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Michigan Business Tax

C38. Do dividends that represent distribution of previously taxed S corporation earnings qualify as dividends for purposes of determining an "active shareholder"?

Yes, the MBT definitions of "active shareholder" and "shareholder" are essentially similar to the definitions under the SBTA. An "active shareholder" is a shareholder who receives, in any combination, at least $10,000 in compensation, director's 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). 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 Internal Revenue Code. MCL 208.1115(2).

Whether a dividend received by a shareholder represents previously taxed S corporation earnings is irrelevant to the determination of whether a shareholder meets the definition of "active shareholder." The statutory definition merely requires that the shareholder receive compensation, director's fees, or dividends from the business.