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Michigan Corporate Income Tax Guidance Released by Dept of Treasury PART 1…

December 23, 2011

On December 23, 2011, the Michigan Department of Treasury released additional guidance on the new Corporate Income Tax (CIT). According to a Treasury representative, this is the second of several sets of FAQs that will be issued. The FAQ contains several topics that pertain to the transition from the Michigan Business Tax (MBT). Additional guidance regarding the MBT is available in various Revenue Administrative Bulletins and FAQs previously issued on the MBT. Below is the full listing of FAQs released to date...

Filing Requirements:

  • Filing Requirement 1. When does the CIT take effect?

    Answer:
    The Corporate Income Tax is effective as of January 1, 2012. The CIT replaces the Michigan Business Tax; however, MBT taxpayers who have received or been assigned certain certificated credits may elect to continue to file under the MBT rather than the new CIT in order to claim such credits.
  • Filing Requirement 2. Who must file CIT quarterly estimates?

    Answer:
    Taxpayers reasonably expecting an annual tax liability exceeding $800 must file quarterly estimates.
  • Filing Requirement 3. When are CIT quarterly estimates due?

    Answer:
    Quarterly returns and payments for calendar year filers are due April 15, July 15, October 15, and January 15. Taxpayers not on a calendar year basis shall file quarterly returns and make estimated payments on the appropriate due date which in the taxpayer's fiscal year corresponds to the calendar year; that is, quarterly returns and estimates for fiscal year filings are due the 15th day of the first month after each quarter.

    If filing monthly using Form 160, Combined Return for Michigan Taxes, and not making remittances by electronic funds transfer, monthly payments may be filed on the 20th day of the month. For example, a calendar year taxpayer may file monthly CIT estimates using Form 160 on February 20th, March 20th, and April 20th rather than April 15 for the quarter. However, for taxpayers required to make remittances by electronic funds transfer or otherwise not using Form 160, CIT estimates remain due on the 15th day of the month following the final month of the quarter. Regardless of the method chosen, the estimated CIT for the quarter must also reasonably approximate the liability for the quarter.
  • Filing Requirement 4. When are CIT Annual Returns due?

    Answer:
    CIT Annual Returns must be filed?and final liability remitted?by the last day of the 4th month after the end of the taxpayer's tax year. Taxpayers (other than Insurance Companies or Financial Organizations) are not required to file a return or pay the tax if their apportioned gross receipts are less than $350,000. The filing threshold is annualized for tax years of less than 12 months. In addition, any taxpayer whose tax liability is $100 or less does not need to file a return or pay the tax.
  • Filing Requirement 5. How can I get an extension of time to file a CIT Annual Return?

    Answer:
    Taxpayers seeking an extension must file a Michigan Application for Extension of Time to File Michigan Tax Returns by the due date of the CIT annual return, together with payment of estimated tax.
  • Filing Requirement 6. If I'm registered for the MBT, what do I need to do to register for the CIT?

    Answer:
    You are automatically registered for the CIT if you are currently registered for the MBT and meet the definition of "taxpayer" found in the CIT at MCL 206.611(5).
  • Filing Requirement 7. When will forms be available for the Corporate Income Tax?

    Answer:
    We are on schedule to have the 2012 Corporate Income Tax (CIT) forms and instructions available on the same schedule as the quarterly and annual returns for the other Michigan taxes.

    Quarterly estimated CIT forms will be mailed to taxpayers starting in early January 2012 for payment of their CIT estimates.

    When the legislature adjourns for the year in December 2012, annual returns will be finalized, posted on our web site, and sent to the printers. We anticipate that paper forms and instructions will be available for distribution to the public in January 2013.

    Fiscal year taxpayers will be granted an automatic extension for their 2012 fiscal year annual CIT return or 2012 fiscal year annual MBT election return. Returns for fiscal years ending in 2012 will be due the same date as 2012 calendar year returns, which is April 30, 2013. An extension request form need not be filed unless required to transmit payment of any tax due with the annual return. The annual return tax due must be paid by the original due date, which is the last day of the fourth month after the end of the fiscal year.

    In addition, beginning in February 2012, taxpayers will be able to pay their CIT estimate on their Combined Return for Michigan Taxes (Form 160).
  • Filing Requirement 8. Does the CIT follow the federal check-the-box regulations?

    Answer:
    Yes. A person that is required or has elected to file as a C corporation as defined under sections 1361(a)(2) and 7701(a)(3) of the IRC is by definition a corporation under the CIT. This statutory definition effectively adopts the federal "check-the-box" regulations for CIT purposes.

    C corporations, insurance companies, financial institutions, and unitary business groups are subject to tax under the CIT.
  • Filing Requirement 9. May a taxpayer make estimated CIT payments on Form 160, the Combined Return for Michigan Taxes, and if so, how will the different due dates be reconciled?

