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.

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