If you are one of many taxpayers who are overpaid on the first Michigan Business Tax (MBT) return, you have some good news and some bad news.

First the good news; the state of Michigan will be refunding overpayments.  Unlike the state of California where the State Controller has said that unless they get a budget agreement, the State will start issuing IOU’s for any refunds; Michigan will be issuing refund checks.

Now the bad news; you may have to wait up to 16 weeks for the refund check.  Processing of the first year MBT returns is taking much more time than was expected.  Not only does the state have a new tax, but they also have a new computer platform processing the returns.  Approximately 90,000 MBT returns were filed on or about April 30th.  There were about 20,000 extensions. 

Following is some advice from Floyd Schmitzer, Administrator of the Tax Processing Bureau at the Michigan Department of Treasury.

1.Do not file a second MBT return if you have not received a refund.

2.Attach statements and schedules to the MBT return where an explanation is warranted. 

3.Do not send or attach original documents to the MBT return.

My Blog dated Tuesday June 16, 2009 titled "Michigan Business Tax Filing Threshold" should be disregarded for now.  It is not my intention to use this blog to promote positions contrary to the Michigan Department of Treasury promulgated policy.  That can be best accomplished in a different venue.

The following position as stated in my blog is indeed contrary to Treasury FAQ M22 (below).

From Ed Kisscorni's blog dated June 16, 2009:

Section 505 of the Michigan Business Tax Act states: “A taxpayer … whose apportioned or allocated gross receipts are less than $350,000.00 does not need to file a return or pay the tax imposed under this act. The apportioned or allocated gross receipts are defined in Section 115, not Section 111 of the Michigan Business Tax Act.

(1) An annual or final return shall be filed with the department in the form and content prescribed by the department by the last day of the fourth month after the end of the taxpayer's tax year. Any final liability shall be remitted with this return. A taxpayer, other than a taxpayer subject to the tax imposed under chapter 2A or 2B, whose apportioned or allocated gross receipts are less than $350,000.00 does not need to file a return or pay the tax imposed under this act.

From Michigan Department of Treasury Frequently Asked Questions:

Mi22. For purposes of calculating the $350,000 filing threshold in section 505(1); will “gross receipts” as defined in section 111 be used, or will the filing threshold be determined by “sales” as defined in section 115? What meaning is given to the term “apportioned or allocated gross receipts”?

The definition of “gross receipts” will be used to calculate the $350,000.00 filing threshold not the definition of “sales.” This is based upon the express language of section 505(1) that the filing threshold is determined by “apportioned or allocated gross receipts.”

The term “apportioned or allocated” has the same meaning as in the Michigan Business Tax Act. When a taxpayer’s business activity is subject to tax within and outside of Michigan its tax base is apportioned, and business activity confined solely to this state results in the tax base being allocated to Michigan.

My plan is to research and digest this issue which creates an undue hardship on many taxpayers not otherwise subject to the Michigan Business Tax.  I will address it in a future State and Local Tax Information release.

I apologize for the confusion.

The Michigan Business Tax (MBT) filing threshold is $350,000.  If gross receipts are less than $350,000, the taxpayer does not need to file a return or pay a tax.

Although the total gross proceeds from the sale of business assets and the gain from the sale of capital assets are included in the modified gross receipts tax base, they are not included in gross receipts for purposes of the filing threshold.  Gross receipts for purposes of the filing threshold is defined in Section 115 of the Michigan Business Tax Act (MBTA).

Gross receipts for purposes of the modified gross receipts tax base is defined in Section 111(1) of the MBTA. See the instructions for Form 4567, Page 1, Line 11. The definition is all inclusive and includes the total gross proceeds from the sale of business assets and gains from the sale of capital assets.

Sales for purposes of apportionment are defined in Section 115 of the MBTA. It does not include casual transactions, isolated sales, gross proceeds from the sale of business assets or capital gains. See the instruction for Form 4567, Page 1, Line 10.  The definition does not include receipts from the sale of business assets or other non business income.

Section 505 of the Michigan Business Tax Act states: “A taxpayer … whose apportioned or allocated gross receipts are less than $350,000.00 does not need to file a return or pay the tax imposed under this act. The apportioned or allocated gross receipts are defined in Section 115, not Section 111 of the Michigan Business Tax Act.