    Answer:
    Yes. At the option of the taxpayer, any MBT overpayments from the final return may be either refunded or carried forward and applied to the initial CIT return. For fiscal year filers, the final MBT return must be made on a short year return filed for the period ending on December 31, 2011. The due date of the final MBT short year return will be April 30, 2012. If payment of the estimated tax due is made on or before this due date with an extension request, an extension of time to file the short year return will automatically be granted until the standard fiscal year due date.

    The Department will handle the situation of a taxpayer with an MBT overpayment that will no longer be a taxpayer after December 31, 2011, by applying section 30 of the "Revenue Act" (MCL 205.30). Section 30 governs overpayments and directs that the overpayment shall be first applied to any known liability as provided in section 30a (MCL 205.30a), and the excess, if any, at the taxpayer's request, shall be refunded or credited against any current or subsequent tax liability.
  • Filing Requirement 10. Will MBT overpayments be applied to CIT?

    Answer:
    Yes. At the option of the taxpayer, any MBT overpayments from the final return may be either refunded or carried forward and applied to the initial CIT return. For fiscal year filers, the final MBT return must be made on a short year return filed for the period ending on December 31, 2011. The due date of the final MBT short year return will be April 30, 2012. If payment of the estimated tax due is made on or before this due date with an extension request, an extension of time to file the short year return will automatically be granted until the standard fiscal year due date.

    The Department will handle the situation of a taxpayer with an MBT overpayment that will no longer be a taxpayer after December 31, 2011, by applying section 30 of the "Revenue Act" (MCL 205.30). Section 30 governs overpayments and directs that the overpayment shall be first applied to any known liability as provided in section 30a (MCL 205.30a), and the excess, if any, at the taxpayer's request, shall be refunded or credited against any current or subsequent tax liability.
  • Filing Requirement 11. What is the filing threshold under Part 2 of the Income Tax Act of 1967 (ITA) that imposes the CIT?

    Answer:
    Section 685(1) (MCL 206.685(1)) of the ITA directs that a taxpayer, other than an insurance company or financial institution, whose apportioned or allocated gross receipts are less than $350,000.00, does not need to file a return or pay the tax imposed under Part 2 of the ITA. Section 685(1) also directs that a taxpayer whose CIT tax liability is less than or equal to $100.00 does not need to file a return or pay the tax imposed under Part 2.

    This section clearly excludes insurance companies and financial institutions from the $350,000.00 filing threshold. An insurance company or financial institution with an annual liability of $100.00 or less is not required to file a CIT annual return or pay the tax.
  • Filing Requirement 12. Can a fiscal year filer request an extension for the first CIT return?

    Answer:
    Fiscal year taxpayers will be granted an automatic extension for their 2012 fiscal year annual CIT return or 2012 fiscal year annual MBT election return. Returns for fiscal years ending in 2012 will be due the same date as 2012 calendar year returns, which is April 30, 2013. However, an extension of time to file is not an extension of time to pay. An extension request form need not be filed unless required to transmit payment of any tax that would be due with the annual return. The annual return tax due must be paid by the original due date, which is the last day of the fourth month after the end of the fiscal year.

    A fiscal year taxpayer may request an additional extension on Form 4, Application for Extension of Time to File Michigan Tax Returns, if the extension to April 30, 2013, is not sufficient, e.g., a taxpayer with a fiscal year ending November 2012, with a federal extension granted through September 2013.
  • Filing Requirement 13. How are quarterly estimates calculated?

    Answer:
    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 2013 and after, if prior year's tax under the CIT or MBT election is $20,000 or less, estimated tax may be based on the 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 expected to be $800 or less, quarterly returns are not required.
  • Filing Requirement 14. Will a safe harbor be allowed for 2012 estimates based on the 2011 MBT return?

    Answer:
    No. For the 2012 tax year, estimated CIT payments must be computed on the actual Corporate Income Tax Base of the period. No interest will be charged if payments are made on time, 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 MBT liability.

    For the 2013 and subsequent tax years, if prior year's tax is $20,000 or less, estimated tax may be based on the prior year's amount in four equal payments, the sum of which equals the previous year's tax liability.

    However, a taxpayer with a certificated credit who elects to continue to be taxed under the Michigan Business Tax Act (MBTA) can base its estimates on its 2011 MBT tax liability to determine if it falls under the safe harbor of four equal estimated payments that total the prior year's liability of $20,000 or less. See MCL 208.1501(4)(b) of the MBTA.
  • Filing Requirement 15. How must a fiscal year taxpayer calculate quarterly estimated payments if one quarter straddles the period in which the MBT ends and the CIT begins? Must a fiscal year taxpayer pay its final MBT quarterly estimated payment or can the taxpayer pay all remaining liability on its final MBT return?

