## INTANGIBLES TAX - S CORPORATION INCOME DEDUCTIONS

Approved: June 2, 1989

RAB-89-52 The purpose of this Bulletin is to explain Public Act 465 of 1988, which amends Michigan’s Intangible Tax Act. This amendment provides a deduction from intangibles tax liability for S corporation shareholders. This provision is effective December 27, 1988.

The ownership of stock in any corporation is taxed at a rate measure by its yield or by a percentage of its par value, whichever is greater. In the case of S corporation stock, the yield is cash or cash equivalents distributed during the tax year. This amount is not necessarily the same as the amount includable as income for federal and state income tax purposes.

### Computing the Deduction

Commencing in the tax year ending in 1988, a deduction from intangible yield (income) is allowed for the lesser of:

1. The amount includable as intangible yield due to a distribution to a shareholder by an S corporation, or

2. 10% of the shareholder’s share of the S corporation income for a tax year ending in 1988.

The percentage in item two above is increased to 15% for the tax year ending in 1989, and to 20% for all tax years ending after 1989.

Therefore, in 1988 an S corporation shareholder takes a deduction in an amount equal to the lesser of: (1) the amount of the actual distribution, or (2) 10% of the shareholder’s pro-rata share of the S corporation’s income.

### Examples

The following are examples of calculating this intangibles tax deduction. In all the examples, it is assumed there is one shareholder of the S corporation. It is also assumed that in years where there is an actual distribution to the shareholders, the distribution (yield) results in a tax greater than 1/10 of 1% of the stock value.

#### Example 1:

 Item 1988 1989 Distributive Share of S Corporation Income \$500,000 \$0 Actually Distributed \$0 \$500,000 Amount of Deduction \$0* \$0* Taxable Yield \$0 \$500,000 Rate of Tax 1/10 of 1% x 0.035 Tax Due ** \$17,500

Aggregate Tax Due for a Two-Year Period \$17,500**

*No deduction is available for either year because the lesser of the actual distribution is 10% of the shareholder’s distributive share of S corporation income is zero.

**Even though there is no taxable distribution to the shareholder in 1988, an intangible tax equal to 1/10 of 1% of the value of the S corporation stock will be imposed.

#### Example 2:

 Item 1988 1989 Distributive Share of S Corporation Income \$500,000 \$0 Actually Distributed \$250,000 \$250,000 Amount of Deduction \$50,000* \$0** Taxable Yield \$200,000 \$250,000 Rate of Tax x 0.035 x 0.035 Tax Due \$7,000 \$8,750

Aggregate Tax Due for a Two-Year Period \$15,750

*10% of the shareholder’s distributive share of the S corporation’s income is less than the intangible yield actually distributed in 1988

**In 1989, the lesser of the actual distribution (yield) or 15% of the share-holder’s distributive share of S corporation income is zero; therefore, there is no deduction for 1989.

#### Example 3:

 Item 1988 1989 Distributive Share of S Corporation Income \$250,000 \$250,000 Actually Distributed \$250,000 \$250,000 Amount of Deduction \$25,000* \$37,500** Taxable Yield \$225,000 \$212,500 Rate of Tax x 0.035 x 0.035 Tax Due \$7,875 \$7,438

Aggregate Tax Due for a Two-Year Period is \$15,313

*10% of the shareholder’s distributive share of S corporation’s income is less than the actual amount distributed in 1988. The deduction equals \$25,000 (\$250,000 x 10%)

**In 1989, the taxpayer may take a deduction of the lesser of 15% of the distributive share of S corporation income or the actual amount distributed (yield). The deduction is equal to 15% of \$250,000 or \$37,500. The taxpayer must multiply the difference between the actual distribution and the deduction by 3½% [(250,000 – 37,500) x .035] to determine the intangibles tax liability.