Rescinded MBT FAQs

The following answers are no longer valid and have been replaced.


A1. Will taxpayers need to calculate the business income, modified gross receipts, and surcharge separately and pay 85% of each to meet the estimated tax payment safe harbor provision in order to avoid interest?

The following answer has been rescinded and replaced by A22 .
Tax liability of the act is imposed on two components; federal taxable income derived from business activity and modified gross receipts. These two components form the basis for tax liability. Estimated tax payments are governed under Section 501. If the sum of the estimated payments equals at least 85% of the liability and the amount of each estimated payment reasonably approximates the tax liability incurred during the quarter for which the estimate is made, interest will not be assessed. Therefore, while a calculation must be made for each component in order to determine tax liability, only one estimated payment of 85% of that liability need be remitted. There is no requirement to remit an estimated payment for each separate tax liability component.


A5. How are quarterly estimates calculated?

The following answer has been rescinded and replaced by A23 .
The sum of estimated payments must equal at least 85% of estimated tax liability for the year, and the amount of each estimated payment must reasonably approximate the tax liability for that quarter. For Tax Year 2009 and after, if prior year's tax is $20,000 or less, estimated tax will be prior year's amount in four equal payments, the sum of which equals the previous year's tax liability. If the year's tax liability is $800 or less, quarterly returns are not required.


A13. Will a safe harbor be allowed for 2008 estimates based on the 2007 SBT return?

The following answer has been rescinded and replaced by A24 .
No. For the 2008 tax year, estimated MBT payments must be computed on the actual business income tax base and modified gross receipts tax base of the period combined. Safe harbor will apply, and no interest will be charged, if payments are made on time and the sum of the estimated payments equals at least 85% of annual liability, and the amount of each payment reasonably approximates the tax liability incurred during the period. Estimates cannot be based on the prior year's SBT liability and cannot be based on 1% of gross receipts.

For the 2009 and subsequent tax years, no interest will be charged if the sum of four estimated payments equals the previous year's MBT liability provided the previous year's liability was $20,000 or less and the payments were made equally over the year.


A21. How does a taxpayer with a fiscal year end calculate tax under the MBT for estimate purposes?

The following answer has been rescinded and replaced by A25 .
If estimated tax liability for the year is over $800.00, a taxpayer must file estimated quarterly returns and payments. Quarterly returns for fiscal year taxpayers are due the 15th day of the first month after each quarter. Any quarter less than 3 months is due on the 15th day of the month immediately following the final month of the taxpayer's tax year. In the case of a short taxable year, no estimated tax payment is required if the short taxable year is a period of less than four full calendar months; or the estimated tax liability for the year is $800.00 or less. See IRS Reg. 1.6655-5(b).

The estimated payment made with each quarterly return must be for the total estimated business income tax base and modified gross receipts tax base for the quarter, or 25% of the estimated annual liability. To avoid penalty and interest charges, estimated payments must equal at least 85 percent of the liability for the tax year, and the amount of each estimated payment must reasonably approximate the tax liability for each quarter. If the year's tax liability is $800.00 or less, quarterly returns are not required. Estimates cannot be based on the prior year's SBT liability, and can no longer be based on 1% of gross receipts.

For taxpayer's whose apportioned or allocated gross receipts equal $350,000 or more, the MBTA imposes a 4.95% business income tax and a modified gross receipts tax at the rate of 0.8%. A credit reduces the tax correspondingly if gross receipts are between $350,000 and $700,000.

For most taxpayers, the business income tax base is essentially that part of federal taxable income derived from business activity, modified by the following to the extent included in, excluded from, or deducted in arriving at federal taxable income:

Additions:

  • Interest income and dividends derived from obligations or securities of states other than Michigan,
  • Taxes on or measured by net income and the tax imposed under the MBT,
  • Any carryback or carryover of a net operating loss,
  • Loss attributable to another taxable entity,
  • Royalty, interest, or other expense paid to a person related to the taxpayer by ownership or control for the use of an intangible asset if the person is not included in the taxpayer's unitary business group.

Subtract:

  • Dividends and royalties received from persons other than United States persons and foreign operating entities,
  • Income attributable to another taxable entity,
  • Interest income derived from United States obligations,
  • Earnings that are net earnings from self-employment as defined under section 1402 of the internal revenue code of the taxpayer or a partner or limited liability company member of the taxpayer except to the extent that those net earnings represent a reasonable return on capital.

The modified gross receipts tax base consists of gross receipts less purchases from other firms. Gross receipts are defined as the entire amount received by a taxpayer from any activity carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others, with certain specific exceptions. "Purchases from other firms” is generally limited to inventory acquired during the tax year, depreciable assets acquired during the tax year, and materials and supplies directly connected to inventory or depreciable assets.


A26. Will a taxpayer be required to make a payment with an extension request or is the listing of estimated payments made going to be accepted as it is in the Single Business Tax?

The following answer has been rescinded and replaced by A30 .
Section 505(3) of the Michigan Business Tax Act (MBTA) instructs that upon application of the taxpayer and for good cause shown, the Department may grant an extension to file the annual Michigan Business Tax (MBT) return. MCL 208.1505(3). The section further instructs that the Treasurer shall require, "[w]ith the application payment of the estimated tax liability unpaid for the tax period covered by the extension.”

The MBTA also grants an automatic extension if the taxpayer has obtained an extension to file its federal return and submits, "[a] copy of the request for extension together with a tentative return and payment of an estimated tax with the department . . .” MCL 208.1505(4).

If the application for an extension for good cause and/or the tentative return submitted with a federal extension show that estimated payments have been made that result in the "estimated tax liability unpaid for the tax period covered by the extension” to be zero, then no payment must accompany the extension request.


B17. Limited liability companies are included in the definition of "person” under the MBT.  Assuming that the federal "check the box” rules are followed, does the business income adjustment set forth at section 201(2)(e), which requires a taxpayer to add the loss or subtract the income attributable to "another entity,” apply to the income or loss of a disregarded limited liability company?

The following answer has been rescinded and replaced by B55
No. Although a limited liability company (LLC) is defined as a "person” under the MBTA, MCL 208.1113(3), to the extent that such an entity is a single member LLC disregarded for federal tax purposes, the owner of the LLC is the MBT taxpayer, and the disregarded entity is treated as a sole proprietorship, branch or division of its owner. Section 201(2)(e) requires the taxpayer to add back a loss or subtract income attributable to "another entity whose business activities are taxable under this section.” MCL 208.1201(2)(e). A disregarded LLC's business activities would not be taxable under section 201; therefore, the section 201(2)(e) adjustment does not apply to an LLC that is a disregarded entity for federal tax purposes.

 


B18. May taxpayers, including corporations and partnerships, take the IRC 199 deduction for MBT purposes?

The following answer has been rescinded and replaced by B44 .
MBT taxpayers that are taxable as corporations that qualify for an IRC 199 deduction on their federal tax return will automatically experience a corresponding reduction in their business income tax base and MBT liability. MBT taxpayers that are pass-through entities are not entitled to take the IRC 199 deduction at the entity level, but rather the deduction is taken at the shareholder, member, or partner level for Michigan income tax purposes.

The domestic production activities deduction under IRC 199 provides a tax benefit for certain domestic production activities. In particular, IRC 199 allows a deduction equal to a specified percentage of the taxpayer's qualified production activities income for the tax year. The specified percentage is 6% for 2008-2009, and 9% thereafter.

The deduction is available to corporations, individuals, estates, and trusts that are engaged in certain domestic trade or business activities. For pass-through entities, including partnerships, limited liability corporations taxed as partnerships, and S corporations, the deduction is based on the activities of the pass-through entity but is computed at the individual partner, member, or shareholder level. Taxpayers use federal Form 8903 to compute the deduction.