    Answer:
    The first CIT estimate is based on the number of months in the fiscal year quarter that fall within 2012. The quarterly estimate should be based on the actual Corporate Income Tax base of the single month and should not be computed using any period from the last MBT tax year. Estimates cannot be based on the prior year's MBT tax liability.

    A taxpayer must file its estimated MBT quarterly returns by the due date. If the taxpayer fails to make the estimated payment to cover the estimated MBT tax liability, the taxpayer is subject to penalty. The fact that the taxpayer's payment on the final return covers the taxpayer's liability does not negate a penalty liability for failure to make the estimated MBT quarterly payment required. The existing requirements governing payment of MBT liability continue to apply and will be enforced.
  • Filing Requirement 16. 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 Michigan Business Tax?

    Answer:
    If the extension request shows that estimated payments have been made that result in no unpaid estimated tax liability for the tax period covered by the extension, then no payment must accompany the extension request.
  • Filing Requirement 17. Will Voluntary Disclosure continue with the Corporate Income Tax (CIT)?

    Answer:
    Yes, the Department is required to administer the CIT under the Revenue Act, 1941 PA 122. See MCL 206.693(1). Voluntary Disclosure agreements are provided for under the Revenue Act at MCL 205.30c. The State Treasurer, or a representative, is authorized to enter into a voluntary disclosure agreement with non-filers that have a nexus filing responsibility and who meet certain other statutory criteria. Under a voluntary disclosure agreement, eligible persons may file returns and pay taxes and interest for a limited lookback period of four years without imposition of penalties, in exchange for future tax compliance.

    While Voluntary Disclosure will continue with the CIT, a taxpayer must still meet the statutory qualifications to enter into an agreement.
  • Filing Requirement 18. Can a taxpayer who claims an error was made in the calculation of a CIT quarterly estimated payment request a refund of that payment without filing an annual CIT return?

    Answer:
    Generally, no. Estimated payments are required for taxpayers who expect to owe an annual liability in excess of $800.00. MCL 206.681(1). The amount, manner of payment, and due dates of the quarterly estimated payments are all established in MCL 206.681. Payments made under MCL 206.681 are a credit against the payment required with the annual return required under MCL 206.685. MCL 206.685 requires all taxpayers with a filing obligation to file an annual or final return in the form and content prescribed by the department by the last day of the fourth month after the end of the taxpayer's tax year.

    A refund claim of overpaid CIT estimates may be made pursuant to MCL 205.30(2) of the Revenue Act, which states:

    (2) A taxpayer who paid a tax that the taxpayer claims is not due may petition the department for refund of the amount paid within the time period specified as the statute of limitations in section 27a [of the Revenue Act]. If a tax return reflects an overpayment or credits in excess of the tax, the declaration of that fact on the return constitutes a claim for refund. If the department agrees the claim is valid, the amount of overpayment, penalties, and interest shall be first applied to any known liability as provided in section 30a, and the excess, if any, shall be refunded to the taxpayer or credited, at the taxpayer's request, against any current or subsequent tax liability.
  • Filing Requirement 19. The first CIT annual returns could be due before CIT forms are released to the taxpayer public. Will penalties be waived for these first CIT returns if taxpayers make a good-faith guess as to liability?

    Answer:
    Because fiscal year taxpayers will be granted an automatic extension for their 2012 fiscal year annual return with an extended due date of April 30, 2013, CIT annual returns will not be due before forms are released in January 2013.

    In accordance with the CIT, "interest and penalty provided by this part shall not be assessed ... (a) 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 estimated payment was made." MCL 206.681(3)(a). While the Revenue Act also provides for imposition of penalties "if a taxpayer fails or refuses to file a return or pay a tax within the time specified" [MCL 205.24(2)], penalties would not be imposed if the criteria of MCL 206.681 are timely met.

Nexus & Apportionment:

  • Nexus & Apportionment 1. Is the occasional sale of assets by a taxpayer a "sale" for apportionment purposes?

    Answer:
    No, so long as the assets sold are neither stock in trade nor inventory and are not held by the taxpayer for sale to customers in the ordinary course of the taxpayer's business. This determination is made on a facts and circumstances basis. For example, the occasional and isolated sale of a desk by a law firm is not a "sale" under MCL 206.609(4)(a); the desk does not constitute stock in trade or inventory to the law firm and is not held by the taxpayer primarily for sale to customers in the ordinary course of the law firm's business. In contrast, if the law firm operates a program under which office furniture is routinely and systematically sold at auction, then such sales would be "sales" under MCL 206.609(4)(a).

    If a transaction is not a "sale" under MCL 206.608(4), it will be excluded from both the numerator and denominator of the sales factor. "Sales" under MCL 206.609(4) may still be included in the corporate income tax base.
  • Nexus & Apportionment 2. How are gross receipts, rents etc. received from real property apportioned?

    Answer:
    Receipts from the sale, lease, rental or licensing of real property are Michigan sales if the property is located in Michigan. MCL 206.665(1)(b).
  • Nexus & Apportionment 3. Does the CIT provide for "throw back sales"?

