M81. Does the step up in basis under Internal Revenue Code (IRC) section 754 election and 743 application qualify as "purchases from other firms" when calculating the modified gross receipts tax base? Does the step up in basis qualify for ITC?
No, a taxpayer may not subtract a step up in basis under IRC section 754 election and 743 application as "purchases from other firms" when calculating the modified gross receipts tax base. The step up in basis does not qualify for ITC.
"Purchases from other firms" are deducted from a taxpayer's gross receipts to calculate the modified gross receipts tax base. Purchases from other firms includes in relevant part:
(b) Assets, including the costs of fabrication and installation, acquired during the tax year of a type that are, or under the internal revenue code will become, eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes. MCL 208.1113(6)(b).
The statute emphasizes that to qualify for this deduction, a taxpayer's purchase must be acquired during the tax year and be an asset of the type that is or will become eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes.
An election by a partnership under IRC section 754 to apply section 743 (b) allows for the step up in the basis of partnership property for transfers of partnership interests. Section 743(b) requires the incoming partner increase his or her share of the partnership's basis in its assets by the excess of the investing partner's outside basis (i.e. what was paid for the partnership interest) over their proportionate share of the adjusted basis of the partnership property. This optional basis adjustment directly affects only the incoming investor partner. An election under IRC Section 754 permits an investor to claim depreciation deductions to the extent that any basis adjustment is allocated to depreciable property.
Under this election, the taxpayer/partnership has not acquired any assets in the year of the election nor has it acquired any assets from another firm. Rather, the assets of the partnership were continually maintained except that they have been revalued for the investing partner due to the change in ownership. Thus, the taxpayer/partnership does not qualify for and may not take a "purchases from other firms" deduction when computing the modified gross receipts tax base.
A taxpayer may claim an ITC against the MBT tax liability for a percentage of the net capital investment paid or accrued for qualifying assets physically located in Michigan for use in a business activity. MCL 208.1403(3). Because the taxpayer/partnership has not made any additional investment in qualifying assets, no ITC may be claimed on the incoming partner's increase to his or her share of the partnership's asset basis.