Michigan's Corporate Income Tax:

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A Michigan's Corporate Income Tax: Latest Developments Navigating the Latest Transitional Legislation and Administrative Guidance TUESDAY, MAY 8, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Angela Acosta, Senior Manager, Grant Thornton,, Southfield, Mich. Steven Grob, Member, Dykema, Detroit Tom Cornett, Senior Manager, Deloitte Tax, Detroit For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Michigan s New Corporate Income Tax Seminar May 8, 2012 Angela Acosta, Grant Thornton angie.acosta@us.gt.com Steven Grob, Dykema sgrob@dykema.com Tom Cornett, Deloitte Tax tcornett@deloitte.com

6 Today s Program Review: Key Aspects Of The New Corporate Income Tax Slide 3 Slide 14 [Angela Acosta] Technical Corrections Legislation i [Steven Grob] Slide 15 Slide 43 Treasury Department Guidance To Date [Angela Acosta] Slide 44 Slide 46 Special Issues Involving Flow-Through Entities [Tom Cornett] Slide 47 Slide 52 Compliance And Planning Issues To Anticipate [Angela Acosta, Tom Cornett and Steven Grob] Slide 53 Slide 74

7 Angela Acosta, Grant Thornton REVIEW: KEY ASPECTS OF THE NEW CORPORATE INCOME TAX

8 Series Of Bills Affecting Income Taxes, Signed Into Law May 25, 2011 Corporate Enact Michigan corporate income tax (CIT), eliminating Michigan Business Tax (MBT) except in limited it situations ti 6% tax rate on apportioned business income of C corporations Effective Jan. 1, 2012 Individual Individual income tax rate fixed at 4.35% Effective Oct. 1, Grant Thornton LLP. All rights reserved. 8

9 Tax Computation Overview Business income + Addition modifications - Subtraction modifications x Single-sales-factor apportionment % Apportioned tax base before business loss - Michigan CIT business loss carryforward (10-year C/F) x 6% tax rate Michigan CIT 2012 Grant Thornton LLP. All rights reserved. 9

10 CIT Highlights Filing obligations for businesses with $350,000 or more apportioned gross receipts Unitary return requirements Relationship and control tests No bonus depreciation or domestic production activities deductions (DPAD) Single-sales-factor apportionment Practically no credits for the general taxpayer 2012 Grant Thornton LLP. All rights reserved. 10

11 Nexus Taxpayer subject to CIT if: Physical presence for more than one day, Actively solicits and gross receipts of $350,000 or more, or Direct or indirect ownership or beneficial interest in one or more flow- through entities with nexus 2012 Grant Thornton LLP. All rights reserved. 11

12 Income Tax Base C corporations subject to 6% CIT of apportioned and allocated business income Entities that t elect to be treated t as corporations for federal income tax purposes are subject to CIT and required to file, as part of a unitary group or individually. Sole proprietorships and flow-through h entities are not subject to CIT. Insurance companies are subject to tax on direct premiums written. Financial institutions are subject to franchise tax on net capital (no goodwill deduction, unlike the MBT) Grant Thornton LLP. All rights reserved. 12

13 Adjustments To Federal Taxable Income: Addition Modifications Bonus depreciation under IRC Sect. 168(k) DPAD under IRC Sect. 199 Interest and dividends from obligations or securities of states other than Michigan, less related expenses State taxes imposed on net income Royalties paid to related person not included in the taxpayer s unitary group for use of intangible property Federal net operating loss 2012 Grant Thornton LLP. All rights reserved. 13

14 Adjustments To Federal Taxable Income: Subtraction Modifications Dividends and royalties received from persons other than U.S. persons Interest from U.S. obligations Income from producing oil and gas, less related expenses 2012 Grant Thornton LLP. All rights reserved. 14

15 Michigan Net Operating Losses Losses of a unitary business group are applied on a group basis, not on a member-by-member basis. Ten-year net operating loss carryforward is also available for losses created under the CIT Grant Thornton LLP. All rights reserved. 15

16 Apportionment Single-sales-factor apportionment for CIT Finnigan rule: Unitary business groups will include all sales in Michigan in the sales factor, regardless of the entity's nexus with Michigan. Sales between members of a unitary group are eliminated in the calculation of the sales factor. Taxpayer with direct or indirect ownership or beneficial interest in a flow-through entity would include percentages of Michigan and everywhere sales, based on ownership percentages. For example, 50% ownership interest would require 50% of MI sales and 50% of everywhere sales in apportionment factor 2012 Grant Thornton LLP. All rights reserved. 16

17 Sourcing Of Sales For CIT purposes, Michigan will generally source sales from services based on where the benefit of the service is received. Ultimate destination is the sourcing rule for sales of tangible personal property. Sourcing provisions for the CIT are intended to be the same as those of the MBT. Special sourcing rules are provided for financial, transportation, telecommunications and media broadcasting services Grant Thornton LLP. All rights reserved. 17