Under the MBT, for taxpayers other than insurance companies and financial institutions, the business income tax comprises a portion of the total tax liability and is calculated by multiplying the business income tax base after apportionment by the applicable rate. "Business income tax base” means "a taxpayer's business income subject to” certain adjustments. MCL 208.1201. "Business income” means "that part of federal taxable income derived from business activity.” MCL 208.1105. "Federal taxable income” means "taxable income as defined in [IRC 63].” MCL 208.1109. Federal taxable income is determined under IRC 63 by subtracting the IRC 199 deduction from gross income. For partnerships (including limited liability companies taxed as partnerships) and S corporations, business income also includes "payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders.” MCL 208.1105.

Corporations. For taxpayers taxed as corporations, federal taxable income includes the IRC 199 deduction. In other words, for federal corporate return purposes, the domestic production activities deduction (Form 1120, line 25) is used to calculate (and reduce) federal taxable income (Form 1120, line 30). In turn, business income for MBT purposes is reduced. No MBT provision specifically disallows corporations from taking IRC 199 deductions, nor is there a provision that requires any IRC 199 deduction to be added back to business income. Thus, MBT taxpayers taxed as corporations that qualify for an IRC 199 deduction on their federal tax return will automatically experience a corresponding reduction in its MBT business income tax base and resulting MBT liability.

Pass-Through Entities. Federal taxable income for pass-through entities is determined under IRC 703 and 1363. Business income includes "payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders.” MCL 208.1105.

By its express terms, IRC 199 does not apply at the entity level with regard to pass-through entities and is not included in the federal taxable income of the entity. See IRC 199(d)(1)(A). Furthermore, IRC 199 is not an item of income or expense separately stated under IRC 702(a). See IRC 199, 703, and 1363. Rather, pass-through entities must directly report to shareholders, members, or partners each item of information needed to calculate the domestic production activities deduction at the shareholder, member, or partner level. Thus, the domestic production activities deduction is not applicable to pass-through entities for MBT purposes; rather, the IRC 199 deduction is taken at the shareholder, member, or partner level for Michigan income tax purposes.


B19. What is the definition of intangible asset as used in computing the business income tax base?

The following answer has been rescinded and replaced by B54 .
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort. Intangible assets may include but are not limited to patents, franchises, trademarks and goodwill. Intellectual property is an intangible asset and includes copyrights, trademarks, patents, and trade secrets. Intangible assets may be wasting and have a finite life such as a patent or they may have an infinite life such as goodwill.

Under the MBT, a person must add back, in computing its business income tax base, certain payments made for the use of intangible assets that were deducted in arriving at federal taxable income. The payments must have been to a person related through ownership or control that is not a member of a unitary group with the taxpayer. Add back of the deducted payments is required unless the taxpayer can prove to the satisfaction of the Department that the payments were at arms-length, have a business purpose other than the avoidance of tax and meet one of three other requirements. MCL 208.1201(2) (f) sets forth these requirements:

Except as otherwise provided under this subdivision, to the extent deducted in arriving at federal taxable income, add any royalty, interest, or other expense paid to a person related to the taxpayer by ownership or control for the use of an intangible asset if the person is not included in the taxpayer's unitary business group. The addition of any royalty, interest, or other expense described under this subdivision is not required to be added if the taxpayer can demonstrate that the transaction has a nontax business purpose other than avoidance of this tax, is conducted with arm's-length pricing and rates and terms as applied in accordance with sections 482 and 1274(d) of the internal revenue code, and satisfies 1 of the following:

(i) Is a pass through of another transaction between a third party and the related person with comparable rates and terms.

(ii) Results in double taxation. For purposes of this subparagraph, double taxation exists if the transaction is subject to tax in another jurisdiction.

(iii) Is unreasonable as determined by the treasurer, and the taxpayer agrees that the addition would be unreasonable based on the taxpayer's facts and circumstances .
 


B24. Is the sale of stock by a stockholder in a closely held corporation back to the corporation or another stockholder subject to MBT?

The following answer has been rescinded and replaced by B45 .
For an individual, the sale of stock in a corporation will generally not constitute business income or gross receipts to that individual so long as the investment does not constitute or is part of the individual's trade or business.

The sale of stock would generally be included in a taxpayer's business income and gross receipts tax bases; however, there are specific exceptions. MCL 208.1105(2)(e)(i) provides that for an individual, estate, partnership or trust organized exclusively for estate or gift planning purposes, income from personal investment activity is not included in business income. Therefore, to the extent that the stockholder is an individual and that the sale of the stock is a personal investment activity that does not constitute nor is part of the individual's trade or business, then the sale of the stock is not included as business income subject to MBT. Also, for an individual, estate, partnership or trust organized exclusively for estate or gift planning purposes, proceeds from personal investment activity that does not constitute a trade or business are not included in the gross receipts tax base subject to MBT. MCL 208.1111(1)(v)(v). Therefore, if the stockholder is an individual and the sale of stock does not constitute nor is part of a trade or business, the amount received by the stockholder taxpayer for the sale of the stock would not be included in the modified gross receipts tax base.


B31. If a C corporation owns 56% of a flow-through entity, and the two meet the MBT definition of a unitary group, how does the corporation report all of the income of the flow-through entity when all it receives from the entity is a K-1? Also, do the other owners of the flow-through entity need to reduce their federal taxable income by their share of the flow-through entity income when computing their MBT liability?

The following answer has been rescinded and replaced by B46 .
Assuming the C corporation and the flow-through entity constitute a unitary group as defined under MCL 208.1117(6), they are required to file one combined return pursuant to MCL 208.1511. The business income tax base of the unitary group is determined by adding the business income tax bases of the C corporation and the flow through entity as computed under MCL 208.1201 and then eliminating any inter-group transactions. The modified gross receipts ("MGR") tax base is determined in a similar manner by computing the MGR tax base of each member under MCL 208.1203 and then eliminating inter-group transactions. If either or both members of the unitary group have nexus in states other than Michigan, the apportionment percentage is determined on a combined basis and then applied to the total business income tax and MGR tax bases of the unitary group. How or in what manner the members of a unitary group share information necessary to prepare a combined return is not determined by the Department.

Owners of the flow-through entity that are not included in the unitary group must adjust their respective MBT income tax bases to remove their share of income or losses from the flow through entity pursuant to MCL 208.1202(2)(e). However, the non-unitary owners that are not individuals, estates, or trusts or partnerships organized exclusively for estate or gift planning purposes must include their distributive share of income from the flow-through entity in their respective MGR tax bases. Owners of flow through entities that are individuals, estates, or trusts or partnerships organized exclusively for estate or gift planning purposes are not generally subject to MBT on their distributive or pro-rata share of flow-through income.


B43. Can a taxpayer net the cost of purchased securities with the proceeds from those securities? For purposes of taxing the gain, is the cost the actual cost of the securities or the fair market value on January 1, 2008?

The following answer has been rescinded and replaced by B47 .
Generally, securities, such as stocks, bonds and similar intangibles, will be capital assets under section 1221 of the IRC unless the securities are inventory to the taxpayer. Receipts from the sale of capital assets could be taxable in both the business income and modified gross receipts tax bases of the MBT. Business income is generally defined as "that part of federal taxable income derived from business activity.” MCL 208.1105(2). To the extent the capital gain from the sale of the securities is derived from the business activity of the taxpayer, the gain must be included in the business income tax base of the MBT. For this purpose, the capital gain will be computed the same as it was federally, which is proceeds from the sale minus basis. The result will flow to the MBT return if the gain is derived from the business activity of the taxpayer. The "cost” or basis is the acquisition cost of the asset just as it is for federal purposes and is not the fair market value as of January 1, 2008, the date that the MBT went into effect.

For purposes of the modified gross receipts tax base, if the securities are sold at a gain then the proceeds of the sale of the securities minus any gain from the sale, to the extent that the gain was included in federal taxable income, will be excluded from the tax base.

If the securities were held for investment purposes by and are sold by an individual, estate, trusts or family limited partnerships (FLIP) that is specifically established for estate planning purposes, then the receipts on the sale of the securities are not taxable in either MBT tax base. MCL 208.1105(2) and 1111(v)(v).


C5. How is the alternate credit under MCL 208.1417 used by a unitary business group? How do the disqualifiers and percentage reducers work?

