Individuals, Trusts and Estates

Tax base.

If a Michigan individual, trust or estate has GILTI from direct ownership of a foreign corporation, to the extent it is included in adjusted gross income, that GILTI is intangible nonbusiness income attributable to this state under MCL 206.110. If GILTI flows through to a resident or nonresident from a flow-through entity, the income is business income and is subject to allocation or apportionment under Chapter 3 of the Michigan Income Tax Act.²² The character of GILTI is not affected by making an election under IRC 962.

Tax base and the IRC 962(d) recapture.

If an individual, trust or estate elects federally to be taxed on GILTI under IRC 962(a)(1), the taxpayer will recognize GILTI adjusted for IRC 78 gross-up and IRC 250 deduction in AGI in that year as deemed income. In a later year, the foreign corporation may issue a cash dividend that includes an amount equal to a portion of GILTI included in a prior year’s AGI.

In Example 2, above, the electing taxpayer recognized GILTI of $90.00 and, after adjustments, included net GILTI of $50 in AGI. In year two, the foreign corporation issued the electing taxpayer a cash dividend of $90.00. After deducting the federal tax paid on GILTI, the taxpayer included $87.50 in AGI for year two. The taxpayer recognized $ 50.00 of income from the same earnings and profits in AGI in both year one and year two.

Part 1 of the Michigan Income Tax Act begins with federal AGI and reaches taxable income through statutory adjustments.²³ Part 1 of the Act has no statutory adjustment to reduce income that is included in more than one year of federal AGI.

Allocation and apportionment.

If GILTI flows through to the owner of a domestic flow-through entity, the income is business income and is subject to allocation or apportionment under Chapter 3 of the Michigan Income Tax Act. As noted above, if GILTI is received directly from a foreign corporation by the individual, estate or trust, it is nonbusiness income allocable to the individual’s state of residence and not subject to apportionment.

The apportionment formula uses a single sales factor.²⁴ “Sales” for purposes of apportionment are defined as “all gross receipts of the taxpayer.”²⁵ GILTI is a gross receipt that must be included in the denominator of the sales factor.

For an IRC 962(a)(1) electing taxpayer, the denominator includes GILTI plus the IRC 78 foreign tax gross up. It does not include the IRC 250 deduction. If the electing taxpayer recognizes an actual dividend in income in a future year, the amount of dividend that is included in the sales factor is the amount recognized in income (the dividend after the adjustment for federal taxes paid in the prior year.)

For intangible income, including GILTI, received through a flow-through entity, the income-producing activity is attributable to the state where the flow-through entity is directed or managed. The state where an entity is directed or managed is its commercial domicile.²⁶ Therefore, GILTI is included in the sales factor numerator if the commercial domicile of the entity is located in Michigan.²⁷ The business activity is that of the flow-through entity, not the business activity of the foreign corporation.

²²Chapter 3: Allocation of Taxable Income to Michigan or Other States. MCL 206.110 et seq.
²³MCL 206.30(1).
²⁴MCL 206.121.
²⁵MCL 206.20(1).
²⁶MCL 206.6(1).
²⁷MCL 206.123(a).