18 Reduced Tax Rate For Small Businesses Businesses with less than $20 million in gross receipts, and business income less than $1.3 million after any loss adjustment, are eligible for a credit to reduce the tax rate to 1.8%. Places limits on total compensation and directors' fees to shareholders and officers Insurance companies and financial institutions not eligible Similar to small business credit provided for under the modified gross receipts portion of the MBT For fiscal-year taxpayers for 2012, and short-year returns, gross receipts and compensation phase-out amounts must be prorated when determining eligibility for the credit Grant Thornton LLP. All rights reserved. 18

19 Steven Grob, Dykema TECHNICAL CORRECTIONS LEGISLATION

20 CIT Technical Amendments The Income Tax Act of 1967 was amended on May 25, 2011 to add Parts 2 and 3 (referred to as the Corporate Income Tax (CIT) Act). The following is a summary of certain amendments to the CIT Act and the Michigan Business Tax (MBT) Act made after May 25, CIT areas affected by the amendments include: Apportionment Nexus Unitary filing Combined reporting Disregarded d entities Tax credit recapture Withholding taxes 20

21 Apportionment Multistate Tax Compact (P.A. 40), effective 05/25/2011 Amended MCL , part of the Multistate Tax Compact as adopted by Michigan, to provide that there is no option for a taxpayer to apportion its tax base under either the MBT or the CIT using an equally weighted three-factor formula rather than the sales-factor-only method specified in both the MBT and the CIT Some taxpayers asserted that the statutory language provided an option to elect an apportionment formula under the Multistate Tax Compact (three-factor) under the MBT (sales- only factor). International Business Machines Corp v MI Dep t of Treasury, Appeals Docket No

22 Apportionment (Cont.) Apportionment: Flow-through entity (P.A. 191), effective 01/01/2012 Amended d CIT apportionment t provisions i in MCL by deleting language that included business income of a flow-through entity in the business income of a taxpayer only if that flow-through entity had business activity in Michigan A taxpayer s business income that is directly attributable to the business activity of a flow-through entity must be apportioned to Michigan, based on the flow-through entity s business activity Apportionment: Flow-through entity (P.A. 310), effective 01/01/2012 Enacted after P.A. 191 (above), P.A. 310 amended MCL of the CIT Provides an exception to the apportionment method outlined above based on whether a flow-through h entity is unitary with the taxpayer 22

23 Apportionment (Cont.) Sales factor of flow-through entity (P.A. 308), effective 01/01/2012 Amended MCL of the CIT to provide that the sales factor numerator of a taxpayer must include its proportionate share of the total t sales in Michigan of a flow-through h entity that t is unitary with the taxpayer The denominator of a taxpayer must include its proportionate share of the total sales everywhere of a flow-through entity that is unitary with the taxpayer. 23

24 Apportionment (Cont.) Sales factor of flow-through entity (P.A. 308), effective 01/01/2012 (Cont.) A flow-through entity is unitary with a taxpayer if: Taxpayer owns or controls more than 50% of the ownership interests with voting rights of the flow-through entity, and Has business activities that result in a flow of value between the taxpayer and the flow-through h entity, or between the flowthrough entity and another flow-through entity unitary with the taxpayer; or has business activities that are integrated with, are dependent upon, or contribute to each other. Sales between a taxpayer and flow-through entities unitary with that taxpayer, or between flow-through entities unitary with a taxpayer, must be eliminated in calculating the sales factor. 24

25 CIT Apportionment Of Business Income From A Flow-Through Entity Situation ti I Corporation A owns a 60% member interest in LLC B, and they are unitary. For 2012, LLC B has: a. CIT business income of 100 b. Michigan sales of 200 c. Everywhere sales of 1,000 For 2012, Corporation A has: a. CIT business income of 500 b. Michigan sales of 800 c. Everywhere sales of 6,000 25

26 CIT Apportionment Of Business Income From A Flow-Through Entity (Cont.) 2012 apportioned tax base calculation: Corporation A separate tax base 500 Share of LLC B tax base (60%) (100) 60 Total unapportioned tax base 560 Apportionment factor: MI sales of Corporation A 800 Share of LLC B MI sales (60%) (200) Everywhere sales of Corporation A 6,000 Share of LLC B everywhere sales (60%) 600 (1,000) Total MI sales 920/6,600 = 14% Total everywhere sales ,600 Total Apportioned tax base: (14%) (560) =78 26

27 CIT Apportionment Of Business Income From A Flow-Through Entity (Cont.) Situation II: Same as Situation I, except Corporation A owns only 40% of LLC B, so they are not unitary. First determine LLC B s apportioned tax base: LLC B s apportionment factor: LLC B MI sales 200 = 20% LLC B everywhere sales 1,000 LLC B s apportioned tax base (20%) (100) = 20 Corporation A s share of LLC B s apportioned tax base is: (40%) (20) = 8 27

