There are a handful of Michigan Business Tax (MBT) items to consider regarding pass-through entities and Form 4700.  Also, if pass-through entities are part of a unitary combined return.

The first issue is when a pass-through entity is receiving pass-through income from another member of a unitary business group.  The eliminations between unitary members should eliminate the doubling up of the income.   The designated member will pass along the SE income to a partner / LLC member who will pay the self-employment tax on the SE earnings.

If two pass-through entities are not part of a unitary group, each will be required to file their own MBT return whether with another unitary group or by themselves.   In this instance, the company receiving the pass through income will exclude from gross receipts amounts received or otherwise attributed to eliminate double taxation, per MCL 208.1111(bb).

For the business income tax, add the loss or subtract the income from a flow-through entity to the extent included in federal taxable income, from the business income tax base that is attributable to another entity whose business activities are taxable under the MBT or would be subject to the tax if the business activities were in Michigan, per MCL 208.1201(2)(e).  The subtraction is found on line 25b Form 4567 for 2008, for 2009 Form 4567, the subtraction is found on Line 39.

Form 4700 for 2008 returns does not take the adjustment into account.  Form 4700 for 2009 is much more detailed.  Line 69 would provide for this exclusion for proper reconciliation from the Federal to the Michigan Business Tax return.  We suggest you create your own reconciliation schedule taking into account the pass through income, scan and attach as a pdf to the e-filed return.

Assuming neither partnership is part of the same unitary group, the entity generating the SE income would be entitle to the deduction.  The MBT act states, “Deduct any earnings that are net earnings from self-employment, to the extent included in the federal taxable income of the taxpayer, partner or limited liability company member.  Net earnings from self-employment are as defined under Section 1402 of the Internal Revenue Code except to the extent that those net earnings represent a reasonable return on capital” [MCL 208.1201(2)(h)].

Remember the SE earnings are added to the computation base for the Compensation Credit.

This month assessors will be mailing assessment notices to property owners.  It’s very important to also note the same form also informs the property owner of the property classification.  The classification is very important if the property owner could qualify for the Michigan Business Tax Personal Property Tax Credit.

Please notify the assessor if the classification is wrong.  It may be wrong because of clerical error or if the assessor initiates a change.  If it is wrong, first contact the assessor.  The next step is the Board of Review, then the State Tax Commission. 

The State Tax Commission (STC) has filed 10,000 or so appeals in the Tax Tribunal.  These are appeals in which the STC has determined that the local assessor got it wrong.  The STC should be notifying the taxpayer, however, because the suit is technically against the local taxing unit a situation could arise in which a taxpayer is not notified.  Hence a truly perverse situation where the STC and the local unit agree without notifying the taxpayer of any of the traditional appeal avenues. 

The property owner can check the status of the case by searching the Tax Tribunal's Docket Look-up by the local unit or the taxpayer of record.

In Michigan's Adventure, Inc., et al. v. Dalton Township, et al., Michigan Court of Appeals, Docket Numbers 283770 and 283869, January 14, 2010 the Court of Appeals ruled Michigan Tax Tribunal, and not the circuit court, had exclusive jurisdiction to decide whether the special assessments at issue were properly imposed. The property owners claimed that the special assessments to improve a sewer system far exceeded any benefit conferred by that sewer system on the properties against which the assessments were made; that their constitutional rights were violated in a number of ways; and that the township failed to follow proper procedures under the Township Public Improvement Act.

Although the Tax Tribunal has exclusive jurisdiction over assessment and tax matters, the Headlee Amendment and its enabling legislation specifically grants the court jurisdiction over Headlee Amendment challenges against the imposition of a “tax.”  However, neither the Headlee Amendment nor the statute extend jurisdiction to special assessment disputes and, generally, special assessments are not taxes for the purposes of constitutional tax limitations.  Despite the property owners' claims that the case involved the imposition of a “disguised tax,” it is appropriate for the Tax Tribunal to initially consider the taxpayer's claim of an alleged violation of the Headlee Amendment in the context of their challenge to the special assessments.  Any decision of the Tax Tribunal will be subject to judicial review on appeal.

In Paris Meadows, LLC v. City of Kentwood, Michigan Court of Appeals.  Docket Number 286978, January 12, 2010, the Court of Appeals ruled that a city could not tax the common element of a condominium development independent of the condominium units.  The disputed property is designated as a “convertible area” on the subdivision plan and is defined in the Master Deed as part of the “general common elements” of the condominium project.

