Michigan Business Tax Case Study


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Presentation by Sam Hodges and Mike Bozimowski relating to Michigan Business Tax

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  • In theory, Gross Receipts less cost of inventory = tax base on VALUE ADDED…
  • Michigan Business Tax Case Study

    1. 1. Industry Group Case Studies The Real World Concepts of MBT Taxation and Related Unitary Concepts December 10, 2009 by Michael D. Bozimowski and Sam Hodges
    2. 2. Service Organization <ul><li>Health Care operation: </li></ul><ul><li>Issues Material and Supplies </li></ul><ul><li>Inventory </li></ul><ul><li>Depreciable Assets Apportionment Where the customer receives benefit </li></ul>
    3. 3. Manufacturing Organization <ul><li>Special Part Manufacturer: </li></ul><ul><li>Issues Material and Supplies </li></ul><ul><li>Inventory </li></ul><ul><li>Depreciable Assets Apportionment Where parts are shipped </li></ul>
    4. 4. Inventory &quot;Inventory&quot; is stock of goods held for resale (retailer/wholesaler), Finished Goods, WIP, & Raw Materials (Manu) &quot;Inventory&quot; acquired during the year 41,261 41,261 40,261 14,500 11,500 What is subtraction for &quot;Inventory&quot;? 40,261 40,261 40,261 Cost of Goods Sold 1,000 1,000 End of Year (FG) 41,261 Sub-total 777 777 Other 1,234 1,234 263A 24,750 24,750 WIP 11,500 11,500 11,500 11,500 Raw Materials Purchases 3,000 3,000 3,000 Beg of Year   E   D   C   B   A     Inventory Analysis
    5. 5. WHO IS INCLUDED IN THE UBG? <ul><li>World Wide Unitary Groups </li></ul><ul><ul><li>California practice </li></ul></ul><ul><ul><ul><li>Waters Edge Elections </li></ul></ul></ul><ul><ul><li>Michigan Practice </li></ul></ul><ul><li>A foreign operating entity cannot be included in a unitary business group. [MCL 208.1117(6)] </li></ul><ul><li>Taxpayer means a person or a unitary business group. [MCL 208.1117(5)] </li></ul><ul><li>A United States person means that term as defined in section 7701(a)(30) of the IRC. [MCL 208.1117(7)] </li></ul>
    6. 6. PROCESS STARTS WITH A UBG <ul><li>Unitary Business Group Defined </li></ul><ul><li>The first step is to identify if a unitary business group exists and if it does, what entities comprise the unitary business group. </li></ul><ul><li>Unitary business group is statutorily defined by state. In Michigan Section 117(6) of the MBTA is very broad and very inclusive. </li></ul>
    7. 7. UNITARY HURDLES <ul><li>States adopting unitary taxation define a unitary business group by the satisfaction of both a control test and in some states only one of two relationship tests. </li></ul><ul><li>Ownership alone is not enough </li></ul>
    8. 8. RELATIONSHIP TESTS FOR UNITY <ul><li>AND the group of persons must have business activities or operations that: </li></ul><ul><li> (1) result in a flow of value between or among persons in the group, and/ or </li></ul><ul><li> (2) are integrated with , are dependent upon, or contribute to each other. </li></ul>
    9. 9. CONTROL THROUGH ATTRIBUTION <ul><li>Michigan’s Department of Treasury will use the term “indirectly” to mean “constructive ownership”. As guidance attribution rules expressed in IRC Section 318 or analogous authority to determine indirect or constructive ownership and control. While IRC Section 318 specifically pertains to corporate stock ownership, the Department of Treasury will apply its principles to all forms of entities subject to the MBT. (Treasury FAQ U34) </li></ul>