28 CIT Apportionment Of Business Income From A Flow-Through Entity (Cont.) Corporation A s separate apportionment factor is: Corporation A s MI sales 800 = 13.3% Corporation A s everywhere sales 6,000 Corporation A s separately apportioned tax base is: (13.3%) 3%) (500) = 67 Corporation A s total tax base is: = 75 28

29 Nexus Actively solicits, for nexus purposes, is defined (P.A. 187), effective 01/01/2012 Defines actively solicits in MCL , for purposes of CIT nexus, as speech, conduct or activity that is purposefully directed at or intended to reach persons within Michigan and that : 1. Explicitly or implicitly invites an order for a purchase or sale, or 2. 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. CIT Act previously said actively solicits would be defined by Department of Treasury through written guidance applied prospectively. Codified a substantially similar definition of actively solicits from Revenue Administrative Bulletin applicable under the MBT 29

30 Nexus (Cont.) Financial institution nexus (P.A. 183), effective 01/01/2012 MCL provides that every financial institution with substantial nexus in Michigan is subject to the financial institution franchise tax (with nexus in Michigan as determined under the CIT). Added provisions that a financial institution has substantial nexus with Michigan if meets any of the following: 1. Physical presence in Michigan for more than one day during the tax year 2. Actively solicits sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan ( actively solicits defined under MCL ) 3. Ownership interest est in a flow-through oug entity ty that has substantial t a nexus in Michigan as provided under these provisions or MCL

31 Unitary Filing And Combined Reporting Tax year of unitary business group (P.A. 170), effective 01/01/2012 Amended MCL of the CIT definition of tax year Provides that a person included in a unitary business group that joins or departs the group, other than at the end of that person s federal tax year, must have two tax years One year beginning with its federal income tax period and ending on the date of joining or departing the unitary business group Another tax year beginning on the date immediately after joining or departing the group and ending with its federal income tax period 31

32 Unitary Filing And Combined Reporting (Cont.) MBT election with filing with certificated credits (P.A. 70), effective 3/29/2012 Amended MCL and MCL of the CIT to allow a member of a unitary business group to elect to file a separate return and pay the tax under the MBT if it has any of the following certificated credits: MEGA credits under MCL MEGA plug-in battery manufacturing credits under MCL (2) Battery related credits under MCL (5) Eliminated mandatory unitary CIT filing for a member with specified certificated credits 32

33 Flow-Through Entities Flow-through entities: Shareholders (P.A. 176), effective 01/01/2012 Provided in MCL that for purposes of the CIT, person includes a flow-though entity Eliminated excess language that specifically included entities included in definition of flow-though entity Also amended definition of shareholder to provide that an individual is considered the owner of the stock, or the equity interest in a business entity that files as a corporation for federal income tax purposes owned, directly or indirectly, by family members as defined in Code Sect. 318(a)(1) 33

34 Disregarded Entities Disregarded entities definition repealed (P.A. 307), effective 01/01/2012 Repealed CIT definition under MCL that defined disregarded entity as a qualified subchapter S subsidiary under Code Sect. 1361(b)(3) or a single-member limited liability company that had not elected to be classified as a corporation under Treasury Reg Flow-through entity defined: Disregarded entities (P.A. 306), effective 01/01/2012 Amended CIT to provide that under MCL , the definition of a flow-through entity does not include any entity disregarded under MCL Disregarded entities (P.A. 309), effective 01/01/2012 Amended the CIT to provide that under MCL , a person that is a disregarded entity for federal income tax purposes under the Internal Revenue Code must be classified as a disregarded entity for purposes of the CIT and the withholding tax Definition of flow-through entity amended (P.A. 311), effective 01/01/2012 Clarified that the CIT definition under MCL of flow-through entity, for withholding tax purposes, does not include any entity disregarded for federal income tax purposes 34

35 Definitions Revised definition of corporation (P.A. 179), effective 01/01/2012 Amended MCL to define corporation as a person (previously, a taxpayer) that is required or has elected to file as a C corporation as defined under Code Sect. 1361(a)(2) and Code Sect. 7701(a)(3) Gross receipts: Flow-through entity member (P.A. 182), effective 01/01/2012 Revised CIT definition of gross receipts under MCL , deleting reference to using the taxpayer s method of accounting used for federal income tax purposes less any amount deducted as bad debt for federal income tax purposes Also, modified exceptions from gross receipts For example, eliminated exceptions for mortgage g company proceeds from the principal balance of loans transferred or sold in the tax year 35

36 Tax Credit Recapture Recapture of certain business tax credits (P.A. 181), effective 01/01/2012 Added MCL to CIT Act to provide that a taxpayer that has claimed a credit under the former SBT or the MBT that was subject to recapture under the terms of that Act must add back to its CIT liability in the year that it failed to comply a percentage, or the entire amount, of the credit previously claimed A taxpayer that has claimed an investment tax credit under the SBT or the MBT for a tangible asset that it has sold, transferred out of Michigan, or otherwise disposed of during the current tax year must, to the extent the credit was used and at the rate at which it was used under the SBT or MBT, have an amount added back to the taxpayer s CIT liability according to a statutory formula. 36