The following answer has been rescinded and replaced by C41 .
The alternate credit (similar to SBT credit commonly known as the small business credit) "is available to any taxpayer with gross receipts that do not exceed $20,000,000.00 and with adjusted business income minus the loss adjustment that does not exceed $1,300,000.00 as adjusted annually for inflation using the Detroit consumer price index” and subject to certain additional disqualifiers. MCL 208.1417(1) (emphasis added).

“Taxpayer” is defined as "a person or a unitary business group.” MCL 208.1117(5). The gross receipts and adjusted business income thresholds under MCL 207.1417(1) apply to taxpayers. Thus, for a unitary business group, the gross receipts and adjusted business income thresholds must be calculated by the unitary business group by combining the gross receipts and adjusted business incomes of its members.

The disqualifiers under MCL 208.1417(1)(a) and (b) apply to a taxpayer that is a unitary business group if such disqualifiers apply to any member of that unitary business group. For example, a taxpayer that is a unitary business group is disqualified from taking the alternate credit under MCL 208.1417 if that unitary business group includes a member that is a partnership and any one partner of that partnership receives more than $180,000.00 as a distributive share of the adjusted business income minus loss adjustment of the partnership.

Similarly, the reduction percentages under MCL 208.1417(1)(c) apply to a taxpayer that is a unitary business group if such reduction percentages apply to any member of that unitary business group. For example, the alternate credit of a taxpayer is reduced by 20% if the taxpayer is a unitary business group that includes a member that is a corporation and the compensation and directors' fees of an officer of that member corporation exceed $160,000.00 but are less than $165,000.00.


C6. What is the compensation credit?

The following answer has been rescinded and replaced by C21 .
MCL 208.1403 provides a credit in the amount of .370% of a taxpayer's compensation in Michigan, not to exceed 65% of the taxpayer's liability imposed under the MBT.

“Compensation” is defined as all wages, salaries, fees, bonuses, commissions, other payments made in the tax year on behalf of or for the benefit of employees, officers, or directors of the taxpayers, and any earnings that are net earnings from self-employment as defined under section 1402 of the internal revenue code of the taxpayer or a partner or limited liability company member of the taxpayer. (Additional information is provided in MCL 208.1107(2)).


C11. Is the farmland preservation credit available under the Michigan Business Tax?

The following answer has been rescinded and replaced by C22 .
No. The farmland preservation credit is found in the Natural Resources and Environmental Protection Act, 1994 PA 451. This is a stand-alone statute apart from both the Single Business Tax and the Michigan Business Tax. The public act was written to provide the farmland preservation credit (for qualifying taxpayers) against the SBT and the individual income tax. MCL 324.36109. The calculation of the credit is performed in reference to the SBT and the statute does not provide a similar credit for the MBT. MCL 324.36109(2).


C12. Will the recapture limiting language of MCL 208.1403(3)(d)-(f) apply to both the Michigan Business Tax Investment Tax Credit (ITC) and ITC taken under the former Single Business Tax?

The following answer has been rescinded and replaced by C27 .
Yes, under MCL 208.1403(3)(d)-(f) ITC recapture is limited to the extent ITC was taken when the cost for the original asset acquisition was paid or accrued and at the rate at which the credit was used under the former SBTA or the MBTA. The recapture applies to depreciable assets acquired before and after December 31, 2007. In other words, a person must recapture ITC upon disposition of assets acquired under both the MBT and the SBT subject to the recapture limitations of MCL 208.1403(3)(d)-(f) that apply to both the SBTA and the MBTA.


C28. Under MCL 208.1403(2), a taxpayer may claim a credit against the MBT equal to a specified percentage of the taxpayer’s “compensation in this state.” What is the definition of “compensation in this state”?

The following answer has been rescinded and replaced by C57 .

Under the MBT, “compensation” is a defined term - with inclusions and exceptions not listed here - that generally means:

all wages, salaries, fees, bonuses, commissions, other payments made in the tax year on behalf of or for the benefit of employees, officers, or directors of the taxpayers, and any earnings that are net earnings from self-employment as defined under section 1402 of the internal revenue code of the taxpayer or a partner or limited liability company member of the taxpayer. [MCL 208.1107(2).]

Compensation is “in this state” if (a) the individual's service is performed entirely within Michigan, or (b) the individual's service is performed both within Michigan and outside Michigan, but the service performed outside Michigan is incidental to the individual's service within Michigan.

Example 1. SalesCo employs Salesperson whose territory includes both Detroit and Toledo. Salesperson's calls on customers located in both Michigan and Ohio. The compensation paid to Salesperson is not “compensation in this state” because Salesperson's activity is not limited solely to Michigan, and calling on customers in Ohio is not incidental to Salesperson's activity in Michigan.
Example 2. Manufacturer employs Engineer at its Michigan facility. Several times a year, Engineer travels out of state to meet with suppliers. Although Engineer performs services both within Michigan and outside Michigan, Engineer's out-of-state services are incidental to Engineer's services within Michigan. The compensation paid to Engineer is “compensation in this state.”

Fi 34. What amount of finance fees and interest qualifies for film production credit, and how is it calculated?

The following answer has been rescinded and replaced by Fi 37 .

To qualify for film production credit, finance fees and interest must be "direct production expenditures” as that term is defined in statute, FAQs and other issued guidance. FAQs #Fi1 and #Fi12 provide some general guidance concerning "direct production expenditures” and interest.

Finance fees and interest must satisfy four "direct production expenditure” criteria to qualify for film production credit. They must be i) made in this state, ii) not a qualified personnel expenditure, iii) directly attributable to the production or distribution of a "qualified production, and iv) subject to taxation in this state.

Finance fee and interest expenditures are made in this state if they meet the criteria identified in FAQs and other issued guidance. Finance fees and interest by their nature are not qualified personnel expenditures. Finance fees and interest received for loan services performed in Michigan are subject to taxation in this state.

In addition to the fact that finance fees and interest expenditures that qualify for film production credit must be related to "development, preproduction, production, or postproduction” activity, two general calculation principles are applicable. Because finance fees and interest are generally expenses predicated upon the time value of money, and because the expenditures must also be made in this state, the qualifying activity the finance fees and interest relate to must take place in Michigan. Finance fees and interest not related to the time during which an otherwise qualifying activity that is being financed takes place in Michigan will not qualify for film production credit.

  • Calculation principle #1: Finance fee and interest expenses recorded in the production company’s accounting records in accordance with generally accepted accounting principles qualifies for credit to the extent they relate to the time during which an activity actually takes place in Michigan within the period in which the finance fees and interest were accrued and paid.

If a production is only partially financed through loans with third party financiers, loan finance fees and interest relate to Michigan activity only in a proportional manner. In other words, funds from loans are not used first to finance Michigan activity any more than self financed funds are.

  • Calculation principle #2: Properly recorded finance fee and interest expense can be allocated to Michigan on a prorated basis to the extent Michigan expenditures relate to total expenditures for the production. Estimates of future expenditures to arrive at total expenditures will be acceptable provided they are reasonable and based upon sound estimating principles.

Like other direct production expenditures, only finance fees and interest that have been accrued and paid will qualify for film production credit. Calculation of qualifying finance fees and interest will generally start with finance fees and interest that have been expensed in the accounting records of the production company in accordance with generally accepted accounting principles ("GAAP").

Qualifying "direct production expenditure” finance fees and interest should be calculated using the following formula prescribed by the State:

FORMULA:

Booked Finance Fee and Interest Expense x Spend Ratio x Michigan Activity Ratio

  • “Booked Finance Fee and Interest Expense” are finance fees and interest expensed in the accounting records of the production company in conformance with generally accepted accounting principles through the date the request for post production certificate was made"
  • Spend Ratio” is the ratio of Michigan spend to total projected production spend (net of finance fee and interest expenditures)
  • “Michigan Activity Ratio” is the ratio of days of Michigan activity to the total days. Total days are the days in the period from the loan origination date through the date the post production certificate was requested. Michigan days are the days on which Michigan activity took place within the total days period.