    Answer:
    No, the CIT does not provide for "throw back sales." A "throw back sale" describes a situation in which the income or activity from a Michigan taxpayer's sale of tangible personal property to an out-of-state purchaser is not taxable in the state of the purchaser. The sale would then be "thrown back" to Michigan for inclusion in the sales apportionment factor's numerator, thereby increasing the sales apportionment factor.

    Sales to destinations outside Michigan need not be included in the CIT sales factor numerator regardless of whether nexus exists or tax is paid in the destination jurisdiction. MCL 206.665(1)(a). However, if the taxpayer does not have nexus in at least one other state, it cannot apportion its tax base, and any corporate income or net capital tax base must be allocated to Michigan. MCL 206.661(3). The direct premiums tax base for insurance companies is not subject to apportionment.
  • Nexus & Apportionment 4. How does a unitary business group apportion its tax base when some members of the group do not have nexus with Michigan?

    Answer:
     For a unitary business group with business activities within and without Michigan, as defined in MCL 206.661(2), the unitary business group's corporate income tax base is apportioned to Michigan by multiplying it by the combined sales factor of the members of the unitary business group. The tax base of a unitary business group is calculated according to MCL 206.623, combining all the unitary business group members' business income. The sales factor is Michigan sales divided by everywhere sales. The sales of all members of the unitary group are included in both the numerator and the denominator. Transactions between unitary business group members are eliminated when determining the group's combined tax base and apportionment. A unitary business group member's business income and sales are included in the calculation of the tax base and apportionment whether or not the member has nexus with Michigan.
  • Nexus & Apportionment 5. What are the nexus standards under the CIT?

    Answer:
    A taxpayer, other than an insurance company, has nexus with Michigan and is subject to the tax imposed under the CIT if (a) the taxpayer has a physical presence in this state for more than one day in a tax year, (b) the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to Michigan, or (c) the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly, or indirectly through one or more other flow-through entities, that has nexus in Michigan.  MCL 206.621(1).  The same nexus standard applies to a financial institution with regard to the imposition of the franchise tax.  MCL 206.653.

    However, the corporate income tax is limited by federal statutory provisions commonly referred to as PL 86-272, which prohibits Michigan from imposing an income tax if the only in-state business activity of the out-of-state person is the solicitation of orders for sales of tangible personal property where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state.  15 USC 381 et seq.  Once a taxpayer exceeds the safe harbor of PL 86-272, the taxpayer is then subject to the corporate income tax on its entire tax base, including that portion of income otherwise protected by PL 86-272. 

    Protection under PL 86-272 does not apply to financial institutions, as they are subject to a franchise tax on net capital, which is not an income tax.Physical presence means “any activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer’s employee, agent, or independent contractor acting in a representative capacity.”  MCL 206.621(2)(b).  Physical presence does not include “the activities of professionals providing services in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in this state.”  MCL 206.621(2)(b).

    “Actively solicits” under the nexus standard referenced in item (b) above means either of the following: (i) Speech, conduct, or activity that is purposefully directed at or intended to reach persons within [Michigan] and that explicitly or implicitly invites an order for a purchase or sale[, or] (ii) Speech, conduct, or activity that is purposefully direct at or intended to reach persons within [Michigan] that neither explicitly nor implicitly invites an order for a purchase or sale, but is entirely ancillary to requests for an order for a purchase or sale.

    MCL 206.621(2)(a).

    Active solicitation includes, but is not limited to, solicitation through: (1) the use of mail, telephone, and e-mail; (2) advertising, including print, radio, internet, television, and other media, and; (3) maintenance of an internet site over or through which sales transactions occur with persons within Michigan.

    Examples of active solicitation include: sending mail order catalogs; sending credit applications; maintaining an internet site offering online shopping, services, or subscriptions, and; soliciting through media advertising, including internet advertisements.
  • Nexus & Apportionment 6. For purposes of apportionment under the CIT, what jurisdictional standard will be applied to determine whether a taxpayer is subject to tax in another state?

    Answer:
    MCL 206.661 (3) provides as follows:

    (3) A taxpayer is subject to tax in another state in either of the following circumstances:
    (a) The taxpayer is subject to a business privilege tax, a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax.
    (b) That state has jurisdiction to subject the taxpayer to 1 or more of the taxes listed in subdivision (a) regardless of whether that state does or does not subject the taxpayer to that tax.

    Under the CIT, a taxpayer “has substantial nexus in this state and is subject to the tax imposed under [the CIT] if the taxpayer has a physical presence in this state for a period of more than 1 day during the tax year, if the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to this state, or if the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly or indirectly through 1 or more flow through entities, that has substantial nexus in this state.”  MCL 206.621(1).