37 Withholding Taxes EFT program for withholding tax (P.A. 76), effective 07/12/2011 Updated statutory references in MCL requiring taxpayers averaging more than $40, a month in income tax withholding to deposit the funds in same manner and schedule as deposits of federal income tax withholding, or in another manner approved by the Commissioner Withholding of business income of flow-though entities (P.A. 188), effective 01/01/2012 Amended MCL of the CIT provisions regarding the withholding of business income of a flow-through entity Taxes withheld accrue to the state on April 15, June 15 and Sept. 15 of the tax year and Jan. 15 of the following year (or fiscal-year equivalent) Publicly traded partnership registered with the SEC is not subject to withholding. On April 13, 2012, Department issued a notice that revises the statutory dates above to April 15, July 15 and Oct. 15 of the tax year and Jan. 15 of the following year (or fiscal-year equivalent). 37

38 Withholding Taxes (Cont.) Withholding: Administrative provisions (P.A. 192), effective 01/01/2012 Revised certain CIT administrative provisions relating to withholding under MCL by using persons rather than identifying each person Flow-through entity withholding (P.A. 193), effective 01/01/2012 Replaced CIT language regarding the withholding by employers, flow- through h entities, eligible ibl production companies and track licensees with persons, under MCL Also provides that a flow-through entity that has withheld taxes on distributive shares of business income reasonably expected to accrue must file an annual reconciliation return no later than the last day of the second month following the end of the flow-through entity s federal tax year Department e t may require e the flow-through oug entity ty to file an annual business income information return on the due date, including extensions, of its annual federal information return. Partnership definitions (P.A. 194), effective 01/01/2012 Amended MCL of the CIT withholding tax provisions to define partnership and publicly traded partnership 38

39 Special Taxpayers Financial institutions (P.A. 171), effective 01/01/2012 Revised MCL CIT definition of financial institution to include a state chartered bank, a state chartered savings bank and a federally chartered savings bank Deleted from the definition an Office of Thrift Supervisionchartered bank or thrift institution, and a savings and loan holding company other than a diversified savings and loan holding company as defined in 12 USC 1467(a)(F) Electric cooperatives (P.A. 173), effective 01/01/2012 Amended MCL of the CIT Act to eliminate the separate definition of business income, for a mutual or cooperative electric company that is exempt from federal income tax under Code Sect. 501(c)(12) 39

40 Special Taxpayers (Cont.) Foreign persons: Tax base and apportionment (P.A. 175), effective 01/01/2012 Provides under MCL that the CIT base of a foreign person does not include net income from sales of tangible personal property, when title passes outside the U.S. (previously, did not include proceeds from sales where title passes outside the U.S.) Provides that the sales factor of a foreign person 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 U.S. Provides that for sales of tangible personal property, only sales in which title passes inside the U.S. are used in the sales factor; and for sales of property other than TPP, sales are apportioned in accordance with the apportionment provisions of MCL et seq. 40

41 Tax Payments Payment: Flow-through entities, filing threshold (P.A. 184), effective 01/01/2012 Provides under MCL that any final CIT liability must be remitted by the annual due date of the taxpayer s annual or final return, excluding any extension of time to file the return Provides that apportioned or allocated gross receipts of a flowthrough entity must be imputed to each of its members based on the same percentage that each member s proportionate share of distributive income is to the total distributive income of the flow-through entity Also provides that if a taxpayer has apportioned or allocated gross receipts for a tax year of less than 12 months, the threshold amount of $350,000 must be multiplied by a fraction, the numerator of which is the number of months in the tax year and the denominator of which is 12 41

42 Tax Payments (Cont.) Estimated tax payments (P.A. 186), effective 01/01/2012 Amended MCL of CIT estimated tax provisions to provide that a taxpayer with a tax year of less than four months is not required to file an estimated tax return or remit estimated taxes Also deleted reference to the CIT base and refers instead to the tax base applicable to the taxpayer, under the chapters imposing CIT, the tax on insurance companies and the tax on financial institutions 42

43 Transition Issues Short tax year (P.A. 190), effective 01/01/2012 Amended MCL of the CIT applicable to a taxpayer with a CIT fiscal tax year ending before Dec. 31, 2012 May compute the CIT for the portion of that tax year to which the CIT applies using one of following two methods: 1. By apportionment, based on the portion of that tax year to which the CIT applies; or 2. On an actual basis Must use the same method for both the MBT portion of the tax year and the CIT portion of the tax year 43

