Legislature Filling Up with Michigan Business Tax Amendments
I have counted 14 bills introduced into the Michigan legislature to amend the Michigan Business Tax (MBT). I may have missed some and there will be more. I would like to address just one of the bills because it attempts to fix some of the more commons problems with the MBT.
Senate Bill No. 1038 was introduced on January 22, 2008 and referred to the Committee on Finance. Following are some the key provisions in the proposed legislation:
1. Amend the definition of "gross receipts" to "not include amounts that are only deemed received".
2. Add an additional exclusion to "gross receipts" for proceeds from treasury functions.
3. Exclude from "gross receipts" capital gains including hedging transactions and land used in a trade or business acquired before 2008.
4. Expand the exclusion from "gross receipts" for amounts received other than from a trade or business and delete "exclusively".
5. Add additional exclusions from "gross receipts" for:
- US and Michigan interest income and dividends.
- Foreign dividends and royalties.
- Any tax, fee or surcharge required by law.
- Amounts received by a partner from an entity subject to the MBT.
After almost 50 speaking engagements since the enactment of the MBT, I have developed a list of issues relating to the tax. My list is up to 33 items. They are not necessarily technical problems, unintended consequences or economic issues. They are issues that all tax practitioners, CPAs and Attorneys should be aware of. In the next few months I will be addressing these issues in this blog.
Whether intentionally or unintentionally SB 1038, in its attempt to expand the exclusion from "gross receipts" for amounts received other than from a trade or business seems to preclude an individual who has business activity reported on Schedule C or F, and possibly Schedule E, from excluding their personal investment activity. The bill reads “Receipts excluded from gross receipts under this subsection for an individual, estate, or trust organized for estate or gift planning purposes, other person organized to conduct investment activity which does not conduct a trade or business or conduct investment activity for a trade or business include, but are not limited to, the following:
(A) Personal investment activity, including interest, dividends, and gains from a personal investment portfolio or retirement account.”
Treasury Q&A B8 seems to indicate that it is their position that all personal investment activity is excluded since it says “As a result, personal investment income, gains from the sale of personal assets or other assets not used in a trade or business, and any other income not specifically derived from a trade or business that is earned, received, or otherwise acquired by an individual, an estate, or a trust or partnership organized or established exclusively for estate or gift planning purposes, are not included in gross receipts for purposes of determining the filing thresholds under sections 200, 411, or 505 (MCL 208.1200, 208.1411, or 208.1505), and are not included in the business income tax base or modified gross receipts tax base under sections 201 and 203, respectively, (MCL 208.1201 and 1203).” Treasury is indicating that it is sufficient that the investment assets not be used in a trade or business.
I see the wording of SB 1038 as limiting that exclusion. What do you think?
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Larry,
I agree with your analysis. However, I believe its an audit issue and for the taxpayer individual a documentation issue. The intent of PA 145 and the proposed legislation is to exclude from the MBT income from personal investment activity as long as it is not an integral part or was used in a trade or business. For a corporation, partnership or LLC; it is much easier to segregate such investment activity from the separate business entity. However, an individual with a Schedule C, Schedule F or Schedule E business activity; the segregation might be harder to document. Also, such an arrangement may be characterized as a "unitary business group". Usually there is a mingling of money, shared expenses and shared administration. It that case it would be subject to tax (MBT). My advice to the individual with investment income would be to segregate the income from the businesses.
Thanks for your comment.
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We have a client that owns an interest in a LLC. The LLC owns active rental property and receives rental income. The client has an interest party that wishes to purchase the clients membership interest. Under the expended wording for business income would the purchase of the membership interest be subject to the MBT?
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In both the definition of business income (Section 105(2)) and in the exclusion from gross receipts (Section 111(1)(v)) the income derived from the sale of a business is included in business income (Section 105(2)(d)) and receipts derived from the sale of a business are included in gross receipts (Section 111(1)(v)(iv)). The question is: Does the sale of a membership interest constitute the sale of a business? I say no.
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