SCENARIO #1:

1. Loan documents signed on May 15th

  •  $1,000,000 principal  6% APR
  • 2 year term

2. Agreement approved on May 15th
3. Michigan activity began on June 1st
4. Michigan activity continuous through July 15th, stopped through July 31st, resumed on August 1st continuing through August 15th and not resuming
5. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
6. Booked Finance Fee and Interest Expense May 15th through September 15th included in request for post production certificate in the amount of $20,219 ($1,000,000 x 6% x 123/365) (note: 16 days in May + 30 days in June + 31 days in July + 31 days in August + 15 days in September = 123 days)

Qualifying Finance Fee and Interest Calculation:

$20,219 x $1,000,000/$2,000,000 x 60/123 = $4,931.46
(note: 30 days in June + 15 days in July + 15 days in August = 60 days of Michigan activity)

 

SCENARIO #2 (EARLY LOAN):

1. Loan documents signed on April 1st

  • $1,000,000 principal
  • 6% APR
  • 2 year term

2. Agreement approved on May 15th
3. Michigan activity began on June 1st
4. Michigan activity continuous through July 15th, stopped through July 31st, resumed on August 1st continuing through August 15th and not resuming
5. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
6. Booked Finance Fee and Interest Expense April 1st through September 15th included in request for post production certificate in the amount of $27,616 ($1,000,000 x 6% x 168/365)
(note: 30 days in April + 31 days in May + 30 days in June + 31 days in July + 31 days in August + 15 days in September = 168 days)

Qualifying Finance Fee and Interest Calculation:

$27,616 x $1,000,000/$2,000,000 x 60/168 = $4,931.43
(note: 30 days in June + 15 days in July + 15 days in August = 60 days of Michigan activity)

SCENARIO #3 (PREPAID INTEREST):

1. Loan documents signed on May 15th

  • $1,000,000 principal
  • 6% APR
  • 2 year term

2. Agreement approved on May 15th
3. Michigan activity began on June 1st
4. Michigan activity continuous through July 15th, stopped through July 31st, resumed on August 1st continuing through August 15th and not resuming
5. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
6. $120,000 interest for the full 2 year loan term prepaid on May 15th ($1,000,000 x 6% x 730/365) booked as a prepaid interest expense asset
7. Booked Finance Fee and Interest Expense (by accounting entries reducing the prepaid interest account) May 15th through September 15th included in request for post production certificate in the amount of $20,219 ($1,000,000 x 6% x 123/365)
(note: 16 days in May + 30 days in June + 31 days in July + 31 days in August + 15 days in September = 123 days)

Qualifying Finance Fee and Interest Calculation:

$20,219 x $1,000,000/$2,000,000 x 60/123 = $4,931.46
(note: 30 days in June + 15 days in July + 15 days in August = 60 days of Michigan activity)

SCENARIO #4 (FINANCE FEES)

1. Loan documents signed on May 15th

  • $1,000,000 principal
  • 6% APR
  • 2 year term
  • $6,000 finance fees paid at closing and amortized over the term of the loan

2. Agreement approved on May 15th
3. Michigan activity began on June 1st
4. Michigan activity continuous through July 15th, stopped through July 31st, resumed on August 1st continuing through August 15th and not resuming
5. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
6. Interest expense through September 15th included in request for post production certificate in the amount of $20,219 ($1,000,000 x 6% x 123/365)
(note: 16 days in May + 30 days in June + 31 days in July + 31 days in August + 15 days in September = 123 days)
7. Finance fee expense through September 15th included in request for post production certificate in the amount of $1,000 ($6,000/24 x 4)
(note: 2 year term = 24 months; May 15th through September 15th = 4 months)

Qualifying Finance Fee and Interest Calculation:

($20,219 + $1,000) x $1,000,000/$2,000,000 x 60/123 = $5,175.37
(note: 30 days in June + 15 days in July + 15 days in August = 60 days of Michigan activity)


M1. Does the Modified Gross Receipts Tax component of the Michigan Business Tax Act tax capital gains of investors, including trusts, Family Limited Partnerships and individuals?

The following answer has been rescinded and replaced by M26 .
Yes, the modified gross receipts tax is a tax on every taxpayer with nexus. "Taxpayer” means a person or a unitary business group liable for a tax, interest, or penalty under this act. The term "person” means an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit. Therefore, the modified gross receipts tax is imposed on the above named persons if taxpayer nexus with Michigan exists.

The modified gross receipts tax base is a taxpayer’s gross receipts less purchases from other firms before apportionment. The definition of "gross receipts” means the entire amount received by the taxpayer from any activity whether intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others with certain exceptions. MCL 208.1111(1)(o) excepts from gross receipts, proceeds from sales of capital assets as defined in section 1221(a) of the internal revenue code, less any gain from the disposition to the extent that gain is included in federal taxable income. Stated another way, the gain included in federal taxable income is included in the modified gross receipts tax base. There are no other statutory exceptions or exclusions that are applicable to capital gains recognized from the sale of investment assets. As a result, these gains are included in gross receipts.


M14. What are purchases from other firms?

The following answer has been rescinded and replaced by M67 .
“Purchases from other firms” are deducted from a taxpayer’s gross receipts to calculate the modified gross receipts tax base. In general, purchases from other firms means: Inventory acquired during the tax year. Inventory – defined at MCL 208.1111 – means the stock of goods, including electricity and natural gas, held for resale in the ordinary course of a retail or wholesale business, and finished goods and good in process of a manufacturer, including raw materials purchased from another person. Inventory also includes floor plan interest for licensed new car dealers and shipping and engineering charges so long as such charges are included in the original contract price for the associated inventory. Depreciable assets acquired during the tax year. Deductible depreciable assets are those that are or will become eligible for depreciation, amortization, or accelerated capital cost recovery under the IRC. The cost of depreciable assets includes costs of fabrication and installation. Materials and supplies. Materials and supplies means tangible personal property acquired during the tax year to be used or consumed in – and directly connected to – the production or management of inventory or the operation or maintenance of depreciable assets as described above. "Materials and supplies” includes repair parts and fuel. Staffing company compensation. Wages, benefits, and certain payroll taxes paid to personnel provided to the clients of staffing companies as defined under the MBT. Payments to subcontractors. For persons included in SIC codes 15, 16, and 17 – such as general contractors, operative builders, and trade contractors – payments to subcontractors for construction projects so long as such payments are made pursuant to a contract specific to that project. For a more complete list of those persons within SIC codes 15, 16, and 17, see http://www.osha.gov/pls/imis/sic_manual.html. Select Payments by Theater Owners. For the 2009 tax year, 50% of film rental or royalty payments paid by a theater owner to a film distributor and/or a film producer. For the 2010 tax year and beyond, all film rental or royalty payments paid by a theater owner to a film distributor and/or a film producer. The more specific statutory definition of "purchases from other firms” is found at MCL 208.1113(6).


M38. May taxpayers, including corporations and partnerships, take the IRC 199 deduction for MBT purposes?

The following answer has been rescinded and replaced by M68 .
MBT taxpayers that are taxable as corporations that qualify for an IRC 199 deduction on their federal tax return will automatically experience a corresponding reduction in their business income tax base and MBT liability. MBT taxpayers that are pass-through entities are not entitled to take the IRC 199 deduction at the entity level, but rather the deduction is taken at the shareholder, member, or partner level for Michigan income tax purposes.

The domestic production activities deduction under IRC 199 provides a tax benefit for certain domestic production activities. In particular, IRC 199 allows a deduction equal to a specified percentage of the taxpayer’s qualified production activities income for the tax year. The specified percentage is 6% for 2008-2009, and 9% thereafter.

The deduction is available to corporations, individuals, estates, and trusts that are engaged in certain domestic trade or business activities. For pass-through entities, including partnerships, limited liability corporations taxed as partnerships, and S corporations, the deduction is based on the activities of the pass-through entity but is computed at the individual partner, member, or shareholder level. Taxpayers use federal Form 8903 to compute the deduction.