    The same standard used to determine nexus for out-of-state taxpayers, as described in MCL 206.621(1) above, will be applied to determine whether a taxpayer is subject to tax in another state for purposes of apportionment under the CIT.

  • Nexus & Apportionment 7. For purposes of apportionment, in determining whether a Michigan-based taxpayer has nexus with a state other than Michigan pursuant to MCL 206.661(3), must gross receipts in any "one" state or in all states equal or exceed $350,000 in order to satisfy the "actively solicits sales" nexus standard?

    Answer:
    Because the nexus standard at MCL 206.621(1) references $350,000 in gross receipts sourced to a single state (Michigan), in applying that standard to determine whether a taxpayer is subject to tax in another state for purposes of apportionment, a taxpayer must meet the $350,000 gross receipts threshold in a single non-Michigan state. Also, MCL 206.661(3) by its terms refers to "another state" (singular) having jurisdiction to subject the taxpayer to tax. Accordingly, a Michigan-based taxpayer having gross receipts of $150,000 in one non-Michigan state and gross receipts of $200,000 in another non-Michigan state would not meet the standard under MCL 206.661(3) and would not be able to apportion its tax base.
  • Nexus & Apportionment 8. An out-of-state company has an employee located in Michigan. The out-of-state company has no sales or business activities in Michigan. Does the out-of-state company have nexus with Michigan under the CIT?

    Answer:
    Yes. Under the CIT, a taxpayer, other than an insurance company, has nexus with Michigan if (a) the taxpayer has a physical presence in Michigan for more than one day in a tax year, (b) the taxpayer actively solicits sales in Michigan and has unapportioned gross receipts of $350,000 or more sourced to Michigan, or (c) the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly, or indirectly through 1 or more other flow-through entities, that has substantial nexus in Michigan. MCL 206.621(1). The presence of a permanent employee in Michigan constitutes physical presence in this state and creates nexus under the CIT.

    However, absent Michigan sales and business activities, that company is unlikely to meet or exceed the filing threshold of $350,000 in allocated or apportioned gross receipts. MCL 206.685(1). In that case, the out-of-state company need not pay the CIT or file a return, even though it would have nexus with Michigan.
  • Nexus & Apportionment 9. Non-U.S. corporations qualify as taxpayers under the CIT. For purposes of the corporate income tax, will the Department recognize the protection of PL 86-272 for non-U.S. corporations?

    Answer:
    Yes, the Department will recognize the protection of PL 86-272 for non-U.S. corporations. Although PL 86-272, by its plain terms, applies only to interstate commerce and makes no mention of foreign commerce, the Department has determined that the protections afforded by this federal statute should also be extended to non-U.S. corporations.
  • Nexus & Apportionment 10. Does the protection of Public Law 86-272 apply to financial institutions?

    Answer:
    No. Public Law 86-272 is a federal law that prohibits a state from imposing a net income tax on an out-of state taxpayer whose only business activity in Michigan is the solicitation of orders for sales of tangible personal property where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state. 15 USC 381 et seq. Financial institutions are subject to a franchise tax under Chapter 13 of the Income Tax Act. MCL 206.653. The franchise tax is levied at a rate of 0.29% on a financial institution's net capital. MCL 206.653; MCL 206.655. This tax on net capital is not a net income tax. Thus, the protection of PL 86-272 does not apply to financial institutions taxed under Chapter 13.
  • Nexus & Apportionment 11. If an out-of-state corporation owns a partnership interest in a partnership in Michigan, does that create nexus for the corporation?

    Answer:
    Yes. There are three separate, alternative nexus standards under the CIT. A taxpayer has nexus with Michigan under the CIT if any of the following exists: (1) the taxpayer has a physical presence in Michigan for a period of more than 1 day during the tax year, (2) the taxpayer actively solicits sales in Michigan and has Michigan sourced gross receipts of $350,000 or more, or (3) if the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly, or indirectly through 1 or more other flow-through entities, that has nexus in Michigan. MCL 206.621(1). A partnership is considered a flow-through entity under the CIT. MCL 206.607(2). Thus, if the partnership has nexus with Michigan, the ownership interest in that partnership will create nexus in Michigan for the corporation.
  • Nexus & Apportionment 12. Does an out-of-state trucking corporation that drives into Michigan for pick up or delivery of product, but has no other physical presence (e.g. employees or real or personal property) in Michigan, create nexus with Michigan subjecting the company to the CIT? If nexus is created, how is apportionment calculated?

    Answer:
    Yes, the out-of-state trucking corporation would have nexus with Michigan for purposes of the CIT if the corporation either picked up or delivered product in Michigan during 2 or more days within the tax year. Furthermore, the corporation would have nexus with Michigan if it merely drives through Michigan, i.e., travels through Michigan on a trip that originates and terminates outside of Michigan, with no pick up or delivery in Michigan and with no other business activity in Michigan, during 2 or more days within the tax year.

