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Revenue Administrative Bulletin 2022-23

Computing Pro-forma Federal Taxable Income for Unitary Business Group Members that File a Federal Consolidated Return

Approved: December 6, 2022

RAB 2022-23.1  This Revenue Administrative Bulletin (RAB) discusses the composition of a unitary business group (UBG) and calculation of the pro-forma federal taxable income (FTI) of each member to be used as the starting point for the required filing of a combined corporate income tax (CIT) return by the UBG.          

Background: For federal income tax, an affiliated group may elect to file a consolidated return.2 In contrast, Part 2 of the Income Tax Act of 1967 (commonly known as the Corporate Income Tax or “CIT”) requires a UBG to file a combined return.3 The Michigan Department of Treasury (Treasury) has consistently recognized that consolidated and combined filing are not the same and has required each UBG member that is included on a federal consolidated return to separately compute a pro-forma federal return to determine its pro-forma FTI.4

Because of differences between the ownership test at the federal level5 and the control test codified in the CIT, differences in the composition of the membership in a consolidated group and the UBG may exist.  The CIT defines UBG and establishes a “more than 50 percent” ownership test, in contrast to the 80 percent test required for federal consolidated groups.6  Furthermore, inclusion in a UBG requires the entities to meet certain relationship tests, whereas there are no relationship requirements for purposes of a federal consolidated group.7

Consolidated return:8 A consolidated tax return is a federal corporate income tax return filed by an affiliated group that elects to report their combined tax liability on a single return. Each corporation within the group must consent to file a consolidated return by filing federal Form 1122 Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return and attaching it to their group Form 1120. Thereafter, the affiliated group is referred to as a consolidated group. The consolidated return allows the consolidated group to combine income, net operating losses, credits, and other items on a single return. Section 1502 of the Internal Revenue Code (IRC) provides that the consolidated return regulations may contain rules that are different from the provisions that would apply if corporations filed separate returns. The regulations broadly attempt to treat the members of the affiliated group as a “single entity” by treating the members in a comparable manner to divisions of a single corporation.

Includable members of a consolidated group are identified in IRC 1504(b) but exclude tax-exempt corporations, insurance companies, certain foreign corporations, Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs), and S-Corporations, among other entity types that are not always subject to the CIT. A consolidated group can only exist when the parent corporation and one or more corporations affiliated through a chain of corporations is connected by ownership of stock representing at least 80 percent of the voting power and value of each affiliated member.9 Unless excluded by a statutory provision, corporations connected to the parent or another member of the affiliated group that meets the ownership requirement must be included in the consolidated return.10

The primary advantage of a consolidated filing is the ability to combine the income and losses of each member of the affiliated group into one taxable income amount. This allows the net operating losses of a member to offset the income of another member. Capital gains and losses can also be netted. Intercompany transactions are eliminated. There are also specific rules related to the basis of stock in a member held by another member that may affect the gain or loss realized on disposition. All members of the consolidated return use the tax year of the parent but may use different accounting methods.11

Combined return: Combined reporting is a state tax filing method where members of a commonly controlled and related group of entities, called a UBG in Michigan, are required to combine the profits earned by the members in every state. Each member maintains separate financial statements and determines its net income from operations in all the states where it has business activity. The starting point for computing each member’s net income is the calculation of a pro-forma FTI. Only after each member computes its net income are the amounts combined into a total amount for the combined return. The combined net income is used to calculate the UGB’s total earnings which are apportioned to each state in which it operates.

Michigan’s combined filing requirement: The CIT is a tax on the adjusted business income of persons that have elected to file as C-Corporations.12 Treasury refers to these persons as standard filers.13 The CIT requires a UBG to file a combined return that includes each United States person that is included in the UBG. Further, each member included in the UBG combined return must be treated as a single person.14 Members included on a federal consolidated return that are members in the UBG must separately compute a pro-forma federal return. In other words, all the components of a federal return are separately computed to arrive at a member’s pro-forma FTI. Each member’s pro-forma FTI is reported on Form 4897, line 21, and amounts for all members are summed together to determine the UBG’s FTI.

Unwinding the Consolidated Group: This RAB focuses solely on the pro-forma calculation of FTI that is the starting point for computing the tax base of each corporation that is a member of a UBG that files a standard combined return. Section 623 of the CIT requires several adjustments to be made to business income to determine the member’s tax base subject to apportionment.15 Pro-forma FTI is the starting point for this calculation.