Under the MBT, for taxpayers other than insurance companies and financial institutions, the business income tax comprises a portion of the total tax liability and is calculated by multiplying the business income tax base after apportionment by the applicable rate. "Business income tax base” means "a taxpayer's business income subject to” certain adjustments. MCL 208.1201. "Business income” means “that part of federal taxable income derived from business activity.” MCL 208.1105. “Federal taxable income” means “taxable income as defined in [IRC 63].” MCL 208.1109. Federal taxable income is determined under IRC 63 by subtracting the IRC 199 deduction from gross income. For partnerships (including limited liability companies taxed as partnerships) and S corporations, business income also includes “payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders.” MCL 208.1105.

Corporations. For taxpayers taxed as corporations, federal taxable income includes the IRC 199 deduction. In other words, for federal corporate return purposes, the domestic production activities deduction (Form 1120, line 25) is used to calculate (and reduce) federal taxable income (Form 1120, line 30). In turn, business income for MBT purposes is reduced. No MBT provision specifically disallows corporations from taking IRC 199 deductions, nor is there a provision that requires any IRC 199 deduction to be added back to business income. Thus, MBT taxpayers taxed as corporations that qualify for an IRC 199 deduction on their federal tax return will automatically experience a corresponding reduction in its MBT business income tax base and resulting MBT liability.

Pass-Through Entities. Federal taxable income for pass-through entities is determined under IRC 703 and 1363. Business income includes “payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders.” MCL 208.1105.

By its express terms, IRC 199 does not apply at the entity level with regard to pass-through entities and is not included in the federal taxable income of the entity. See IRC 199(d)(1)(A). Furthermore, IRC 199 is not an item of income or expense separately stated under IRC 702(a). See IRC 199, 703, and 1363. Rather, pass-through entities must directly report to shareholders, members, or partners each item of information needed to calculate the domestic production activities deduction at the shareholder, member, or partner level. Thus, the domestic production activities deduction is not applicable to pass-through entities for MBT purposes; rather, the IRC 199 deduction is taken at the shareholder, member, or partner level for Michigan income tax purposes.


M45. How is “fuel” defined for purposes of the “purchases from other firms” deduction under MCL 208.1113(6)? Does it include the cost of gas for all of a business' automobiles currently in use, including owned and leased vehicles? Does it include propane to run equipment? Does it include natural gas to run furnaces?

The following answer has been rescinded and replaced by M80 .  FAQ M80 revises M45 by removing the phrase “purchased in the tax year” from the last sentence in the second paragraph.
Whether fuel is a “purchase from other firm” under MCL 108.1113(6) depends upon whether the taxpayer's use of the fuel powers inventory or a depreciable asset acquired by the taxpayer during the tax year.

 

“Purchases from other firms” includes in pertinent part:

(a) inventory, as defined in MCL 208.1111(4), acquired during the tax year;

(b) assets acquired during the tax year of a type that are or will become eligible for depreciation, amortization, or accelerated capital cost recovery under the internal revenue code for federal income tax purposes; and

(c) to the extent not included in inventory (subparagraph (a)) or depreciable assets (subparagraph (b)), materials and supplies, including repair parts and fuel.

Materials and supplies in subparagraph (c) are those items taxpayer acquired during the tax year to be used or consumed in, and directly connected to, producing or managing inventory acquired (subparagraph (a)) or operating or maintaining depreciable assets acquired (subparagraph (b)) during the tax year. Therefore, fuel acquired in the tax year to be used in, and directly connected to, producing or managing inventory purchased in the tax year or operating and maintaining depreciable assets purchased in the tax year would be a “purchase from other firms” and deducted from gross receipts when determining the modified gross receipts tax base.

“Fuel” is not expressly defined in the MBT, but the term commonly refers to material used to produce heat or power by burning. In the example posed, gasoline purchased to power automobiles the taxpayer uses is not a “purchase from other firms” because automobiles used by taxpayer are not taxpayer's inventory. Gasoline purchased to power taxpayer's automobiles might be a “purchase from other firms” to the extent that such automobiles acquired during the tax year are depreciable assets for federal income tax purposes. Passenger automobiles, both owned and leased, are included as “listed property” under section 280F of the internal revenue code and may be eligible for depreciation deductions for federal income tax purposes, subject to specific rules and limitations. 26 USC § 280F; Treas. Reg § 1.280F-1T et seq.

Equipment and furnaces are generally depreciable assets for federal income tax purposes. Consequently, propane or natural gas purchased to run the equipment or furnace might be “purchases from other firms” if the equipment or furnace powered by the fuel was purchased during the tax year. Natural gas consumed for general space heating of a commercial office building would not be a “purchase from other firms;” however, natural gas purchased to run equipment or furnace designed to maintain temperature or dryness specifications necessary to preserve the quality and integrity of inventory purchased during the tax year might be a “purchase from other firm.” Therefore, whether a certain fuel purchased constitutes a “purchase from other firms” will depend upon the facts and circumstances of its use.


M46. Is the sale of stock by a stockholder in a closely held corporation back to the corporation or another stockholder subject to MBT?

The following answer has been rescinded and replaced by M70 .
For an individual, the sale of stock in a corporation will generally not constitute business income or gross receipts to that individual so long as the investment does not constitute or is part of the individual's trade or business.

The sale of stock would generally be included in a taxpayer's business income and gross receipts tax bases; however, there are specific exceptions. MCL 208.1105(2)(e)(i) provides that for an individual, estate, partnership or trust organized exclusively for estate or gift planning purposes, income from personal investment activity is not included in business income. Therefore, to the extent that the stockholder is an individual and that the sale of the stock is a personal investment activity that does not constitute nor is part of the individual's trade or business, then the sale of the stock is not included as business income subject to MBT. Also, for an individual, estate, partnership or trust organized exclusively for estate or gift planning purposes, proceeds from personal investment activity that does not constitute a trade or business are not included in the gross receipts tax base subject to MBT. MCL 208.1111(1)(v)(v). Therefore, if the stockholder is an individual and the sale of stock does not constitute nor is part of a trade or business, the amount received by the stockholder taxpayer for the sale of the stock would not be included in the modified gross receipts tax base.


M47. Are dividends from subsidiaries and interest income from unrelated parties included in the modified gross receipts tax base in the MBT?

The following answer has been rescinded and replaced by M71 .
Interest income from unrelated parties is included in a taxpayer's modified gross receipts (MGR) tax base, with one exception. MCL 208.111(1) Interest income received by a taxpayer that is an individual, estate or partnership organized exclusively for estate or gift planning purposes or trust organized exclusively for estate or gift planning purposes from the taxpayer's personal investment portfolio or retirement account or from transactions, activities and sources other than in the regular course of the taxpayer's trade or business is excluded from gross receipts.

The inclusion of dividends from a subsidiary into a taxpayer's MGR tax base depends upon whether the taxpayer is a unitary business group and whether the subsidiary is a member of the unitary group. Dividends from a subsidiary are included in a taxpayer's MGR tax base where the subsidiary is not a member of a unitary business group. Dividends from a subsidiary that is a member of a unitary business group taxpayer, however, are not included in the taxpayer's MGR tax base as the inter-company dividends are eliminated under MCL 208.1203(3) and MCL 208.1511.


M66. Can a taxpayer net the cost of purchased securities with the proceeds from those securities? For purposes of taxing the gain, is the cost the actual cost of the securities or the fair market value on January 1, 2008?

The following answer has been rescinded and replaced by M69 .
Generally, securities, such as stocks, bonds and similar intangibles, will be capital assets under section 1221 of the IRC unless the securities are inventory to the taxpayer. Receipts from the sale of capital assets could be taxable in both the business income and modified gross receipts tax bases of the MBT. Business income is generally defined as “that part of federal taxable income derived from business activity.” MCL 208.1105(2). To the extent the capital gain from the sale of the securities is derived from the business activity of the taxpayer, the gain must be included in the business income tax base of the MBT. For this purpose, the capital gain will be computed the same as it was federally, which is proceeds from the sale minus basis. The result will flow to the MBT return if the gain is derived from the business activity of the taxpayer. The “cost” or basis is the acquisition cost of the asset just as it is for federal purposes and is not the fair market value as of January 1, 2008, the date that the MBT went into effect.

