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.