Production Tax credit will have its annual cap increased from $70 million to $100 million.
The Entertainment Economic Enhancement Program Tax Credit’s cap is tripled, from $8 million to $24 million, and the Waterfront Development Tax Credit’s cap is increased from $1.5 million to $5 million per fiscal year.
The Act adds two new articles creating tax credits, one for business and one for individuals. Article XIX-H relates to “airport land development zones” and allows transferable tax credits to qualifying employers within such zones. Article XIX-I creates a PIT credit for employment-related expenses for dependent-care costs incurred while an individual is working or seeking employment. This credit is equal to 30% of the federal Child and Dependent Care Credit earned by a taxpayer in a given year.
Finally, the Act extends the qualification period for computer data center program benefits from 15 to 25 years.