For purposes of the modified gross receipts tax base, if the securities are sold at a gain then the proceeds of the sale of the securities minus any gain from the sale, to the extent that the gain was included in federal taxable income, will be excluded from the tax base.

If the securities were held for investment purposes by and are sold by an individual, estate, trusts or family limited partnerships (FLIP) that is specifically established for estate planning purposes, then the receipts on the sale of the securities are not taxable in either MBT tax base. MCL 208.1105(2) and 1111(v)(v).


Mi1. Revenue Administrative Bulletin 2001-2 describes provisions of the SBT related to the tax base of a foreign person for tax years beginning in or after 2000. Does RAB 2001-2 apply to the MBT?

The following answer has been rescinded and replaced by Mi40 .
Bulletins issued to provide guidance under the SBT are not necessarily applicable to the MBT. Furthermore, RAB 2001-2 generally addresses provisions of the SBT specific to foreign persons. Other than the definition of unitary business group under MCL 208.1117, which is limited to U.S. persons, the MBT does not distinguish between foreign and U.S. persons.


Mi5. Are limited liability companies subject to the MBT?

The following answer has been rescinded and replaced by Mi28 .
Yes. Under the MBT, taxpayer means “a person or a unitary business group liable for a tax, interest, or penalty.” MCL 208.1117(5). “Person” means “an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company , receiver, estate, trust, or any other group or combination of groups acting as a unit.” MCL 208.1113(3) (emphasis added). Thus, a limited liability company is a taxpayer subject to the MBT.


Mi6. What is the meaning of the acronym FIRE which appears in the presentation entitled MBT Overview–August 1, 2007 on the MBT Website?

The following answer has been rescinded and replaced by Mi34 .
The acronym FIRE, at slide 12 of the presentation, stands for Financial Sector, Insurance Sector and Real Estate Sector. The presentation, which was one of the Department's earliest overviews of the newly enacted Michigan Business Tax Act (MBTA), indicated that these industries may pay more under the MBT than under the SBT.

Insurance companies will pay a gross direct premiums tax of 1.25% under the MBT, as addressed in Chapter 2A of the MBTA. Financial institutions will pay a tax on net capital at a rate of 0.235%, as explained in Chapter 2B. Real estate entities, like all taxpayers not taxed under Chapters 2A or 2B, are subject to the Business Income and Modified Gross Receipts taxes found in MCL 208.1201 and MCL 208.1203, respectively.

On December 1, 2007, the MBTA was amended to impose, in addition to the taxes described above, an annual surcharge on each taxpayer, except insurance companies. The surcharge is equal to a specified percentage of the taxpayer's MBT liability, after allocation or apportionment to Michigan, but before calculation of the various credits in the MBTA.

For a financial institution, the MBT surcharge is 27.7% for tax years ending in 2008, and 23.4% for tax years ending in 2009 and later. Financial institutions authorized to exercise only trust powers are not subject to the surcharge.

For real estate entities, like all taxpayers other than insurance companies and financial institutions, the MBT surcharge is equal to 21.99% of MBT liability.

The amount of the surcharge imposed on any taxpayer, other than financial institutions, cannot exceed $6,000,000.00 for any single tax year.


Mi18. Are limited liability companies subject to the MBT?

The following answer has been rescinded and replaced by Mi28 .
Yes. Under the MBT, taxpayer means “a person or a unitary business group liable for a tax, interest, or penalty.” MCL 208.1117(5). “Person” means “an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit.” MCL 208.1113(3) (emphasis added). Thus, a limited liability company is a taxpayer subject to the MBT.

However, to the extent that a limited liability company is a single member limited liability company disregarded for federal tax purposes, then the owner of that limited liability company will be the taxpayer under the MBT. The disregarded single member limited liability company will be treated as a sole proprietorship, branch, or division of its owner.


Mi 25. Does the MBT follow the federal check-the-box regulations?

The following answer has been rescinded and replaced by Mi44.
Yes. Effective January 1, 1997, a separate business entity that is not required to be classified as a corporation for tax purposes is permitted to elect its entity classification under the federal “check-the-box” provisions of the Federal Income Tax Regulations, Treas Reg § 301.7701-3. These check-the-box regulations allow an unincorporated entity, such as a limited liability company ("LLC"), to elect to be taxed as a corporation. An unincorporated entity with at least two members that fails to elect corporate tax treatment will, by default, be taxed as a partnership. An unincorporated entity with one member that fails to elect corporate tax treatment will, by default, be disregarded as an entity separate from its owner for federal tax purposes. A single member entity, such as a single member LLC ("SMLLC"), that is disregarded for federal tax purposes will be treated as a sole proprietorship, branch, or division of its owner.

For MBT purposes, a person is defined in MCL 208.1113(3) to include various types of entities, including partnerships, corporations, and LLCs. An entity that has elected or is required to file as a corporation or partnership under the Internal Revenue Code is by definition a corporation or partnership under the MBT act, MCL 208.1107(3) and 208.1113(2). These statutory definitions effectively adopt the federal check-the-box regulations for MBT purposes.

To the extent a SMLLC is a disregarded entity for federal tax purposes, the owner of the SMLLC is the MBT taxpayer, and the SMLLC will be treated as either a sole proprietorship or as a branch or division of its owner. A SMLLC will be the MBT taxpayer only if it elects to be taxed as a corporation under the federal check-the-box regulations and is not part of a unitary group.


Mi27. Are controlled foreign corporations ("CFC's") under IRC 957 taxpayers under the MBT? Can controlled foreign corporations be members of a unitary business group? What if the controlled foreign corporation is a disregarded entity of a U.S. parent?

The following answer has been rescinded and replaced by Mi45.

CFC's as Taxpayers. Under the MBT, taxpayer means “a person or a unitary business group liable for a tax, interest, or penalty.” MCL 208.1117(5). “Person” means “an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit.” MCL 208.1113(3). Other than the definition of unitary business group under MCL 208.1117, which is limited to U.S. persons, the MBT does not distinguish between foreign and U.S. persons. Thus, controlled foreign corporations are taxpayers under the MBT.

CFC's as Members of a Unitary Business Group. A unitary business group is defined – in part – as:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons … [MCL 208.1117(6) (emphasis added).]

“United States person” means “that term as defined in [IRC] 7701(a)(30).” MCL 208.117(7). Under IRC 7701(a)(30), “United States person” means:

(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate, within the meaning, of paragraph (31)), and
(E) any trust if -
    (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
    (ii) one or more United States persons have the authority to control all substantial decisions of the trust. [IRC 7701(a)(30).]

A controlled foreign corporation means:

any foreign corporation if more than 50 percent of -

(1) the total combined voting power of all classes of stock of such corporation entitled to vote, or
(2) the total value of the stock of such corporation,

is owned (within the meaning of section 958(a) ), or is considered as owned by applying the rules of ownership of section 958(b) , by United States shareholders on any day during the taxable year of such foreign corporation. [IRC 957(a).]

As a foreign corporation, a controlled foreign corporation is not a U.S. person and is thus excluded from the definition of unitary business group under the MBT.

CFC's as Disregarded Subsidiary of U.S. Parent. As stated above, unitary business groups cannot include foreign corporations. Therefore, a controlled foreign corporation that is a disregarded subsidiary of a U.S. cannot be a member of a unitary business group – even one that includes its U.S. parent. In that case, the foreign entity must file a separate return.


Mi 28. Are single member limited liability companies and qualified subchapter S subsidiaries ("QSubs") disregarded for federal tax purposes also disregarded under the MBT?

The following answer has been rescinded and replaced by Mi46.

Single Member Entities. Under federal regulations known as check-the-box regulations, an eligible domestic entity may elect to be classified for federal tax purposes as an association taxable as a corporation or as a partnership. Treas Reg 301.7701-1 - 301.7701-3. If the entity declines to make an election, federal regulations provide for automatic default classifications. Specifically, corporations and certain other organizations that are required to be corporations for federal tax purposes are not eligible for entity election. However, unincorporated entities, such as limited liability companies having two or more members, may elect to be taxed as a corporation; otherwise, the entity will be classified by default as a partnership for federal tax purposes.

