C Corporations

Tax base.

The starting point of Michigan CIT is “business income,”¹³ which is “federal taxable income.”¹⁴ Therefore, GILTI, IRC 78 gross-up, and the IRC 250 deductions for GILTI and FDII are included in the starting point of the CIT return (Form 4891, line 12 or Form 4897, line 21 for unitary business group members) to the extent they are included in (or deducted from) FTI. Business income is then adjusted to reach the corporate income tax base before allocation or apportionment.¹⁵ One adjustment provides:

To the extent included in federal taxable income, deduct dividends and royalties received from persons other than United States persons and foreign operating entities, including, but not limited to, amounts determined under section 78 of the internal revenue code or sections 951 to 964 of the internal revenue code.¹⁶

The extent to which GILTI and IRC 78 gross-up are included in FTI are their net amounts after their IRC 250(a)(1)(B) deduction. Therefore, business income is adjusted on Form 4891, line 28 (Form 4897, line 33 for unitary business group members) to remove—to the extent included in or deducted from FTI—GILTI, IRC 78 gross-up, and the IRC 250(a)(1)(B) deduction.

Example 3: Assume the facts given in the “Federal Taxable Income” column.

Federal Taxable Income
Ordinary Income: $100¹⁷
Plus: IRC 951A GILTI inclusion: 90
Plus: IRC 78 gross-up attributable to GILTI: 10
Less: IRC 250 deduction:

(a)(1)(A): 37.5% FDII: (30)
(a)(1)(B): 50% GILTI + IRC 78: (50)
Total IRC 250 deduction: (80)

FTI: $120

Corporate Income Tax Base
FTI: $120
MCL 206.623(2)(d) subtraction:

IRC 951A (GILTI): 90
IRC 78 gross-up of GILTI: 10
Less: IRC 250(a)(1)(B): (50)
Net GILTI Subtraction: (50)

Corporate Income Tax Base:¹⁸ $70

Note: There is no adjustment in the CIT for the IRC 250(a)(1)(A) FDII deduction; therefore, the CIT tax base reflects the taxpayer’s $30 FDII deduction.

Allocation and Apportionment.

The corporate income tax base is subject to allocation or apportionment based on a sales factor.¹⁹ “Sales” are generally limited to amounts received by the taxpayer as consideration.²⁰ However, certain sales are carved out from those criteria. Section 609(4)(e) states:

For taxpayers not engaged in any other business activities, sales include, interest, dividends, and other income from investment assets and activities and from trading assets and activities.²¹

Most taxpayers have business activities beyond those described in section 609(4)(e) and, thus, will not include GILTI or IRC 78 gross-up in their sales factor. However, for a taxpayer with no other activity, GILTI and IRC 78 gross-up attributable to GILTI are income from an investment activity—i.e., an investment in a foreign corporation—and are consequently included in the sales factor. For a unitary business group, each member’s respective business activity should be considered to determine if the income from investment activity is included in sales.

If GILTI and IRC 78 gross-up are included in sales, those sales are sourced under MCL 206.665(10)(b).

¹³MCL 206.603(3).
¹⁴MCL 206.607(1), subject to adjustments for IRC 168(k) and 199.
¹⁵MCL 206.23(2).
¹⁶MCL 206.623(2)(d). Emphasis added.
¹⁷Assume this taxpayer’s activity and assets produce FDII in the amount of $80, which is a component of the $100 of ordinary income.
¹⁸Subject to allocation or apportionment and adjustment for business loss, if available. MCL 206.623(2).
¹⁹MCL 206.661.
²⁰MCL 206.609(4).
²¹MCL 206.609(4)(e).