44 Transition Issues (Cont.) MBT returns and credits (P.A. 209), effective 01/01/2012 Amended several sections of the MBT Act (including MCL , 1117, 1431, 1500 and 1503) to provide the following: Taxpayer with fiscal year ending after Dec. 31, 2011 is considered to have two separate tax years, for portions before and after that date. Allows a taxpayer claiming MBT credit for health care benefits to report aggregate costs of employer-sponsored benefits If a taxpayer elects to file and pay the MBT to use a certificated credit, its MBT return for a unitary business group must include all the persons in the group, regardless of whether a person is incorporated. Requires that a taxpayer with a certificated credit for a multiphase brownfield project, and that elects to file and pay under the MBT, must continue to file and pay under the MBT until the credit is used up 44

45 Transition Issues (Cont.) MBT returns and credits (P.A. 209), effective 01/01/2012 (Cont.) For a taxpayer with certificated credits and that elects under MCL to pay the MBT rather than CIT, disallows a deduction for a business loss for a prior year in which the taxpayer was not subject to the MBT Provides that for a partnership or S corporation, business income includes payments and items of income and expense that are separately reported to its owners Provides that a taxpayer that is subject to the MBT and the CIT, for portions of a tax year, must use the same method to compute both taxes 45

46 Transition Issues (Cont.) MBT returns and credits (P.A. 209), effective 01/01/2012 (Cont.) A taxpayer subject to the MBT and required to file two separate, short period annual returns encompassing fractional parts of the taxpayer s same fiscal tax year must compute the MBT for each short period return, using the same method. A taxpayer that files two separate, short period annual returns must calculate and claim its credits based on actions taken or payments made during the period represented on each short period return. 46

47 Loss Carryforward CIT business loss amended (P.A. 312), effective 01/01/2012 Amended the MCL CIT deduction for a business loss by deleting language regarding limiting a loss carryforward to not more than 10 taxable years after the loss year Retained language limiting a loss carryforward to the loss year, then successively to the next 9 taxable years following the loss year or until the loss is used up, whichever occurs first 47

48 Angela Acosta, Grant Thornton TREASURY DEPARTMENT GUIDANCE TO DATE

49 Department Guidance: FAQs, Forms, Instructions Approximately 100 FAQs posted to date Form 4913 CIT quarterly estimated tax forms 1/12 CIT annual forms/instructions Web site estimated 12/12 Paper estimated 1/13 Form 4917 now available (For 4918 will come later) flow-through withholding quarterly returns/reconciliation 2012 Grant Thornton LLP. All rights reserved. 49

50 Department Guidance: Draft RABs In Progress Unitary business group filing requirements Unitary control and relationship tests Sourcing of services Withholding for pass-through entities Small business credit Nexus standards Actively solicits MBT election 2012 Grant Thornton LLP. All rights reserved. 50

51 Tom Cornett, Deloitte Tax SPECIAL ISSUES INVOLVING FLOW THROUGH ENTITIES

52 Corporate Income Tax: Ownership In A Flow-Through Entity C Corporation ownership in a flow-through entity Unitary ownership interest: As a result of a Dec CIT amendment, C corporations holding an ownership interest in a unitary flow-through entity will include a proportionate share of the entity s sales in the C corporation s sales factor, both numerator and denominator. This is the traditional unitary roll up approach adopted in many unitary corporate income tax states. Non-unitary ownership interest: In contrast, C corporations holding an ownership interest in a non-unitary flow-through entity will apportion the business income directly attributable to the business activity of the flow- through entity, by using an apportionment formula based on the business activity of that flow-through entity (i.e., distributive income/loss removed from C corporation s CIT tax base, separately apportioned based on partnership s CIT sales factor, and resulting amount is returned to the post-apportionment CIT tax base of the C corporation). Other than the CIT tax base adjustment noted above associated with ownership in a non-unitary flow-through entity, no other addition/subtraction modification is made for a C corporation s CIT tax base for income/loss from a flow-through entity. 52 Copyright 2012 Deloitte Development LLC. All rights reserved.

53 Corporate Income Tax: Ownership In A Flow-Through Entity (Cont.) The test for unitary ownership is consistent with the test for unitary between C corporations, i.e., ownership greater than 50% and existence of flow of value/interdependencies. Look to prior-year MBT returns for guidance in this context. Elimination provision exists for sales between the C corporation and the unitary flow-through entity. However, there is no CIT tax base adjustment for transactions between a C corporation and a unitary flow-through entity. Nexus considerations: Ownership or beneficial interest, direct or indirect, in a flow-through entity would appear to create nexus for any C corporation partner/ member. CIT provisions appear to draw no distinction, for nexus purposes, between general and limited partnership interests. 53 Copyright 2012 Deloitte Development LLC. All rights reserved.