Unlike the federal definition of “affiliated group” that applies a direct 80 percent or more ownership test based on voting rights and a value test, the definitions of “unitary business group” and “affiliated group” in the CIT have a lower ownership threshold. Both of those definitions include persons that are more than 50 percent owned, directly or indirectly, by another member.16

Thus, under the CIT’s lower ownership requirements, the members included in a federal consolidated return may not be the only members required to be included in a UBG’s return filed with Treasury. Also, not all tax-exempt corporations excluded from a federal consolidated return are exempt from the CIT. For example, persons included under IRC 501(c)(12) (benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, electric companies, or “like organizations”) and 501(c)(16) (cooperative farmers associations), and some 501(c)(4) (social welfare) organizations, are subject to the CIT and may be members in a UBG to the extent they have unrelated business activities.17  While REITs are excluded from “includable corporation” under the federal definition of affiliated group, the definition of “real estate investment trust” includes corporations and associations.18 Thus, REITs may be required to be included as a member in a UBG if the control and one of the alternative relationship tests are met. Further, foreign operating entities may be included in a federal consolidated return but are specifically excluded from the definition of UBG.19

Example: Parent Company, P, is headquartered in Michigan. P owns 100 percent of A Company, B Company (a foreign operating entity), and a REIT. P also owns 60 percent of C Company and 51 percent of D Company. All subsidiaries elected C-Corporation status and meet one of the CIT relationship tests.

Companies A and B have filed the proper authorization and consent forms and will file a consolidated federal return with P. The REIT subsidiary is not an includable member under IRC 1504. Companies C and D fail the federal ownership test required to be included in the consolidated group.

Because all entities elected C-Corporation status and are more than 50 percent owned by P, the control test for a UBG is met. B Company is a foreign operating entity and, by definition, is excluded from the UBG. Since P has nexus with Michigan and ownership over the member subsidiaries, it will file the UBG return as the designated member. Since all the remaining entities meet the relationship and control tests and have elected C-Corporation status, the UBG return is comprised of P Company and members A Company, the REIT subsidiary, C Company, and D Company. Each entity will need to compute its pro-forma FTI as the starting point for computing its tax base that will be combined with the other members’ tax bases for the UBG return.

Taxpayers must carefully review the ownership and relationships of owned entities when determining the members of a UBG, as the composition of a consolidated group and a UBG may differ.

Affiliated group election:20 The CIT has a carve-out for affiliated groups to elect to file as a UBG. The election does not require Treasury’s consent, but the taxpayer must provide notice to Treasury of its election on a form prescribed by Treasury. Such notice must be filed in a timely manner with the taxpayer’s annual return.21  Once made, each person in the affiliated group is bound by the election, including renewals of the election, and waives any objection to inclusion in the affiliated group and treatment as a UBG.  If a person enters the affiliated group after the tax year the election is made, that person is deemed to have consented to the election and is bound by it.

The election is irrevocable for a total of ten years and is renewable in 10-year increments.  However, if not renewed, a new election is not permitted in any of the immediately following 3 tax years. The election remains in effect if the ownership requirements are met, regardless of whether a federal consolidated group to which the UBG belongs discontinues filing a federal consolidated return or the common parent changes due to a reverse acquisition or acquisition by a related person.22

This election will establish the membership in the UBG. Each member of the UBG will calculate its pro-forma FTI that will be used in the calculation of its tax base. Each member’s tax base will be combined to determine the tax liability of the UBG.

Pro-forma FTI calculation:23 The CIT requires the UBG to file a combined return and further states that each person included in the UBG shall be treated as a single person.24 This means that members of a consolidated group that are members of a UBG must each compute a pro-forma FTI as a single person. The pro-forma FTI amount is subject to statutory adjustments to arrive at the UBG member’s tax base and, ultimately, the UBG’s combined CIT liability.

Section 623 states that the tax base of a taxpayer is its business income subject to certain adjustments.25 Business income is defined as FTI. For tax-exempt taxpayers, FTI is limited to income derived from unrelated business activity.26 FTI in turn is defined as taxable income defined in section 63 of the IRC, except it is calculated as if section 168(k) (bonus depreciation) and section 199 (income attributable to domestic production activities) were not in effect.27 Section 63 of the IRC defines taxable income as gross income minus the deductions (other than the standard deduction) allowed by chapter 1.28 Federal consolidated return regulations are promulgated under chapter 6, IRC 1501-1564, those regulations are outside of the chapter 1 definition of FTI, and are not followed for purposes of computing pro-forma FTI under the CIT.  These differences, and the required statutory adjustments, will result in differences between FTI for federal tax and CIT purposes, even when the members of a consolidated group and the UBG are the same.29 Further, each member included in a UBG combined return must be treated as a single person; thus, a pro-forma FTI calculation must be made by each member. Each member’s pro-forma FTI is reported on Form 4897, and amounts for all members are summed together to determine the UBG’s combined FTI. Because of differences in the federal regulations and the CIT, the combined pro-forma FTI of a UBG will not necessarily equal the FTI on the federal consolidated return, even if membership in the two returns is the same. Likewise, members of a federal consolidated group that file as a single taxpayer under the CIT must compute a pro-forma FTI.

Example: Parent Company, P, acquired 100 percent of S Company’s stock for $1,000. P and S file a consolidated return. For Year 1, the consolidated group has $100 of taxable income when determined by including only S’s items of income, gain, deduction, and loss taken into account. Under the consolidated investment adjustment rules,30 P’s basis in S’s stock is adjusted as of the close of Year 1. P’s basis in S’s stock is increased by the amount of the group’s taxable income determined by including only S’s items taken into account. Thus, P’s basis in S’s stock is increased by $100 as of the close of Year 1 to $1,100.