Similarly, a single member entity, such as a single member limited liability company, may elect to be taxed as a corporation or – by default – disregarded as an entity separate from its owner for federal tax purposes. Under the federal regulations, a single member entity disregarded as a separate entity is treated as a sole proprietorship, branch, or division of its owner. Treas Reg 301.7701-1 - 301.7701-3.

In general, the MBT conforms to the federal check-the-box regulations. For example, "corporation” means a taxpayer that is required to file or has elected to file as a corporation for federal tax purposes. MCL 208.1107(3). In addition, "partnership” is defined as a taxpayer that is required to file or has elected to file as a partnership for federal tax purposes. MCL 208.1113(2). Furthermore, the business income component of the MBT is computed using federal taxable income as a starting point, which – in turn – relies on the tax classifications governed by the check-the-box regulations.

Thus, a single member entity, including limited liability companies, disregarded for federal tax purposes will be similarly disregarded under the MBT. In other words, an entity disregarded for federal tax purposes will be treated as a sole proprietorship, branch, or division of its owner. The owner of the disregarded entity will be the taxpayer under the MBT.

QSubs. The MBT also conforms to the federal QSub election. Under federal tax provisions, the separate existence of a QSub is ignored. An S corporation and its QSub are deemed to be one corporation and file a single federal income tax return. For MBT purposes, the QSub is disregarded as an entity and the S corporation and its QSub must file a single return (or as part of the combined return of a unitary business group).

An MBT taxpayer with a QSub must attach a copy of its federal QSub election form to its MBT return for the year the election is made or the first year the election is reflected on the MBT return if not previously attached to one of its SBT returns.


U6. Would a group of companies who have a flow of value between them but are owned by two unrelated persons, each owning 50%, be considered a unitary business group?

The following answer has been rescinded and replaced by U51 .

No. To meet the definition of a unitary business group in the Michigan Business Tax Act (MBTA) the U.S. persons, other than foreign operating entities, which cannot be included in the group, must pass a control test and 1 of 2 relationship tests. MCL 208.1117(6). The control test requires that one of the U.S. persons own or control, directly or indirectly, more than 50% of the ownership interests with voting rights or similar rights of the other U.S. persons. MCL 208.1117(6).

For purposes of MBTA section 117(6), the Department will use as guidance attribution rules expressed in IRC § 318 or analogous authority to determine indirect or constructive ownership and control. While IRC § 318 specifically pertains to corporate stock ownership, the Department will apply its principles to all forms of entities subject to the MBT.

As the subject persons are described as nonrelated and each owning 50% of the group, the control test in section 117(6) is not met. Thus, these entities do not comprise a unitary business group.


U8. What is a unitary business group?

The following answer has been rescinded and replaced by U33 .
Generally, a unitary business group is a group of related persons - including entities - whose business activities or operations are interdependent. More specifically, a unitary business group is two or more persons that satisfy both a control test and one of two relationship tests . MCL 208.1117(6). A unitary business group is a single taxpayer under the MBT and must file a combined return. MCL 208.1117(5), 208.1511. Foreign persons and foreign operating entities cannot be part of a unitary business group.

Control Test. The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interest with voting or comparable rights of the other person or persons. Generally, indirect ownership is determined using IRC 318, except that the Department will apply IRC 318 to all forms of ownership interests.

Relationship Tests . In addition to satisfying the control test, the group of persons must have business activities or operations that (1) result in a flow of value between or among persons in the group, or (2) are integrated with, are dependent upon, or contribute to each other.

Flow of value is established when members of the group demonstrate one or more of functional integration, centralized management, and economies of scale. Examples of functional integration include common programs or systems and shared information or property. Examples of centralized management include common management or directors, shared staff functions, and business decisions made for the group rather than separately by each member. Examples of economies of scale include centralized business functions and pooled benefits or insurance. Groups that commonly exhibit a flow of value include vertically or horizontally integrated businesses, conglomerates, parent companies with their wholly owned subsidiaries, and entities in the same general line of business. Flow of value must be more than the mere flow of funds arising out of passive investment.

Businesses are integrated with, are dependent upon, or contribute to each other under many of the same circumstances that establish flow of value. However, this alternate relationship test is also commonly satisfied when one entity finances the operations of another or when there exist intercompany transactions, including financing.


U16. If you are an entity within the unitary group that does not have nexus without application of the unitary principal, are your shareholders liable for Michigan personal income tax?

The following answer has been rescinded and replaced by U59 .

No. If the (flow through) entity standing alone lacks nexus with the State of Michigan under the Due Process and Commerce Clauses of the U.S. Constitution, or under the statutory jurisdictional standards for activities protected under P.L. 86-272, the shareholders, partners, or other individual owners are not subject to Michigan income tax on their share of profits from the business activity. The Michigan Income Tax Act, 1967 P.A. 281, MCL 206.1 – 206.532, does not provide for unitary groups or combined reporting, and apportionment must be determined on a separate entity basis. For purposes of this determination, separate entities do not include entities disregarded for federal tax income purposes, such as federal Qualified Subchapter S Subsidiaries (Q-Subs) or unincorporated single member limited liability companies (SMLLCs).


U19. Is an individual a member of a unitary business group with the entities in which the individual has a controlling interest?

The following answer has been rescinded and replaced by U60 .

It depends. Under the MBT, a unitary business group is:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. [MCL 208.1117(6).]

An individual that owns a controlling interest in one or more entities but is not otherwise engaged in a trade or business will have neither business income nor gross receipts under the MBT. MCL 208.1105, 208.1111. Furthermore, an individual not engaged in a trade or business has no business activities or operations which would result in a flow of value with – or would be integrated with, dependent upon, or contribute to – the entities in which the individual owns a controlling interest. Thus, an individual not engaged in a trade or business is not unitary with the entities in which that individual has a controlling interest.

On the other hand, an individual that is a sole proprietor or owner of a disregarded entity, or is otherwise engaged in a trade or business resulting in business income or gross receipts under the MBT, may be unitary with the entities in which that individual has a controlling interest if the individual has business activities or operations (1) which result in a flow of value between or among persons included in the unitary business group or (2) that are integrated with, are dependent upon, or contribute to each other. MCL 208.1117(6).


U23. What is a unitary business group?

The following answer has been rescinded and replaced by U48 .

The designated member of a unitary business group must register with the Department for the MBT. "Designated member” means a member of a unitary business group that has nexus with Michigan under MCL 208.1200 and that will file the combined return required under MCL 208.1511 for the unitary business group. Only the designated member must register, and the MBT return will be filed under its FEIN.

If the member that owns or controls the other members of the unitary business group has nexus with Michigan, then that controlling member must be the designated member. Otherwise, the designated member can be any member of the unitary business group with nexus. The designated member must remain the same every year unless the designated member ceases to be a member of the unitary business group or the controlling member engages in activity in Michigan that subjects that member to nexus.

While only the designated member will register with the Department, all members of the unitary group will be listed on the group's annual return.


U24. If five or fewer persons who are unrelated individuals, estates or trusts own a controlling interesting in a brother-sister group of entities, will that satisfy the control test for purposes of qualifying as a unitary business group?

The following answer has been rescinded and replaced by U52.

No, so long as none of the five or fewer unrelated individuals, estates or trusts own more than 50% of the brother-sister group of entities.

Under the MBT, a unitary business group is:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. [MCL 208.1117(6).]

The Department will follow IRC 318 or analogous authority to determine indirect, or constructive, ownership and control, except that the Department will apply IRC 318 to all ownership interests.

Under the SBT, controlled groups and entities under common control were generally defined to include situations where the same five or fewer unrelated individuals, estates or trusts owned a controlling interest in two or more entities taking into account the ownership of each such person only to the extent such ownership is identical with respect to such entity. See, e.g., RAB 1989 48. However, so long as none of the five or fewer unrelated individuals, estates or trusts own more than 50% of the brother-sister group of entities, these control tests under the SBT do not apply to the MBT for purposes of determining a unitary business groups.


