Corporate Tax Base 8. How is a like-kind exchange treated under the CIT?

Generally, for business or investment property exchanged solely for business or investment property of a like-kind, no gain or loss is recognized for federal income tax purposes under IRC 1031. If, as part of the exchange other (not like-kind) property or money is received, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality. IRC 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

The corporate income tax base is the taxpayer's business income, before allocation or apportionment, with prescribed adjustments after allocation or apportionment. MCL 206.623(2). The taxpayer's business income is federal taxable income. MCL 206.603(2). Therefore, to the extent the like-kind exchange is or is not recognized in federal taxable income, it will be similarly recognized in the corporate income tax base.

Like the SBT and MBT, the value of property received in a like-kind exchange will be excluded from gross receipts, which is determined for purposes of determining nexus under MCL 206.621, the filing threshold under MCL 206.685, and eligibility for the small business credit under MCL 206.671. If, as part of the exchange, other (not like-kind) property or money is received and gain is recognized for federal income tax purposes, the gain will be included in gross receipts. Losses that are not recognized for federal income tax purposes similarly are not recognized for purposes of determining gross receipts under the CIT.