(1) An annual or final return shall be filed with the department in the form and content prescribed by the department by the last day of the fourth month after the end of the taxpayer's tax year. Any final liability shall be remitted with this return. A taxpayer, other than a taxpayer subject to the tax imposed under chapter 2A or 2B, whose apportioned or allocated gross receipts are less than $350,000.00 does not need to file a return or pay the tax imposed under this act.

The Michigan Business Tax (MBT) instructions for Form 4570 state "Compensation includes expenses such as payroll taxes (exclusive of payments for state and federal unemployment compensation and federal insurance contributions) and all other fringe benefits made for the benefit of employees".

The question often asked is:  What payroll taxes are included in the calculation of the compensation credit?

There is a lot of confusion on this matter. I believe no payroll taxes are included in “compensation” for purposes of the compensation credit. Compensation is defined in Section 107(2) of the MBTA. (See below) Subparagraphs (c), (d) and (e) seem to rule out any form of payroll taxes. Please note the language “and similar social insurance programs” contained in subparagraph (d).

Compensation does not include any of the following:

(a) Discounts on the price of the taxpayer's merchandise or services sold to the taxpayer's employees, officers, or directors that are not available to other customers.

(b) Except as otherwise provided in this subsection, payments to an independent contractor.

(c) Payments to state and federal unemployment compensation funds.

(d) The employer's portion of payments under the federal insurance contributions act, chapter 21 of subtitle C of the internal revenue code, 26 USC 3101 to 3128, the railroad retirement tax act, chapter 22 of subtitle C of the internal revenue code, 26 USC 3201 to 3233, and similar social insurance programs.

(e) Payments, including self-insurance payments, for worker's compensation insurance or federal employers' liability act insurance pursuant to 45 USC 51 to 60.

The Michigan Business Tax Act (MBTA) provides an exclusion of gross receipts derived from investment activities in MBTA Section 111(1)(x).  [MCL 208.1111(1)(x)]  However, the exclusion has two limitations.

A taxpayer may not be able to exclude from “gross receipts” the receipts derived from investment activities under MBTA Section 111(1)(x) because the exclusion is limited to:

“a person that is organized exclusively to conduct investment activity and that does not conduct investment activity for any person other than an individual or a person related to that individual …”

“a person is related to an individual if that person is a spouse, brother or sister whether of the whole or half blood or by adoption, ancestor, lineal descendent of that individual or related person, or a trust benefiting that individual or 1 or more persons related to that individual.”

First we have the "organized exclusively to conduct investment activity" limitation and then the "does not conduct investment activity for any person other than an individual or a person related to that individual".  Only if both situations exist will the exclusion apply.

Gross receipts derived from investment activities could be excluded under MBTA Section 111(1)(w)(ii)(a) as “Receipts derived from investment activity … if the investment activity is not part of the taxpayer’s trade or business”.  You must satisfy the “organized for estate or gift planning purposes” requirement of MBTA Section 111(1)(w).  This requirement must be documented.

The MBTA attempts to exclude gross receipts and income from investment activities.  However, there are limitations.  It is very important to segregate the investment activities from those of a trade or business, otherwise they would be included in the MBT tax base.

It must be a sign of the times, but we have received many questions on how to treat a cancellation of indebtedness as it relates to the Michigan Business Tax (MBT).  David George, CPA of Troy provides the following explanation.

When a LLC (partnership) has a debt for debt exchange and realizes cancellation of debt income; the debt forgiven is included in gross receipts calculation for MBT in the amount of benefit it derived.  See Treasury FAQ B21 and FAQ M42.

If the company retains the assets and reduces the basis as provided by IRC Section 108 we will have ITC recapture.  The debt forgiven is the deemed selling price and gain would be zero assuming basis is greater than the COD income.

If the company does not retain the assets the total amount of the gain including the COD Income would be subject to the MBT business income tax calculations, and ITC recapture rules would be applicable.

Regardless the COD income would be included as part of the gross receipts.