    If nexus with Michigan is established, and if the corporation's tax liability exceeds $100 and its apportioned or allocated gross receipts exceed the $350,000 filing threshold under MCL 206.685(1), then the taxpayer's corporate income tax base is apportioned by multiplying the tax base by the sales factor. MCL 206.661(1). Generally, for an out-of-state transportation corporation, receipts from transportation services provided by the transportation corporation are sourced according to MCL 206.665(11), (12) based on the ratio of revenue miles in Michigan (numerator) to revenue miles everywhere (denominator). Revenue mile means the transportation for consideration of one net ton in weight or one passenger the distance of one mile. MCL 206.609(3). Receipts from transportation services are combined with other receipts or sales of the taxpayer to compute the sales factor. Note that once nexus exists in a tax year, then all revenue miles driven in Michigan, including revenue miles associated with "drive through" trips made in Michigan, are included in the apportionment formula numerator.

    For an out-of-state transportation corporation that is a "foreign person" as defined in MCL 206.625(5)(c) and is subject to CIT taxes, the sales factor is a fraction, the numerator of which is the taxpayer's total sales in Michigan during the tax year and the denominator of which is the taxpayer's total sales in the United States during the tax year. MCL 206.625(4). For purposes of apportionment for a "foreign person" subject to CIT taxes, for sales of tangible personal property, only those sales where title passes inside the United States shall be used in the sales factor. For sales of property other than tangible personal property, those sales are apportioned in accordance with the apportionment methods set forth in Chapter 14 of the Income Tax Act.

    Under MCL 206.625(1)(c), however, a foreign corporation domiciled in a member country of NAFTA is not subject to CIT if the foreign corporation is domiciled in a subnational jurisdiction of that member country that does not impose an income tax on a similarly situated person domiciled in Michigan whose presence in that foreign member country is the same as the foreign corporation's presence in the United States. This exemption from the CIT exists notwithstanding the fact that the foreign corporation has nexus with Michigan for CIT. Furthermore, if a subnational jurisdiction of the NAFTA member country does not impose an income tax on businesses, but instead imposes some other type of subnational business tax, then the foreign corporation domiciled in that subnational jurisdiction is not subject to CIT taxes if that subnational jurisdiction's business tax is not imposed on a similarly situated person domiciled in Michigan whose presence in the foreign country is the same as the foreign person's presence in the United States. MCL 206.625(1)(c).

Corporate Tax Base:

  • Corporate Tax Base 1. May taxpayers take the IRC 199 deduction for CIT purposes?

    Answer:
    No. For federal tax purposes, the 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.

    This federal deduction, however, does not flow through to the CIT. The CIT defines "federal taxable income" to mean "taxable income as defined in section 63 of the internal revenue code, except that federal taxable income shall be calculated as if . . . section 199 of the [IRC was] not in effect." MCL 206.607(1). Thus, to the extent that the IRC 199 deduction is included in the calculation of federal taxable income for federal tax purposes, the amount of that deduction must be added back in calculating federal taxable income for CIT purposes.
  • Corporate Tax Base 2. The CIT is decoupled from federal bonus depreciation. Consequently, taxpayers must add back to business income bonus depreciation that was taken on the federal return. 

    Since bonus depreciation is not allowed for CIT returns, when increasing the business income for the amount of bonus depreciation taken, is it allowable to compute and subtract from business income regular MACRS depreciation or section 179 expense on those assets for which bonus depreciation was claimed for federal purposes?

    Answer:
    The amount of IRC §179 expense deduction taken on a taxpayer's federal tax return will be allowed in computing CIT business income. This amount will not vary in computing business income for federal and Michigan tax purposes. A taxpayer that did not elect and take a federal §179 expense deduction on its federal tax return may not claim the federal deduction in its computation of business income under the CIT.

    Any IRC §168(k) bonus depreciation claimed on a taxpayer's federal return will not be allowed for CIT purposes. MCL 206.603(2); 206.607(1). Taxpayers should re-compute CIT depreciation using a federally accepted depreciation method that computes a depreciation amount as if IRC §168(k) was not in effect. This depreciation method must be used consistently over the life of the asset until retired or disposed of when computing CIT business income. The federal depreciation expense that is calculated as if §168(k) was not in effect is the deduction used in calculating CIT business income. A taxpayer must keep sufficient records to track the basis of the asset and depreciation deduction claimed for purposes of the CIT.
  • Corporate Tax Base 3. If an entity is subject to the Corporate Income Tax (CIT), will the entity's shareholders be subject to Michigan personal income tax?

    Answer:
    Yes. An individual shareholder of an entity subject to CIT will also be subject to Michigan income tax on any dividend income paid by the corporation that is included in the shareholder's taxable income. Dividend income is allocated to the shareholder's state of residence for individual Income Tax purposes. MCL 206.113.
  • Corporate Tax Base 4. Are farms exempt under the CIT? Are agricultural activities taxed under the CIT? What about a taxpayer that has both retail and farm activities?