The Court ruled the Tax Tribunal erred in concluding that the developer's reservation of rights to develop the disputed property rendered the property not a common element, and thus separately taxable.  According to the language in the Master Deed and the Michigan Condominium Act, the disputed property was a common element, in which the co-owners held an undivided, inseparable interest, and the fact that the developer retained the right to withdraw or develop the property for six years did not vitiate this fact.

Property taxes may only be assessed against the individual condominium units and the prorated value of the common elements must be added to the condominium unit's tax bill.  The court rejected the city's argument that the taxes on the disputed property could be assessed against the developer as the agent of the co-owners because under Michigan law [MCL 211.3], where the owner is known the owner is taxed and here the owners of the disputed property are known, the co-owners of the individual condominium units. 

The Michigan Department of Treasury (Department) has announced that for the 2009 tax year, the Department will not be mailing Michigan Business Tax forms or instruction books (standard taxpayers, financial institutions, or insurance companies) to MBT taxpayers.  MBT forms and instructions for the 2008 tax year were mailed as it was the inaugural year for the tax.  All 2009 MBT returns and instructions are available from the Department's website.  They are found on the MBT forms page.

All eligible MBT returns prepared using software must be e-filed.  E-file information is available at www.MIfastfile.org.  The Department will not begin accepting MBT e-file returns until January 25, 2010, and therefore, will begin issuing acknowledgments for MBT e-file returns on January 26, 2010.

Public Act 240 of 2009 (PA 240-09)

PA 240-09, effective January 8, 2010, amends Section 434 [MCL 208.1434] of the Michigan Business tax Act (MBTA) to allow the Michigan Economic Growth Authority (MEGA) to enter into a maximum of five (previously four) Michigan Business Tax credit agreements for the construction of an integrative cell (battery) manufacturing facility and extends the deadline from October 1, 2009 to March 31, 2010 for MEGA to enter into such agreements. PA 240-09 allows MEGA, until March 1, 2010, to enter into Michigan Business Tax credit agreements for the manufacture of advanced lithium ion battery packs in Michigan for tax years beginning on or after January 1, 2010 end ending before January 1, 2017.

The law specifies that the taxpayer must make capital investments in Michigan of at least $250 million, create at least 1,000 new jobs and manufacture at least 225,000 advanced lithium ion battery packs in Michigan. The maximum credit cannot exceed $26 million per tax year for no more than three tax years. If a taxpayer makes capital investments of at least $200 million and create at least 300 new jobs, the total credit is not more than $42 million over four consecutive tax years.

If a taxpayer claims the first credit above, then the second credit above cannot also be claimed.  Capital investments, new jobs, and other expenses cannot be double-counted for this credit and for other credits against the MBT.  Applicable to tax years beginning after 2014 and ending before 2017, a taxpayer may claim a credit for 75% of the costs incurred to implement a sourcing program to use battery cells from a business that has agreed to construct an integrative cell manufacturing facility.  A single taxpayer cannot claim a credit of more than $12.5 million per year for more than two years. A taxpayer must manufacture at least 10,000 motor vehicles in each year a credit is claimed at a Michigan facility.  Also, some of the costs eligible for the credit must be incurred at the facility where the motor vehicles are manufactured.  The law require agreements for various battery-related tax credits to include a repayment provision.

Public Act 241 of 2009 (PA 241-09)

PA 241-09, effective 01/08/2010, amends the Michigan Business Tax brownfield credit to provide that a qualified taxpayer that has a preapproval letter issued after December 31, 2007 and before January 1, 2014 (previously, January 1, 2013) may claim a brownfield credit. 

PA 241-09 provides that for a project approved or amended on and after January 1, 2010, if the total of all eligible investments for a project exceed $10 million but less than $100 million, (previously $300 million), the taxpayer may claim a credit of:

(1) up to 12.5% of the costs of the qualified taxpayer's eligible investment on an eligible property that is located in a qualified local governmental unit; or

(2) up to 15% of the cost (up to 20% until December 31, 2010) of the qualified taxpayer's eligible investments on an eligible property if the project is designated as an urban development area project.

The law also amends the maximum number of projects the Michigan Economic Growth Authority may approve.  PA 241-09 also replaces references to the Department of Environmental Quality with references to the Department of Natural Resources.

Yesterday I reported on the Form Motor Credit decision of the Michigan Court of Appeals.  On an almost identical issue, the Court of Appeals in Daimler Chrysler Services of North America, LLC, a/k/a DaimlerChrysler Services North America, LLC v. Department of Treasury, Michigan Court of Appeals, Docket No. 288347, January 21, 2010 ruled that a sales finance company was not entitled to a bad debt deduction on transactions involving repossessed vehicles. 