The following is provided from Treasury FAQ B21:

A taxpayer who meets the nexus standards and gross receipts thresholds of the MBT act is subject to a business income tax imposed on the business income base of the taxpayer and a modified gross receipts tax imposed on the modified gross receipts tax base of the taxpayer. MCL 208.1201 and 1203. The business income tax base of a taxpayer means the business income of the taxpayer subject to a series of specific adjustments listed in section 201. MCL 208.1105(2) defines business income, in part, to mean “that part of federal taxable income derived from business activity. For a partnership or S corporation, business income includes payments and items of income and expense that are attributable to the business activity of the partnership or S corporation and separately reported to the partners or shareholders. . .”. (Emphasis added).

In order to claim an Investment Tax Credit (ITC) to carryover from the Single Business Tax (SBT) into the Michigan Business Tax (MBT), the taxpayer must file a SBT return for the year of acquisition and for each of the intervening years if any. Then, and only then, can the unused credit be carried forward into the MBT and used as an offset against tax. The four year statute of limitations is not applicable in this situation because no return was filed and no claim of refund is made for the SBT years.

The above is a common situation with the SBT because of the separate return nature of the tax.  If there is no tax due and gross receipts were $350,000 or less, then no return was needed and the credits were lost.  However, the unused ITC can be carried forward for ten years.  However, tax returns are needed to document the credits.

I have been on the road a lot with the MBT seminars and consulting engagements.  Last week I was in Marquette for an in-house seminar and two other seminars at Northern Michigan University.  The week before I was in Detroit for a MBT seminar and two consulting engagements.  The Michigan Business Tax continues to present unique challenges and opportunities.

Now that we have forms and instructions as well as a filing season behind us, tax practitioners are finding new issues to deal with.  In presenting the MBT seminars I have found a lot of confusion and doubt in regard to the book/tax adjustment to the business income tax.  Many practitioners do not understand its application and how to compute the adjustment.  The book/tax adjustment, which is filed on Form 4593, presents a unique opportunity to create deductions to the business income tax.

In June I will be teaming up with David Barrons to present a series of MBT seminars on nexus, apportionment and unitary.  We have developed a new seminar titled: Michigan Business Tax – Multistate: Nexus, Apportionment and Unitary Business Group. Participant evaluations from the 2008 MBT seminars were used to develop this new seminar.

The seminar features detailed problems on the control test, the relationship test and how to complete a unitary business group study. Participants will also complete, step by step, a unitary combined Michigan Business Tax return.

The following list shows the dates and locations for the June seminars. Ctrl + Click to follow the link to the MACPA website for a complete description of the seminar and registration information:

Thursday, June 11, 2009 – Radisson Detroit, Livonia

http://www.michcpa.org/public/catalog/coursedetails.aspx?courseID=09MBTA1

Friday, June 19, 2009 – WMU Beltline Conference Center, Grand Rapids

http://www.michcpa.org/public/catalog/coursedetails.aspx?courseID=09MBTA2

Monday, June 22, 2009 – Turtle Creek Casino & Hotel, Williamburg

http://www.michcpa.org/public/catalog/coursedetails.aspx?courseID=09MBTA3

Thursday, June 25, 2009 – MSU Management Education Center, Troy

http://www.michcpa.org/public/catalog/coursedetails.aspx?courseID=09MBTA4

Public Act 8 of 2009 is now law, effective retroactive for tax years beginning after 12/31/2007, it amends the Michigan Business Tax to allow a taxpayer that calculates and pays estimated payments for federal income tax purposes under Internal Revenue Code Section 6655(e) , to use the same methodology as used to calculate the annualized income installment or the adjusted seasonal installment, whichever is used as the basis for the federal estimated payment, to calculate the estimated MBT payments required each quarter.  A penalty for underpayment of an estimated MBT will not be assessed for a tax year that ends before December 1, 2009 if the taxpayer paid 75% of the tax due for the tax year. 

The Michigan Department of Treasury has stated that for now they will follow FAQ A36 and allow an overpayment made in connection with the annual return to be applied as timely against the taxpayer's first quarter MBT estimate, even though the overpayment may have been made after the due date for the first quarter MBT estimated payment.

Senate Bill 98, addressing the issue of penalty relief for underpayment of estimated Michigan Business Tax (MBT) filings, was sent to the Governor for her signature Thursday, April 2^nd.  The measures provide relief for all tax years ending before December 1, 2009, if the taxpayer pays at least 75% of the tax due.  The bills will reduce from 85% to 75% the estimated tax safe harbor.  The 75% safe harbor is available only for taxpayers with tax years ending before December 1, 2009.  The reduced safe harbor will cover all calendar year 2008 MBT returns and most tax year returns starting in 2008.