    Answer:
    No, farms are not exempt under the CIT. Furthermore, the tax base attributable to the production of agricultural goods by a person whose primary activity is the production of agricultural goods is similarly not exempt. However, taxpayers under the CIT are limited to C corporations, insurance companies, financial institutions, and unitary business groups.
  • Corporate Tax Base 5. Are system software royalties excluded from the determination of corporate income tax liability like they were under the Single Business Tax Act (see MCL 208.9(4)(g)(viii) and (7)(c)(vii))?

    Answer:
    Unlike the SBTA, but similar to the MBT, there is no specific language in the CIT which excludes such system software royalties from the calculation of the corporate income tax base. However, there are certain royalty adjustments to the corporate income tax base under the CIT that may apply in limited circumstances, generally those involving foreign entities. See MCL 206.623.
  • Corporate Tax Base 6. Under the CIT, will there be a depreciation deduction? Will Michigan conform to federal depreciation rules?

    Answer:
    To the extent applicable, federal depreciation rules are utilized for the purpose of calculating CIT liability. Although there is no specific deduction or credit for depreciation expenses under the CIT, a taxpayer receives the benefit of any depreciation deduction taken on its federal income tax return due to the inherent structure of the corporate income tax base. A CIT taxpayer's corporate income tax base is composed of the taxpayer's "business income," with certain adjustments. MCL 206.623(2). "Business income" is defined as "federal taxable income" MCL 206.603(2). "Federal taxable income" means taxable income as defined in IRC 63, except that federal taxable income shall be calculated as if IRC 168(k) and 199 were not in effect. Thus, any IRC 168(k) bonus depreciation claimed on a taxpayer's federal return will not be allowed for CIT purposes. Taxpayers should re-compute CIT depreciation using a federally accepted depreciation method that computes a depreciation amount as if IRC 168(k) was not in effect. This depreciation method must be used consistently over the life of the asset until retired or disposed of when computing CIT business income. The federal depreciation expense that is calculated as if 168(k) was not in effect is the deduction used in calculating CIT business income. A taxpayer must keep sufficient records to track the basis of the asset and depreciation deduction claimed for purposes of the CIT.
  • Corporate Tax Base 7. For purposes of applying section 623(2)(e) of the CIT, does the phrase "subject to tax in another jurisdiction" refer only to taxation by another state, or does it also include taxation by a foreign country?

    Answer:
    The phrase includes taxation by a foreign country.  Pursuant to section 623(2)(e) of the CIT, a taxpayer must add back to its corporate income tax base “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.”  MCL 206.623(2)(e).  Such amounts need not be added back, however, if certain conditions are met:

    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 section 482 and 1274(d) of the internal revenue code, and

    (ii) Results in double taxation.  For purposes of this paragraph, double taxation exists if the transaction is subject to tax in another jurisdiction.  MCL 206.623(2)(e)(ii).

    The meaning of the phrase “subject to tax in another jurisdiction” is not specifically set forth in the statute.  For purposes of applying this subsection, as with the MBT, the Department will interpret “another jurisdiction” to mean states other than Michigan and foreign taxing jurisdictions.
  • Corporate Tax Base 8. How is a like-kind exchange treated under the CIT?

    Answer:
    Generally, for business or investment property exchanged solely for business or investment property of a like-kind, no gain or loss is recognized for federal income tax purposes under IRC 1031. If, as part of the exchange other (not like-kind) property or money is received, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality. IRC 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
    The corporate income tax base is the taxpayer's business income, before allocation or apportionment, with prescribed adjustments after allocation or apportionment. MCL 206.623(2). The taxpayer's business income is federal taxable income. MCL 206.603(2). Therefore, to the extent the like-kind exchange is or is not recognized in federal taxable income, it will be similarly recognized in the corporate income tax base.

    Like the SBT and MBT, the value of property received in a like-kind exchange will be excluded from gross receipts, which is determined for purposes of determining nexus under MCL 206.621, the filing threshold under MCL 206.685, and eligibility for the small business credit under MCL 206.671. If, as part of the exchange, other (not like-kind) property or money is received and gain is recognized for federal income tax purposes, the gain will be included in gross receipts. Losses that are not recognized for federal income tax purposes similarly are not recognized for purposes of determining gross receipts under the CIT.
  • Corporate Tax Base 9. Is an individual person who earns more than $350,000 in interest and dividends for the tax year subject to the CIT? Are the person's capital gains from sales of stock subject to the CIT?

    Answer:
    No, the corporate income tax is levied and imposed only on a person that is required or elected to file as a C corporation, insurance companies, financial institutions, or a unitary business group as defined under MCL 206.611(6). However, dividends, interest, and capital gains of an individual are subject to the individual income tax of 4.35% to the extent that they are included in the individual's federal adjusted gross income for the tax year.
  • Corporate Tax Base 10. Is the gain recognized on the one time sale of business assets and goodwill by an entity to another entity taxed under the CIT?

