Michigan Business Tax

C33. How are gross receipts computed on an installment sale of a capital asset? Is the realized installment sale gain included in the two tax bases? How is the investment tax credit (ITC) affected?

When calculating gross receipts and the tax bases under the MBT, taxpayers should consistently use the accounting method used in computing federal income taxes. Annual federal installment sale gain is realized by computing a gross profit rate on the sale and then applying that rate to the payments received in the year. The annual installment payments received on the sale of the capital asset and the gain realized for federal income taxes should be used in calculating the MBT gross receipts for that year.

Under the MBT, "gross receipts" are defined as the entire amount received by the taxpayer from any activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others. MCL 208.1111(1) Excepted from the definition of gross receipts are the proceeds less any gain related to the disposition of a trade or business capital asset. Subsection (o) provides:

Proceeds from a sale, transaction, exchange, involuntary conversion, or other disposition of tangible, intangible, or real property that is a capital asset as defined in section 1221(a) of the internal revenue code or land that qualifies as property used in the trade or business as defined in section 1231(b) of the internal revenue code, less any gain from the disposition to the extent that gain is included in federal taxable income. MCL 208.111(1)(o).

The installment sale method prorates gain and recognizes it over the years in which payments are received. For federal income tax purposes, the installment method may only be used for nondealer sales of property other than inventory. Generally, dealers in real or personal property may not use the installment method to report gain. A "dealer disposition" includes, with some exceptions, any disposition of personal property by a person who regularly sells or otherwise disposes of such property on an installment plan and any disposition of real property which is held for sale to customers in the ordinary course of the taxpayer's business.

There are no other gross receipts exceptions under the MBT for gains received on sales of property other than capital assets. Nor are there any other exceptions that are computed using gains realized from transactions that are not from the sale of capital assets. Therefore, any amount received that is attributed to installment sales and the gains that are realized in subsequent years are included in MBT gross receipts.

To the extent the installment sale gain is derived from the business activity of the taxpayer and included in federal taxable income it must also be included in the business income tax base. The gain realized in any tax year from the installment sale is included in both the business income and modified gross receipts tax base.

The MBT requires recapture of ITC when a sale, exchange, or other disposition of a qualifying asset, including the removal of the asset from the state, occurs. Similar to the SBT, a sale of qualifying property reported on the installment method for federal income tax purposes causes the recapture of the entire gross proceeds in the year of the sale, less any gain reported in federal taxable income in that year. Gain attributed to the installment sale that is realized in the seller's federal taxable income in subsequent years is subtracted in computing any ITC claimed against the MBT in those subsequent years.

The purchaser of a qualifying asset on an installment sale may claim ITC against total MBT liability using the entire amount paid or accrued in the taxable year pursuant to MCL 208.1403(3). Nothing in the MBTA prohibits a taxpayer from deducting the cost, in the year of purchase, of an asset that qualifies as a "purchase from other firms" when calculating its modified gross receipts tax base, and then subsequently utilizing the same asset purchase to qualify for the ITC.