MACPA’s Legislative Advisory Group, Business Tax Restructuring Task Force and Government Relations staff worked diligently in negotiating and securing an agreement with the Department of Treasury and the Legislature reducing the original threshold of 85% accuracy in estimating total liability payment down to 75%.  Additionally, the MACPA’s amendment ensured equal application of the provisions to fiscal-year filers by changing the affected time period to tax years ending prior to December 1, 2009.

While Senate Bill 98 provides a 25% cushion and should cover most small errors in computing MBT estimated tax payments, the Revenue Act provides for much broader penalty relief based on reasonable cause.  We have received many inquiries from taxpayers and tax practitioners about Michigan Business Tax (MBT) waiver of penalties for reasonable cause. 

The Department of Treasury (Treasury) has consistently stated that there would be no broad waiver of penalty for the MBT and that the penalty provisions contained in the Revenue Act would be imposed when appropriate.  However, existing law [MCL 205.24(4)], rules [R 205.1013] and RAB 2005-3 provide the Treasury with +sufficient authority to waive MBT penalties for reasonable cause.  Recently they have agreed to consider requests for penalty waiver under the MBT.

Treasury has consistently opposed any broad penalty waiver provision because they believe the potential imposition of penalties is a deterrent to tax evasion and tax avoidance by taxpayers.  They also believe their collection efforts would be made more difficult without the penalty provisions,

Public Act 13 of 1993 and Public Act 14 of 1993 were enacted into law and provide for a waiver of penalty for reasonable cause.  The legislation, dubbed “The Taxpayer’s Bill of Rights”, amended the Revenue Act.  A later amendment was added by Public Act 657 of 2002.

Section 24(4) of the Revenue Act [MCL 205.24(4)] provides: “If a return is filed or remittance is paid after the time specified and it is shown to the satisfaction of the department that the failure was due to reasonable cause and not to willful neglect, the state treasurer or an authorized representative of the state treasurer shall waive the penalty prescribed by subsection (2).

Administrative Rule 205.1013 provides for the waiver of penalty for “reasonable cause” and provides several examples of what may constitute “reasonable cause”.  Rule 13 also states “A taxpayer is required to exercise ordinary business care and prudence in complying with filing and payment requirements.”

Treasury promulgated Revenue Administrative Bulletin 1995-4 and then Revenue Administrative Bulletin 2005-3 on their penalty provisions. The following from pages 7 and 8 of the bulletin describes a waiver of penalty for reasonable cause.

Waiver for Reasonable Cause

If the taxpayer establishes that the failure to file or pay was due to reasonable cause and not to willful neglect, the department shall waive the penalty. If a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return or pay the tax within the prescribed time, then the delay is due to reasonable cause. In determining whether a taxpayer was unable to file a return or pay a tax in spite of the exercise of ordinary business care and prudence, the department will consider all facts and circumstances surrounding the taxpayer, the nature of the tax, and the like.

If a taxpayer subject to the negligence penalty demonstrates to the department's satisfaction that the deficiency or excess claim for credit was due to reasonable cause, the department shall waive the negligence penalty. If a taxpayer successfully disputes a penalty for intentional disregard of the law, the department shall not impose a negligence penalty on the tax due.

Examples that are illustrative, but not conclusive, in showing reasonable cause include:

1. The failure to file or pay is caused by the death or serious illness of the taxpayer responsible for filing;

2. The failure to file or pay is caused by the destruction by fire or other casualty of the taxpayer's records or the taxpayer's business;

3. The failure to file or pay personal taxes is caused by the prolonged unavoidable absence of the taxpayer responsible for filing and the taxpayer is precluded, due to circumstances beyond the taxpayer's control, from making alternate arrangements for filing or paying;

4. A showing that the completed return or payment was timely mailed, that is, the United States postmark stamped on the envelope is dated on or before the due date set for filing the return, including extensions; or

5. A showing that the delay or failure is caused by erroneous written information that has been prepared contemporaneously and given to the taxpayer by an employee of the department.

Any taxpayer may request, in writing to the Treasurer, a waiver of penalty. The written request must contain all facts and circumstances alleged to constitute reasonable cause and an absence of willful neglect.