    10. 10. ATTRIBUTION <ul><li>The constructive ownership rules of IRC Section 318, 1563 and 414 can apply to the following categories of related parties: </li></ul><ul><ul><li>Family members </li></ul></ul><ul><ul><li>Partnerships and partners </li></ul></ul><ul><ul><li>Estates and beneficiaries </li></ul></ul><ul><ul><li>Trusts and beneficiaries </li></ul></ul><ul><ul><li>Corporations and shareholders </li></ul></ul><ul><ul><li>Holders of stock options </li></ul></ul>
    11. 11. ATTRIBUTION LIMITATIONS <ul><li>NO Re-Attribution </li></ul><ul><li>NO Double Inclusion </li></ul><ul><li>NO Family Re-Attribution </li></ul><ul><li>NO Sidewise </li></ul>
    12. 12. UNITARY FLOW OF VALUE AND INTREGRATION <ul><li>Functional Integration </li></ul><ul><ul><li>Transfers of equipment used in the business, </li></ul></ul><ul><ul><li>Common advertising, </li></ul></ul><ul><ul><li>Centralized accounting, legal, or personnel functions, </li></ul></ul><ul><ul><li>Common insurance policies, pension plans or employee benefits, and </li></ul></ul><ul><ul><li>Intercompany financing, when such financing serves more than a mere investment function </li></ul></ul>
    13. 13. 313 8,042 5,342 (625) 13,971 Modified Gr Receipts Tax - Watercraft/Vehicles GRT 313 8,042 5,342 (625) 13,971 Tax @ .8% 39,126 1,005,190 667,716 (78,126) 1,746,364 Sub-Total - - - - - Usable SBT Loss C/F (65%) - Prior Year SBT Loss C/F 39,126 1,005,190 667,716 (78,126) 1,746,364 Apportioned Gr Receipts 100.% 32.7932% 15.4909% 100% 23.8034% Apportionment 39,126 3,065,238 4,310,377 (78,126) 7,336,615 Modified Gross Receipts - -Miscellaneous - -Contractors 15, 16, 17 - -Staffing company (10,000) (100,000) (200,000) (310,000) -Materials and Supplies (29,000) (632,000) (466,000) (1,127,000) -Depreciable Assets Acqd (3,143,016) (2,529,380) (5,672,396) -Inventory Acquired 78,126 6,940,254 7,505,757 (78,126) 14,446,011 Gross Receipts 78,126 6,940,254 7,505,757 (78,126) 14,446,011 Total Sales 78,126 2,275,933 1,162,709 (78,126) 3,438,642 Michigan Sales Co 3 Co 2 Co 1 Elim UBG Michigan Business Tax
    14. 14. 1,046 10,522 13,583 28,577 Liability Before Credits 189 1,897 2,448 5,151 Surcharge @ 21.99% 858 8,625 11,135 23,426 Total MBT Before Surcharge 545 584 5,793 - 9,455 Income Tax @ 4.95% 11,000 11,795 117,027 - 191,005 Business Income Tax Base - -Affordable Housing Deduct - -MBT Loss C/F 11,000 11,795 117,027 - 191,005 Apportioned Business Inc 100% 32.7932% 15.4909% 100% 23.8034% Apportionment 11,000 35,969 755,459 - 802,428 Business Income Tax Base - -Net Earnings from S/E - -US Interest Income - -Inc from non UBG flowthru - -Fgn Div & Royalties - +Non UBG Intangible Exp - +Loss from non UBG flowthr - +Federal NOL C/B C/F 1,000 10,000 15,000 26,000 +MBT/SBT Taxes - +Taxes Measured by Income - +Muni Interest/Dividends 10,000 25,969 740,459 776,428 Business Income Co 3 Co 2 Co 1 Elim UBG Michigan Business Tax
    15. 15. - -Small Business - -Research & Development (673) (14,662) (10,811) 12,598 (13,548) -Investment (222) (370) (888) 740 (740) -Compensation - -SBT Credit Non-Refundable Credits Co 3 Co 2 Co 1 Elim UBG Michigan Business Tax
    16. 16. Michigan Update –What’s Coming <ul><li>New Look at current item </li></ul><ul><ul><li>Proposed Rules & RAB’s </li></ul></ul><ul><ul><ul><li>Actively Solicits in Michigan </li></ul></ul></ul><ul><ul><ul><li>Controlled Group defined - RAB </li></ul></ul></ul><ul><ul><ul><li>Materials and Supplies Defined </li></ul></ul></ul><ul><ul><ul><li>Industrial Personal Property </li></ul></ul></ul><ul><ul><ul><li>Order of the Credits </li></ul></ul></ul><ul><li>Michigan Nexus – CAUTION!!!! </li></ul>