This case was previously decided by the Court of Appeals in DaimlerChrysler v. Department of Treasury, 271 Mich App 625 , 723 NW2d 569 (2006) with regard to a separate issue, that the taxpayer was entitled to a bad debt deduction on vehicles that it had financed and that later defaulted.  The statute in question was later amended to place limitations on the person that may be characterized as a “taxpayer” for purposes of the bad debt deduction.

On remand for a determination of the amount of refund due, the Court of Claims erred in finding that transactions involving repossessed vehicles are includible in the calculation of a refund under the bad debt statute [MCL 205.54i].  The version of the bad debt statute in effect at the time the refund claims were filed clearly states that for purposes of the bad debt deduction, a bad debt does not include repossessed property.

In Ford Motor Credit Co. v. Department of Treasury, Michigan Court of Appeals, Docket Number 289781, January 12, 2010 a finance company that financed sales of motor vehicles by its affiliated dealers was not entitled to recover overpayments of sales tax under the general Sales Tax Act's bad debt statute.  The court rejected that taxpayer's constitutional arguments for the reasons stated in GMAC, LLC, et al. v. Department of Treasury, Michigan Court of Appeals. Docket Numbers 289261-289263 and 289266, December 3, 2009. 

The court also rejected the claim that the taxpayer remained entitled to the refund based on the definition of person contained in in the Sales Tax Act [MCL 205.51(1)(a)] as without merit.  That statute expressly provides that it does not apply where a more limited meaning is disclosed by the context.  In light of the legislature's amendment of MCL 205.54i to express its original intent that only the person who remits the tax on the specific sale at retail was entitled to the bad debt deduction, the taxpayer's position was without merit.  Finally, the taxpayer's assertion that it is entitled to the bad debt deduction based on an assignment is contrary to the legislature's expressed statement that the deduction is available only to the person who remits the tax.

Public Act 209 of 2009 (PA 209-09)

PA 209-09 amends the Plant Rehabilitation and Industrial Development Act (PA 198) to allow a property tax abatement for an electric generating plant fueled by biomass that is not owned by a local unit of government if:

(1) the plant involves the reuse of a federal Superfund site remediated by the U.S. Environmental Protection Agency; and

(2) an independent study has concluded that the plant would not have an adverse effect on wood supply in the area from which the plant's wood supply would be derived.

A plant would be presumed not to have an adverse effect if the company has a study funded by the U.S. Department of Energy and managed by the Michigan Department of Energy, Labor, and Economic Growth concluding that the plant will consume not more than 7.5% of the annual wood growth within a 60-mile radius of the plant.

Public Act 162 of 2009 (PA 162-09)

PA 162-09, effective December 14, 2009, allows the designation of all or part of a local development finance authority district as a certified alternative energy park. The bill allows the Michigan Economic Development Corporation (MEDC) to designate up to 10 certified alternative energy parks. The MEDC cannot enter into a agreement for an alternative energy park after December 31, 2011. The bill allows a municipality in which a certified alternative energy park is located to make a tax pledge to support an authority's tax increment financing bonds. The Local Development Financing Authority Act allows a local development finance authority to “capture” revenue from property tax millage that is levied on increased property values, within the jurisdiction to the authority.

Public Act 161 of 2009 (PA 161-09)

PA 161-09, effective December 14, 2009, amends the Local Development Financing Act to allow the Michigan Economic Development Corporation to designate an additional two certified technology parks (Smart Zones) after June 1, 2009 and before April 1, 2010.  Under the Act, these special technology parks or zones can “capture“ the growth in property taxes (tax increments) within the park.

In a case that I was involved with as a consultant at the audit level, the Michigan Court of Appeals has allowed a landfill owner and operator to claim the industrial processing exemption from the Michigan sales tax and use tax.  [Granger Land Development Co. v. Department of Treasury, Michigan Court of Appeals, Docket No. 286355, December 29, 2009]

In Granger, property and equipment used by a landfill operator to erect cells in which it deposits waste for the production of methane gas for sale, qualify for exemption from Michigan use tax because the property is used in industrial processing.  Though the Department of Treasury contended that the personal property used to erect and maintain the cells was affixed to the real property, the taxpayer did not attach the cells to the underlying real property and affirmatively insulated the real property from the waste.  Further, the cells were not established to improve the land but to facilitate the processing of waste material.  The cells were not intended to be a permanent accession to real estate because the fact that the processing of the raw materials occurs in the same location that the eventual disposal of leftover materials might occur does not mean that the materials in the cells become part of the real estate during the processing period.  The heavy equipment used by the taxpayer is also exempt because it is used to transport the waste and to erect the cells and therefore is used in the industrial processing of the waste.