54 Corporate Income Tax: Ownership In A Flow-Through Entity (Cont.) Impact on C corporation can be quite different Non-unitary example: C corporation with no Michigan sales owns 40% of Partnership X, which operates entirely in Michigan. C corporation receives a K-1 with $400k of distributive net income from Partnership X. Inclusive of this $400k, C corporation has a total of $1m in FTI. CIT result: [$600K * 0% CIT appmt for C Corp] + [$400K * 100% CIT appmt for Pship] = $400K business income. $24k CIT tax result Unitary example: C corporation with no Michigan sales owns 60% of Partnership X, which operates entirely in Michigan. C corporation receives a K-1 with $600k of distributive net income from Partnership X. Inclusive of this $600K, C corporation o has a total of $1m in FTI. Corporation has $9m of sales, and Partnership X has $5m of sales. C Corp has a 25% [$3m/$12m] CIT apportionment factor. CIT result: $1m * 25% appmt for C Corp = $250K business income. $15k CIT tax result 54 Copyright 2012 Deloitte Development LLC. All rights reserved.

55 Corporate Income Tax: Flow-Through Entity Withholding Beginning in 2012, a flow-through entity operating in Michigan is required to withhold CIT relative to any C corporation partners (withholding of MI IIT relative to any non-michigan resident individual/estate/trust id t /t t continues to be required as well). CIT withholding is mandated for a flow-through entity with apportioned CIT business income exceeding $200, after apportionment. Withholding is measured on the distributive share of the business income of the member (not cash or in-kind distributions). Flow-through withholding of MI IIT and/or CIT must be made on Form 4917, on a quarterly basis. Quarterly due dates for calendar year flow-through entity are April 15, July 15, Oct. 15 and Jan. 15. Annual withholding reconciliation is on Form Due date is Feb. 28. While a discretionary composite filing appears still to be available for filing in 2012 on behalf of non-michigan resident individual/estate/trust partners (Form 807), no such filing would appear to exist relative to C corporation partners. There is no indication yet that a Michigan Form 1065 will be required, either. 55 Copyright 2012 Deloitte Development LLC. All rights reserved.

56 Corporate Income Tax: Flow-Through Entity Withholding (Cont.) No exemptions are available for withholding of CIT relative to C corporation partners (e.g., non-profit C corporation that otherwise is exempt from CIT, MI-domiciled C corporation) Flow-through entities with a mix of individual, flow-through and C corporation ownership face real challenges in computing accurate IIT and CIT withholding. Tiered flow-through structures may not have information as to the ultimate ownership, individual vs. C corporation. The default would appear to be withholding for all partner/members on higher CIT tax rate (6%), not the lower IIT rate (4.35%.). If ultimate ownership is known, however, a flow-through entity can calibrate withholding based on the mix of individual and C corporation partner/members. Very real possibility that CIT withheld will have little relationship to the actual CIT liability of the C corporation partner/member Important differences exist between the CIT apportioned business income computation (both the tax base and sales factor) relative to the MI IIT apportioned business income computation. SB 1104, introduced on April 26, would add specific exemption provisions from CIT withholding. 56 Copyright 2012 Deloitte Development LLC. All rights reserved.

57 Angela Acosta, Grant Thornton Tom Cornett, Deloitte Tax Steven Grob, Dykema COMPLIANCE AND PLANNING ISSUES TO ANTICIPATE

58 Optional MBT Filing And Certificated Credits Entities, subject or not subject to CIT, may elect to continue filing a MBT return if they have certificated credits or unused carryforwards. The MBT is effectively repealed when the Treasury Department notifies the Secretary of State in writing that the last "certificated" credit/carryforward has been used. Certificated credits are credits granted before Jan. 1, 2012 under the MBT Act and include the Michigan Economic Growth Authority (MEGA) credits and certain Renaissance Zone, brownfield redevelopment, film production and battery production credits, among others Grant Thornton LLP. All rights reserved. 58

59 MBT Opt-In Filing Guidelines Will file a MBT return and not file a CIT return Election applies to entire unitary group Must elect to file MBT return for the first tax year ending after Dec. 31, 2011 Must continue to file a MBT return until credit and any credit carryforward is exhausted May elect to receive historic preservation or brownfield credits in lump sum, less applicable statutory percentage Must still pay the greater amount of tax due under the MBT or a modified version of the CIT, after taking into effect the credits 2012 Grant Thornton LLP. All rights reserved. 59

60 Repeal of MTC Election Beginning Jan. 1, 2011 Public Act 40 eliminated the MTC election, for MBT purposes The MTC election generally permits a taxpayer to elect to use an equalweighted, three-factor formula (based on relative MI payroll, MI property and MI sales) to apportion its income tax base. Treasury has disputed d whether this MTC election is available under the MBT, which applies a single factor based solely on relative MI sales to apportion the business income and modified gross receipts tax bases. PA 40 of 2011 explicitly states that beginning January 1, 2011, taxpayers shall not apportion pursuant to the MTC Act. Test case pending; Court of Appeals decision expected in next 9-12 months Treasury continues to deny the availability of MTC Election for any MBT tax year and continues to send out disallowance notices to taxpayers that filed MBT returns making MTC elections. Taxpayers need to closely watch their mail for receipt of any sort of disallowance notice, and protest in a timely fashion. 60 Copyright 2012 Deloitte Development LLC. All rights reserved.