U30. Are foreign entities includable in unitary business group? What if the foreign entity is the single member of a domestic single member limited liability company disregarded for federal tax purposes?

The following answer has been rescinded and replaced by U36 .

A unitary business group is defined – in part – as:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons . . . . [MCL 208.1117(6) (emphasis added).]

“United States person” means "that term as defined in [IRC] 7701(a)(30).” MCL 208.117(7). Under IRC 7701(a)(30), "United States person” means:

(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D)any estate (other than a foreign estate, within the meaning, of paragraph (31)), and
(E) any trust if—
(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust. [IRC 7701(a)(30).]

A partnership or corporation is "domestic” when that entity is "created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.” IRC 7701(a)(4).

In other words, a foreign entity is not a U.S. person and is therefore excluded from unitary business groups. Similarly, foreign operating entities are also excluded from unitary business groups under the MBT. "Foreign operating entity” means a U.S. person that:

(a) Would otherwise be a part of a unitary business group that has at least 1 person included in the unitary business group that is taxable in this state.

(b) Has substantial operations outside the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or a political subdivision of any of the foregoing.

(c) At least 80% of its income is active foreign business income as defined in section 861(c)(1)(B) of the internal revenue code. [MCL 208.1109(5).]

Foreign entities or foreign operating entities are excluded even if that entity owns a domestic single member limited liability company disregarded for federal tax purposes. The domestic disregarded entity and foreign parent will file separately – the domestic subsidiary as part of the unitary business group and the foreign entity, or foreign operating entity, as a separate taxpayer. [Note: The insertion of a foreign entity or foreign operating entity into a chain of ownership does not cut off the entities under the foreign entity from the unitary business group so long as the control and relationship tests for a unitary business group are satisfied.]

Foreign entities or foreign operating entities are also excluded if that entity is the disregarded entity of a domestic entity included in a unitary business group. In that case, the foreign entity must file a separate return.


U31. Are controlled foreign corporations ("CFC's") under IRC 957 taxpayers under the MBT? Can controlled foreign corporations be members of a unitary business group? What if the controlled foreign corporation is a disregarded entity of a U.S. parent?

The following answer has been rescinded and replaced by U60 .

CFC's as Taxpayers. Under the MBT, taxpayer means "a person or a unitary business group liable for a tax, interest, or penalty.” MCL 208.1117(5). "Person” means "an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit.” MCL 208.1113(3). Other than the definition of unitary business group under MCL 208.1117, which is limited to U.S. persons, the MBT does not distinguish between foreign and U.S. persons. Thus, controlled foreign corporations are taxpayers under the MBT.

CFC's as Members of a Unitary Business Group. A unitary business group is defined - in part - as:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons . . . . [MCL 208.1117(6) (emphasis added).]

“United States person” means "that term as defined in [IRC] 7701(a)(30).” MCL 208.117(7). Under IRC 7701(a)(30), "United States person” means:

(A) a citizen or resident of the United States,

(B) a domestic partnership,

(C) a domestic corporation,

(D) any estate (other than a foreign estate, within the meaning, of paragraph (31)), and

(E) any trust if -

(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and

(ii) one or more United States persons have the authority to control all substantial decisions of the trust. [IRC 7701(a)(30).]

A controlled foreign corporation means:

any foreign corporation if more than 50 percent of -

(1) the total combined voting power of all classes of stock of such corporation entitled to vote, or

(2) the total value of the stock of such corporation,

is owned (within the meaning of section 958(a) ), or is considered as owned by applying the rules of ownership of section 958(b) , by United States shareholders on any day during the taxable year of such foreign corporation. [IRC 957(a).]

As a foreign corporation, a controlled foreign corporation is not a U.S. person and is thus excluded from the definition of unitary business group under the MBT.

CFC's as Disregarded Subsidiary of U.S. Parent. As stated above, unitary business groups cannot include foreign corporations. Therefore, a controlled foreign corporation that is a disregarded subsidiary of a U.S. cannot be a member of a unitary business group – even one that includes its U.S. parent. In that case, the foreign entity must file a separate return.


U36. Are foreign entities includable in unitary business group? What if the foreign entity is the single member of a domestic single member limited liability company disregarded for federal tax purposes?

The following answer has been rescinded and replaced by U61 .

A unitary business group is defined - in part - as:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons . . . . [MCL 208.1117(6) (emphasis added).]

“United States person” means "that term as defined in [IRC] 7701(a)(30).” MCL 208.117(7). Under IRC 7701(a)(30), "United States person” means:

(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D)any estate (other than a foreign estate, within the meaning, of paragraph (31)), and
(E) any trust if-
(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust. [IRC 7701(a)(30).]

A partnership or corporation is "domestic” when that entity is "created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.” IRC 7701(a)(4).

In other words, a foreign entity is not a U.S. person and is therefore excluded from unitary business groups. Similarly, foreign operating entities are also excluded from unitary business groups under the MBT. "Foreign operating entity” means a U.S. person that:

(a) Would otherwise be a part of a unitary business group that has at least 1 person included in the unitary business group that is taxable in this state.

(b) Has substantial operations outside the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, or a political subdivision of any of the foregoing.

(c) At least 80% of its income is active foreign business income as defined in section 861(c)(1)(B) of the internal revenue code. [MCL 208.1109(5).]

Foreign entities or foreign operating entities are excluded even if that entity owns a domestic single member limited liability company disregarded for federal tax purposes. The domestic disregarded entity and foreign parent will file separately - the domestic subsidiary as part of the unitary business group and the foreign entity, or foreign operating entity, as a separate taxpayer. [Note: The insertion of a foreign entity or foreign operating entity into a chain of ownership does not cut off the entities under the foreign entity from the unitary business group so long as the control and relationship tests for a unitary business group are satisfied.]

Foreign entities or foreign operating entities are also excluded if that entity is the disregarded entity of a domestic entity included in a unitary business group. In that case, the foreign entity must file a separate return.


U40. A dental practice organized as a sole proprietorship became a professional limited liability company ("PLLC") effective January 1, 2008. For federal income tax purposes, the PLLC is a disregarded entity and the member reports his income as a sole proprietor on federal schedule C.

Can the owner of the dental practice continue to file as a sole proprietor for Michigan individual and MBT purposes?

The owner or single member of the PLLC also owns the building the PLLC uses for the dental practice, and effective January 1, 2008, will be renting the building to the PLLC. The owner and spouse also own an additional rental property. Should the rental income and be combined with the PLLC income for MBT purposes, or should the PLLC and rental activity each be separately reported?

The following answer has been rescinded and replaced by U62 .

A group of businesses that meets the definition of unitary group is a taxpayer and is required to file a combined return for MBT. Under the MBT, a unitary business group is defined in section 117 (MCL 208.1117(6)) as:

a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. [MCL 208.1117(6).]

A single member PLLC that is a disregarded entity for federal income tax purposes is considered a sole proprietorship for Michigan and federal tax purposes, and may be unitary with any other entities in which that individual owner has a controlling interest if the individual has business activities or operations (1) which result in a flow of value between or among persons included in the unitary business group or (2) that are integrated with, are dependent upon, or contribute to each other. MCL 208.1117(6).

In the case of an individual who owns and leases an office building or any other real or tangible property to a sole proprietorship, single member limited liability company, or any other business entity in which he or she has a controlling interest (greater than a 50% ownership interest), the business activity and rental activity will constitute a unitary group under MCL 208.1117 because the individual owns a controlling interest in each activity and there is a flow of value between the business activity and the rental activity, and they are integrated with, dependent upon, and contribute to each other.

If the individual owns another rental property that is not leased or rented to the business entity owned by the individual, the rental property will be part of the unitary group if there is a flow of value between the activities or if they are integrated with, dependent upon, and contribute to each other. As a general rule, rental properties owned and managed by the same individual owner will be integrated with, dependent upon, and contribute to each other, and therefore be considered a unitary group under the MBT.

For purposes of these ownership requirements, property owned by a spouse (other than spouses who are legally separated under a decree of divorce or separate maintenance) is deemed to be owned by the other spouse and vice versa.