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| C42. For purposes of the Small Business Alternative Credit under MCL 208.1417, do the rules of attribution attribute the allocated business income related shareholder to determine whether the taxpayer is disqualified from the credit? |
So long as the related shareholders are not active shareholders, the shares
of one shareholder and any corresponding allocated business income (the amount
determined under MCL 208.1417(1)(b)(ii)(B)) will be attributed to the other.
The Small Business Alternate Credit is available to entities that meet certain
statutory criteria. One such criterion is that the allocated business income of
a shareholder of a corporation must not exceed $180,000. A "shareholder" is a
person who owns outstanding stock in a business or is a member of a business
entity that files as a corporation for federal income tax purposes. An
individual is considered as the owner of the stock owned, directly or
indirectly, by or for family members as defined by section 318(a)(1) of the IRC.
MCL 208.1115(2). For example, Husband and Wife each own 20% of the stock in
Corporation A. The allocated business income for Husband and Wife from
Corporation A is $100,000 each. Due to attribution, both the Husband and Wife
will be deemed to own the stock of the other. Thus, Wife will be deemed to own
40% of the stock of Corporation A with a corresponding allocated business income
of $200,000, and vice versa. Since the allocated business income of each of
these shareholders - under the rules of attribution - exceeds $180,000,
Corporation A is disqualified from the Small Business Alternative Credit.
However, the rules of attribution do not attribute the compensation and
directors' fees of one shareholder to another. Furthermore, "an active
shareholder's share of business income shall not be attributed to another active
shareholder." MCL 208.1417(2). An "active shareholder" is a shareholder who
receives, in any combination, at least $10,000 in compensation, directors' fees,
or dividends from the business, and who owns at least 5% of the outstanding
stock or other ownership interest. MCL 208.1417(9)(a). In the example above, if
Husband and Wife were both active shareholders, then there would be no
attribution between them. However, attribution would still apply if one spouse
was an active shareholder and the other was not.
The Small Business Alternative Credit under the MBT operates similarly to the
Small Business Credit that was provided for under the SBT. The analysis above is
substantially similar to that used under the SBT.
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