61 Public Act 305 Of 2011 Clarified DRE treatment, for MBT purposes MBT law changes enacted in December 2011 clarify that a disregarded entity (DRE) for federal purposes would be treated similarly as for MBT purposes. Retroactive to Jan. 1, 2008 A safe harbor provision exists. Taxpayer that previously filed MBT returns excluding a DRE is not required to amend previously filed MBT returns, and potentially may file the 2011 MBT return so as to continue to exclude DRE. However, this safe harbor provision does not preclude taxpayers that filed MBT returns excluding a DRE from filing amended returns to include the DRE in the MBT filing of their single member, if they so choose. 61 Copyright 2012 Deloitte Development LLC. All rights reserved.

62 Pending MBT Technical Clarifications Bill SB 1037 Favorably clarifies many of the MBT issues that have become problematic over the four-year history of the MBT Explicitly excludes cancellation of indebtedness Income from MBT gross receipts Definition of materials and supplies MGRT deduction is clarified Ordering of unused carryforwards of SBT credits is clarified Corrects Renaissance Zone credit computation for taxpayers in a RZ prior to 2003 Bill would be retroactive to Jan. 1, Because of resistance from Treasury, passage is uncertain. 62 Copyright 2012 Deloitte Development LLC. All rights reserved.

63 History Of Michigan Taxation of A Disregarded Entity (DRE) Under the Single Business Tax (SBT) The Department of Treasury (Department) tried to follow federal treatment. Issued Administrative Bulletin RAB A taxpayer (Kmart) challenged the Department s position because it wanted to file a separate return for its DRE. Kmart won its case. The Department reversed its position to follow the Kmart decision. Notice dated 2/5/10 Retroactive corrective legislation, 2010 P.A. 38 (3/31/10), provides that the SBT follows federal treatment. 63

64 History Of Michigan Taxation Of A Disregarded Entity (DRE), Cont. Under Michigan Business Tax (MBT) Department initially tried to follow federal treatment for a domestic DRE. Issued FAQ Mi 28 A foreign DRE was viewed as a regarded entity by the Department. Following Kmart decision, Department felt it had to tax a DRE as a separate taxpayer. However, most DREs would probably file a unitary MBT return with parent. Department issued a notice stating that DREs must file separate returns. The due date of required separate filings was extended several times. Corrective legislation amended the MBT Act to follow federal treatment PA 305 (SB 369) 64

65 History Of Michigan Taxation Of A Disregarded Entity (DRE), Cont. The CIT applies only to an entity taxed as a corporation, for federal income tax purposes. Any entity that is disregarded for federal income tax purposes is disregarded for parts 2 and 3 of the CIT Act. MCL A corporation subject to CIT includes any income or loss from a DRE it owns. 65

66 MBT Transition For Fiscal-Year-End Companies Final MBT Due 4/30/2012 Calendar-year taxpayers are allowed an 8-month extension. Fiscal-year taxpayers are allowed an extension to the due date of the initial short year CIT return. Fiscal-year taxpayers Must file two short-period returns - one to report its final MBT liability up to 12/31/11 and the other to report its initial CIT liability, for the period from Jan. 1, 2012 to the end of its fiscal year 2012 Grant Thornton LLP. All rights reserved. 66

67 MBT Transition For Fiscal Year-End Companies (Cont.) FYE 3/31/2012 example - applies to all fiscal year-end taxpayers with year-end on or before 4/30/12 MBT Short Year 1.Need to file short period extension (Form 4) for period from 04/01/2011 through 12/31/ Check Box MBT on Extension Form 4 3.Pay tax liability due if any 4.Short period return for 04/01/2011 through 12/31/2011 period will be extended until the standard fiscal year due date, so through 3/31/ Form 4 filing is MANDATORY for MBT return 6.All Forms 4 short period MBT extensions due 4/30/ Grant Thornton LLP. All rights reserved. 67

68 MBT Transition For Fiscal Year-End Companies (Cont.) FYE 3/31/2012 example (Cont.) - applies to all fiscal-year-end taxpayers with year-end on or before 4/30/12 CIT short year 1. Short period return for 01/01/2012 through 03/31/2012 period will be AUTOMATICALLY extend through 4/30/2013 for all fiscal-year taxpayers. 2. If the taxpayer has CIT liability due, need to file Form 4 for 01/01/2012 through 03/31/2012 short period return, check Box CIT and pay tax to the state of Michigan 2012 Grant Thornton LLP. All rights reserved. 68

