United States: Michigan Enacts Corporate Income Tax And MBT Legislation Concerning Unitary Business Groups

Michigan has enacted two separate corporate income tax (CIT) and Michigan Business Tax (MBT) legislative provisions that could have significant impact on corporate structures with significant Michigan presence. For tax years beginning after December 31, 2012, affiliated groups are allowed to make an election to be treated as a unitary business group that may file a combined return for purposes of the CIT.1 In addition, for tax years beginning after December 31, 2011, each member of a flow-through entity that makes an election to continue to file MBT returns to receive "certificated credits" and does not file as a member of a unitary business group must disregard all items attributable to that member's ownership interest in the flow-through entity for purposes of the CIT.2

Affiliated Group Unitary Election

For tax years beginning after December 31, 2012, the CIT has been amended to provide an affiliated group with the option of making an election to file combined returns and be treated as a unitary business group.

Affiliated Group

"Affiliated group" means the federal definition of the term from Internal Revenue Code (IRC) Section 1504,3 with substantial modifications. A Michigan "affiliated group" includes all U.S. persons that are corporations, insurance companies, or financial institutions, other than a foreign operating entity, that are commonly owned, directly or indirectly, by any member of the affiliated group and other members of which more than 50 percent of the ownership interests with voting rights or ownership interests that confer comparable rights to voting rights of the member is directly or indirectly owned by a common owner or owners.4 The definition of "unitary business group" is amended to include an affiliated group that makes the election to be treated, and to file, as a unitary business group.5

Unitary Election

A person that is part of an affiliated group may elect to have all of the persons that are included in the affiliated group to be treated as a unitary business group.6 The election must be filed in a timely manner with the taxpayer's annual return and on a form or in a format as prescribed by the Department of Treasury. Each person included in the affiliated group or that subsequently joins the group is bound by the election. The election is irrevocable and binding for the tax year during which the election was made and the following nine tax years.7 The election remains in effect for the time period in which the ownership requirements under the Michigan definition of "affiliated group" are met even if a federal consolidated group to which the unitary business group belongs discontinues the filing of a federal consolidated return or the common parent changes due to a reverse acquisition or acquisition by a related person.

Following the expiration of the initial election period, an election may be renewed for ten additional tax years without the Department's consent.8 However, if the election is not renewed, a new election is not permitted in any of the immediately following three tax years. The renewal must be made on a form or in a format as prescribed by the Department and filed in a timely manner with the taxpayer's annual return after the completion of a ten-year period for which the election was in place.

Flow-Through Entities Making MBT Election

Under existing law, for tax years beginning after December 31, 2011, taxpayers may elect to continue filing MBT returns rather than CIT returns so that they may claim "certificated credits" until the credits are exhausted.9 In general, if a taxpayer that elects to file an MBT return in order to claim a certificated credit or any unused carryforward for that tax year is a unitary business group, the return filed by the unitary business group includes all persons in the unitary business group, including corporate and noncorporate entities.10

The statute is retroactively amended for tax years beginning after December 31, 2011 to provide that in the case of a flow-through entity that has made the election to file an MBT return, each member of the entity that does not file as a member of the unitary business group must disregard all items attributable to that member's ownership in the flow-through entity for all purposes of the CIT.11 Also, the flow-through entity is not subject to the income tax withholding provisions for its members that are corporations.12

Commentary

The CIT legislation expands unitary tax filings to a broader range of taxpayers. Under existing law, the definition of "unitary business group" provides a "control test" and a "relationship test."13 The "control test" requires that one member of the group owns or controls, directly or indirectly, more than 50 percent of the ownership interest and corresponding voting rights of the other members. The "relationship test" requires that the group must have "business activities or operations which result in a flow of value between or among members included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other."14 By expanding the unitary group definition to include affiliated groups that make the requisite election, groups no longer need to meet the "relationship test" in order to file as a unitary group.15 In some situations, it is difficult to apply the "relationship test" to specific taxpayers. Also, the Michigan definition of "affiliated group" is more expansive than the corresponding federal definition because the ownership threshold is 50 percent rather than 80 percent. Taxpayers that satisfy the "affiliated group" definition should consider whether it would be advantageous to make a unitary group election, noting that once the election is made, there is no way to terminate the election for ten years, even if future developments result in substantially more CIT liability than originally envisioned. The MBT legislation may result in reduced tax liability for some owners of flow-through entities that have chosen to remain within the MBT regime and are not subject to the CIT. As explained in the legislative summary of the law, the tax reduction could be significant in some cases, but the amount "depend[s] on the specific characteristics of the affected taxpayers."16

Footnotes

1. Act 266 (S.B. 367), Laws 2013. Note that the CIT replaced the MBT for tax years beginning on or after January 1, 2012. The MBT was in effect for tax years beginning between January 1, 2008 and December 31, 2011.

2. Act 233 (H.B. 5041), Laws 2013.

3. Under IRC § 1504, "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation, but only if: (i) the common parent directly owns stock meeting 80 percent voting and value tests in at least one of the other includible corporations; and (ii) stock meeting the 80 percent voting and value tests in each of the includible corporations (except the common parent) is owned directly by one or more of the other includible corporations.

4. MICH. COMP. LAWS § 206.603(1).

5. MICH. COMP. LAWS § 206.611(6).

6. MICH. COMP. LAWS § 206.691(2). The election may be made without the consent of the Department of Treasury.

7. Id.

8. Id.

9. MICH. COMP. LAWS § 208.1500. A "certificated credit" is a specified credit for which a taxpayer has received approval from the state but the credit has not been fully claimed or paid prior to January 1, 2012. MICH. COMP. LAWS § 208.1107(1).

10. MICH. COMP. LAWS § 208.1500(1).

11. Id.

12. Id. Under Michigan law, every flow-through entity with business activity in Michigan that has more than $200,000 of business income reasonably expected to accrue in the tax year after allocation or apportionment must withhold tax in an amount computed by applying the CIT rate to the distributive share of the business income of each member that is a corporation or flow-through entity. MICH. COMP. LAWS § 206.703(4).

13. MICH. COMP. LAWS § 206.611(6); Summary of S.B. 367 as Reported from Committee 12-11-13, Michigan House Fiscal Agency, Dec. 11, 2013.

14. MICH. COMP. LAWS § 206.611(6).

15. Note that Massachusetts (MASS. GEN. LAWS ch. 63, § 32B(g)(ii)) and Wisconsin (WIS. STAT. § 71.255(2m)) allow similar combined reporting elections.

16. Floor Summary for H.B. 5041, Michigan Senate, Dec. 10, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.