In Year 2, the consolidated group has a $50 consolidated net operating loss when determined by taking into account only S’s items of income, gain, deduction, and loss. S’s loss is absorbed by the group in Year 2, offsetting P’s income for that year. Because S’s loss is absorbed in the year it arises, P has a $50 negative adjustment with respect to S’s stock. P reduces its basis in S's stock by $50 to $1,050. P sells the stock for $2,000 recognizing a $950 gain.

Because the CIT computes FTI under IRC section 63 and the consolidation rules under chapter 6 are not taken into account, P’s basis in S’s stock is $1,000. P will recognize a gain of $1,000 in Year 2 when the stock is sold.

Example: Parent Company, P, owns 100 percent of subsidiary X and 60 percent of subsidiary Y. All corporations have sufficient relationship to meet the relationship test under the CIT. Net income before depreciation for each corporation is P - $1,000, X - $800, and Y - $400. P had MACRS depreciation of $80 and IRC 168(k) bonus depreciation of $20 for total allowed depreciation of $100. X had MACRS depreciation of $30 and $10 bonus depreciation for total allowed depreciation of $40. Y only recorded MACRS depreciation of $50.

P and X will file a federal consolidated return, and Y will file a single taxpayer federal return because it does not meet the federal ownership test. FTI for the consolidated group is $1,660 ($1,800-140). Y reports FTI of $350.

Because P owns more than 50 percent of X & Y corporations, the control test is met. Since the relationship test is also satisfied, P, X and Y are a UBG and will file a combined return under the CIT. Each member must compute a pro-forma FTI. P’s FTI, adjusting for bonus depreciation, is $920 ($1,000-80), X’s FTI is $770 ($800-30) and Y’s FTI is $350. The combined FTI for the UBG is $2,040 ($920 + $770 + 350).

The examples above illustrate both the difference in composition between a consolidated group and a UBG as well as adjustments that must be made in computing each member’s FTI under the CIT. The pro-forma FTI of each member of the UBG is subject to the statutory adjustments under section 623 and is the starting point for computing the tax base of each member.


1 Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006 and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

2 IRC 1501.

3 MCL 206.691.

4 See former Michigan Business Tax (MBT) MCL 208.1511 and FAQs U12, U17 and U25, and Corporate Income Tax MCL 206.691 and FAQ “Corporate Tax Base 12” (all requiring combined filing). Further see Form 4580 Part 2A Member Data for Combined Return of Standard Taxpayers at

5 IRC 1504(a)(2) requires an 80 percent voting and value test, whereas the CIT has a “more than 50 percent” ownership test.

6 Specifically, "unitary business group" means “a group of United States persons that are corporations, insurance companies, or financial institutions, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other members, and that has business activities or operations which result in a flow of value between or among members included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. Unitary business group includes an affiliated group that makes the election to be treated, and to file, as a unitary business group under section 691(2). MCL 206.611(6).

7 The definition of “affiliated group” only has an ownership requirement - IRC 1504(a)(2).

8 IRC 1501-1505.

9 IRC 1504(a)(2) and (4).

10 IRC 1501.

11 Treas Reg 1.1502-76(a).

12 See MCL 206.605 and 206.623.

13 The definition of “corporation” excludes insurance companies and financial institutions. Treasury refers to those entity types as regulated filers, and they file returns on forms separate from standard filers. Insurance companies are subject to a tax on direct premiums, and financial institutions are taxed on equity capital.

14 MCL 206.691(1).

15 MCL 206.623.

16 See MCL 206.603(1) and 206.611(6). Members of a UBG must also meet one of two relationship tests in addition to the more than 50% control test. For more information, See RAB 2018-12, CIT - Unitary Business Group Control Test and Relationship Tests (

17 MCL 206.625(1)(b)(i)-(iii).

18 IRC 856.

19 See MCL 206.607(3) and 206.611(6).

20 See MCL 206.691(2).

21 See Form 4891, line 7b.

22 MCL 206.691(2).

23 See CIT Form 4897 and MBT Form 4580.

24 MCL 206.691(1).

25 MCL 206.623(2).

26 MCL 206.603(3).

27 MCL 206.607(1). Note, Pub. L. 115-97, Sec. 13305(a), struck Sec. 199, effective for taxable years beginning after December 31, 2017.

28 IRC 63(a).

29 Additionally, the Tax Cuts and Jobs Act (TCJA) and Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted and modified, respectively, IRC 163(j) that limits the amount of business interest expense that may be deducted. The amount deducted at the federal level and under the CIT may be different. For more information, see the June 8, 2020, Notice Corporate Income Tax Treatment of the IRC 163(j) Business Interest Limitation. This Notice is subject to revision pending statutory codification of the IRC 163(j) adjustments required under the CIT that may diverge from current interpretation discussed in the Notice.

30 26 CFR §1.1502-32(b).