69 MBT Transition For Fiscal Year-End Companies (Cont.) FYE 6/30/2012 example - applies to all fiscal-year-end taxpayers with year-end after 5/1/12 MBT short year 1. Need to file short period extension (Form 4) for period from 07/01/2011 through 12/31/ Check box MBT on extension Form 4 3. Pay tax liability due, if any 4. Short period return for 07/01/2011 through 12/31/2011 period will be extended until the standard fiscal year due date, so through 06/30/ Form 4 filing is MANDATORY form MBT return 6. All Forms 4 short period MBT extensions are due 4/30/ Grant Thornton LLP. All rights reserved. 69

70 MBT Transition For Fiscal Year-End Companies (Cont.) FYE 6/30/2012 example (Cont.) - applies to all fiscal-year-end taxpayers with year-end after 5/1/12 CIT short year 1. Short period return for 01/01/2012 through 06/30/2012 period will be AUTOMATICALLY extended through 4/30/2013 for all fiscal-year taxpayers that have to file short period initial CIT return. 2. Taxpayer will get ADDITIONAL extended time by filing Form 4, for CIT short period return until 6/30/ File Form 4 for 01/01/2012 through 06/30/2012 short period return, check box CIT, and pay tax due, if any, to the state of Michigan 2012 Grant Thornton LLP. All rights reserved. 70

71 MBT Transition For Fiscal Year-End Companies (Cont.) Fiscal year taxpayers' activity Actual amounts from each short period (actual method) Prorated amounts (annual method) Method must remain consistent between the final MBT and initial CIT 2012 Grant Thornton LLP. All rights reserved. 71

72 Corporate Income Tax Credits Small business credit: Small businesses are eligible for a reduced rate of 1.8%, based on adjusted business income. Qualifications similar to MBT small business credit: Business income minus loss adjustment cannot exceed $1.3 million. Gross receipts cannot exceed $20 million (phase-out between $19 and $20 million). Compensation of shareholder or officer cannot exceed $180,000. Business income is determined d based on entire unitary business group. Compensation is determined based on payments from entire unitary business group. Taxpayers that qualify remit tax on 1.8% of adjusted business income. 72 Copyright 2012 Deloitte Development LLC. All rights reserved.

73 Corporate Income Tax Credits (Cont.) Due to a December 2011 amendment to the CIT Act, ITC recapture will be required upon the disposition of Michigan-sitused assets that previously had been the basis for either SBT or MBT investment tax credits. An elective mechanism permits taxpayers (including otherwise nontaxable flow-through entities) with certificated credits from prior MBT and SBT tax years to apply such credits. 73 Copyright 2012 Deloitte Development LLC. All rights reserved.

74 Corporate Income Tax Credits (Cont.) The environment for negotiated incentives is significantly different than what existed prior to Managed by the Michigan Strategic Fund Community Revitalization Program Business development programs Direct assistance Not tax credits generally cash grants or low-interest financing Trend to incentivize job creation, not job retention Property tax abatements still available locally Limits to benefits 74 Copyright 2012 Deloitte Development LLC. All rights reserved.

75 Individual Income Tax Apportionment Of Business Income From Flow-Through Entity Prior to 2011 amendments to individual income tax, business income from a flow-through entity was apportioned using an equally weighted, three-factor t formula: Property/payroll/sales Michigan/everywhere Note: This was different than SBT and MBT apportionment of the tax base of a person subject to the SBT or MBT. Under 2011 amendments, business income from a flow-through entity is apportioned using a single factor: Sales in MI/sales everywhere 75

76 Individual Income Tax Apportionment Of Business Income From Flow-Through Entity (Cont.) The effective date of this apportionment change is confusing. Original CIT Act (P.A. 38, enacted 5/25/11) made the change effective 1/1/11. P.A. 178 (HB 4958) was enacted 10/13/11 and given immediate effect. P.A. 178 delayed the effective date from 1/1/11 to 1/1/12. The causes for confusion over the effective date of this change: P.A.178 was given immediate, not retroactive, effect Arguably, P.A. 178 does not modify P.A. 38 and leaves the single sales factor in effect starting on either 1/1/11 or 5/25/11. 76

77 77 Corporate Income Tax: Foreign Entity Considerations CIT tax base impact Subtract foreign dividend and foreign royalty income Add expenses associated with payments to a foreign affiliate for use of an intangible asset (favorable safe harbor exists, however) Unitary group for CIT purposes excludes a C corporation that is organized in a country other than the U.S. Unitary group, for CIT purposes, excludes a U.S. corporation that is a foreign operating entity. Substantial operations outside U.S., Puerto Rico and any territory of U.S., and At least 80% of income is active foreign income under 861(c)(1)(B) Foreign entities with nexus file on a stand-alone alone basis. Special CIT tax base and apportionment rules for foreign C corporations with nexus to Michigan Sub-national reciprocity exemption also exists. Foreign DRE is treated similarly for CIT purposes (included as division of single member) Copyright 2012 Deloitte Development LLC. All rights reserved.

78 About This Presentation This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation. 78 Copyright 2012 Deloitte Development LLC. All rights reserved.