    Answer:
    Yes, the gain is taxed under the CIT. A taxpayer's corporate income tax base is the taxpayer's business income, which is federal taxable income, before allocation or apportionment, subject to specific statutory adjustments after allocation or apportionment. MCL 206.623(2). To the extent the capital gain is included in the taxpayer's federal taxable income it must also be included in the corporate income tax base. There are no statutory exceptions, exclusions, or deductions under the CIT that are applicable to capital gains recognized by a corporation from the sale of capital assets.
  • Corporate Tax Base 11. Does business income include casual transactions or isolated sales?

    Answer:
    Yes. Business income means federal taxable income. MCL 206.623(2). To the extent that the income attributable to a casual transaction or isolated sale is included in a taxpayer's federal taxable income, it is included in its corporate income tax base under the CIT. In other words, unless expressly excluded, business income will include income derived from any transaction included in the taxpayer's federal taxable income, including "casual transactions" or "isolated sales."
  • Corporate Tax Base 12. How should inter-company transactions between members of a unitary business group be eliminated when the members have different year ends?

    Answer:
    MCL 206.691 requires the elimination of all transactions between members of the unitary business group that affect the corporate income tax base and the apportionment formula. When members of a unitary business group have different year ends, the combined return of the unitary business group must include each tax year of each member whose tax year ends with or within the tax year of the designated member of the unitary business group. "Designated member" means a member of a unitary business group that has nexus with Michigan under MCL 206.621 and that will file the combined return required under MCL 206.691. If the member that owns or controls the other members of the unitary business group has substantial nexus with Michigan, then that controlling member must be the designated member. Each member should eliminate the inter-company items of income and expense recorded on its books for the tax period of the member that is included in the combined return of the unitary business group. In other words, inter-company eliminations are made on an entity basis in computing the members' tax bases that are summed together for the combined return.

    For example, a unitary business group consists of Corporation A, the designated member that reports on a calendar year, Corporation B that reports on a calendar year, and Corporation C that has a fiscal year ending March 31. In 2012, Corporations A and B will eliminate all inter-company transactions between each other since they both report on a calendar year end. In computing their 2012 tax bases, Corporations A and B will also eliminate all inter-company transactions they had recorded on their books during the calendar year with Corporation C.

    Corporation C will report the months April 1, 2011, through December 31, 2011, on a final MBT return. Only January 1, 2012, through March 31, 2012, will be reported on the unitary business group's 2012 CIT return. When computing its 2012 corporate income tax base, Corporation C will eliminate all inter-company transactions it has recorded on its books for the period January 1, 2012, through March 31, 2012. On the unitary business group's 2013 CIT return, Corporation C will eliminate all inter-company transactions it has recorded on its books for the periods April 1, 2011, through March 31, 2012. Corporations A and B will eliminate all inter-company transactions recorded in 2013 between each other and with Corporation C since both Corporations A and B report on a calendar year end. While timing differences will occur due to differences in each member's year end, eliminating each member's inter-company transactions that were recorded on that member's books during the periods included in the combined return will eliminate inter-company transactions from the unitary business group's tax base.
  • Corporate Tax Base 13. How are gross receipts used under the CIT?

    Answer: Unlike under the MBT, gross receipts are not used directly to determine a taxpayer's liability. In other words, unlike under the MBT, there is no modified gross receipts tax and gross receipts are not subject to tax. Gross receipts are, however, used in other contexts under the CIT.

    First, gross receipts are used to determine whether a taxpayer has nexus in Michigan. There are three separate alternative nexus standards under the CIT. One of these is that a taxpayer has nexus with Michigan if the taxpayer actively solicits sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan. Therefore, the amount of a taxpayer's gross receipts, in conjunction with active solicitation of sales, is determinative of whether a taxpayer has nexus in Michigan.

    Second, gross receipts are used as a threshold to determine whether a taxpayer is required to file an annual CIT return and pay the tax. A taxpayer, other than an insurance company or a financial institution, whose apportioned or allocated gross receipts are less than $350,000 is not required to file a return or pay the tax imposed under the CIT. MCL 206.685(1). A taxpayer whose gross receipts exceed this amount must file a return and pay the tax.

    Finally, gross receipts are used to determine whether a taxpayer qualifies for a small business alternative credit under MCL 206.671. Subject to other disqualifying conditions set forth at MCL 206.671, the credit is available to a taxpayer with gross receipts that do not exceed $20,000,000 for the tax year, adjusted annually for inflation. In addition, the credit is reduced by a fraction where the taxpayer's gross receipts exceed $19,000,000 up to the $20,000,000 disqualifying threshold.

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If you have any questions, please Contact the Multi-State Tax Group at Beene Garter.