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
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.