    17. 17. What is FIN 48? <ul><li>An interpretation to FAS 109 </li></ul><ul><li>Requirement to book a liability for uncertain tax positions </li></ul>
    18. 18. Michigan Business Tax – Other State Income Tax Impact on FAS109 <ul><li>MBT </li></ul><ul><ul><li>Income tax component </li></ul></ul><ul><ul><li>Gross receipts component </li></ul></ul><ul><li>Deferred MBT on inception (2008) </li></ul><ul><li>What does “below the line” mean? </li></ul><ul><li>Calculating a state effective tax rate? </li></ul>
    19. 19. Tax Impact on FAS109 continued <ul><li>Both components of the MBT tax, Business Income Tax (BIT) and Modified Gross Receipts Tax (MGRT), are considered income taxes under FAS 109 </li></ul><ul><li>Deferred tax must be calculated for the cumulative difference between book and tax basis for all items on the balance sheet </li></ul><ul><li>Applies to all entity taxpayers – C Corporations, S Corporations, Partnerships, LLC's </li></ul>
    20. 20. What is a Tax Position <ul><li>Tax Position: </li></ul><ul><li>As used in FIN 48, a position taken on a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. </li></ul><ul><li>Tax Position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. </li></ul>
    21. 21. What is a tax position… <ul><li>The term tax position also encompasses, but is not limited to: </li></ul><ul><ul><li>A decision not to file a tax return </li></ul></ul><ul><ul><li>An allocation or a shift of income between jurisdictions </li></ul></ul><ul><ul><li>The characterization of income or a decision to exclude reporting taxable income in a tax return </li></ul></ul><ul><ul><li>A decision to classify a transaction, entity, or other position in a tax return as tax exempt. </li></ul></ul>
    22. 22. When is a Tax Position Uncertain <ul><li>More-likely-than-not Standard: </li></ul><ul><li>A tax position is uncertain when the likelihood (using a threshold of more than 50 percent) that a positive resolution would result for the position taken upon examination by any tax authority, based upon all evidence that the taxing authority (assume taken to the highest court). </li></ul>
    23. 23. Documentation <ul><li>Regardless of the information used to support its position, management’s documentation should capture its conclusions on each uncertainty and the documentation should stand on its own. </li></ul><ul><li>. </li></ul><ul><li>The documentation should include a description of the uncertain tax position, the tax return treatment, the tax technical merits of the position, and an assessment of the probability that the position will be sustained upon its technical merits or relevant administrative practices (i.e., prior IRS resolutions of like or similar issues). </li></ul>
    24. 24. MICHIGAN BUSINESS TAX <ul><li>? ? ? </li></ul>
    25. 25. THANK YOU <ul><li>Sam Hodges </li></ul><ul><li>Sam Hodges & Associates LLC </li></ul><ul><li>26400 Lahser Rd, Suite 210 </li></ul><ul><li>Southfield, Michigan 48033 </li></ul><ul><li>[email_address] </li></ul><ul><li>(248) 327-6430 </li></ul><ul><li>Mike Bozimowski </li></ul><ul><li>The Rhemann Group LLC </li></ul><ul><li>39300 W. Twelve Mile Rd., Suite 100 Farmington Hills, MI  48331-2989 </li></ul><ul><li>[email_address]  (248) 579-1100 </li></ul>The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.