Revenue Administrative Bulletin 1989-49
Approved: May 31, 1989
SINGLE BUSINESS TAX - CONSOLIDATED OR COMBINED REPORTING
(Replaces Single Business Tax Bulletin 1982-1)
RAB-89-49. The purpose of this Bulletin is to explain the consolidated or combined filing provisions of the Single Business Tax Act (SBTA).
The Commissioner of Revenue has broad discretion regarding whether to allow or require a group of corporate taxpayers to file consolidated returns. [MCL 208.77] To do so, the Commissioner must determine that the corporations are an affiliated group as defined in MCL 208.3(1) and meet the consolidated or combined return filing requirements as specified in MCL 208.77.
The Commissioner of Revenue may require an affiliated group of corporations filing consolidated or combined returns to selectively include or not include each and every member of the affiliated group in the return. [MCL 208.77] The Commissioner may require this treatment if it is determined that such a consolidated or combined return is necessary to maintain a consistent treatment of tax deductions and recapture amounts or other tax benefits. A consolidated or combined return that does not or will not fairly represent the extent of the group's business activities in this State will not be permitted or required. Alternatively, the Commissioner may require appropriate adjustments on separate returns that are filed by the taxpayers when they are no longer eligible to file consolidated or combined returns or request separate filing status.
Pursuant to the discretion granted the Commissioner regarding consolidated reporting, permission will be granted to file in this manner prospectively only. A request to file a consolidated or combined return must be received by the Commissioner prior to the date set for filing the annual single business tax return (or the extended due date). Late requests shall be denied.
Affiliated Group Definition
An affiliated group "means two or more corporations, one of which owns or controls, directly or indirectly, 80% or more of the outstanding capital stock with voting rights of the other corporation or corporations." [MCL 208.3(1)]
Corporation T owns 100% of the capital stock of Corporation L and 10,000 shares of Corporation J's stock. Corporation J has 12,000 share of capital stock outstanding. The affiliated group is T, L and J. Corporation T owns, directly, 83.3% of Corporation J.
Same facts as above, except Corporation J owns 100% of Corporation D. Therefore, Corporation T owns, indirectly, 83.3% of Corporation D. The affiliated group is T, L, J and D.
Consolidated or Combined Return Filing Requirements
Corporations may be included in a consolidated or combined return for single business tax purposes if during the consolidated year each corporation meets all the following conditions:
- The parent corporation must be a member of the consolidated group, and
- Each member must be subject to single business tax, and
- Each member must maintain a relationship with one or more members of the group which includes intercorporate transactions of a substantial nature (see "Substantial Intercorporate Transactions" below), and
- Each member must be subject to apportionment by the same specific apportionment formula. [MCL 208.45, 57, 58, 62, and 65] The formula is the one that would be applicable to every member as if it were filing a separate return and would be subject to apportionment.
Substantial Intercorporate Transactions
Substantial intercorporate transactions are qualified transactions between a "selling member" and a "purchasing member" of the affiliated group.
Intercorporate transactions are transactions giving rise to a business activity as defined in the SBTA and connected directly with the business conducted by the members. Intercorporate transactions must be substantial in nature as such transactions relate to the total business activity of the member. The Department has established the following criteria for determining whether a member corporation has substantial intercorporate transactions:
- A selling member has substantial intercorporate transactions if the receipts from such transactions comprise at least 10% of that selling member's total receipts from activities, excluding the transactions discussed under paragraph 3 (following). If such receipts comprise less than 10% of the selling member's total receipts, then the affiliated group must demonstrate that the intercorporate transactions are of substantial nature.
- A purchasing member has substantial intercorporate transactions if the cost of such transactions comprise at least 10% of such purchasing member's total cost of operations. Cost of operations is defined as cost of goods sold plus other ordinary business deductions, excluding costs relating to functions described in paragraph 3 (following). If the cost of such transactions comprise less than 10% of the purchasing member's total cost of operations, then the affiliated group must demonstrate that the intercorporate transactions are of a substantial nature.
- Intercorporate transactions of the following nature shall not be considered business activity:
- Functions of control involving accounting, legal matters and personnel matters.
- Functions of ownership involving distribution of a member's capital stock, dividends and liquidations.
- Functions of financing involving loans, bonds, notes and other indebtedness which are obligations of any other member.
Permission to File Consolidated or Combined Returns
An affiliated group requesting permission for consolidated or combined filing must do so on SBT Form C-8007. The request must provide the information indicated below for the taxable year that the request is being submitted:
- The names, addresses, account numbers and business activities of every member.
- The apportionment formula provision [MCL 208.45, 57, 58, 63 or 65] that is applicable to each member whether or not such activity is taxable without the State of Michigan.
- A complete description of all intercorporate transactions:
- Total dollar amount of such transactions by each selling number, and
- Total amount of receipts for such selling member, and
- Total dollar amount of such transactions by each purchasing member, and
- Total cost of operations for such purchasing member, and
- The identity of each member purchasing from another member.
- A list of all members in the federal affiliated group indicating those members having nexus in Michigan.
- Any additional information necessary to enable the Commissioner to determine the adjusted tax base of each member separately.
Method of Computing Tax
An affiliated group approved for combined reporting computes its tax on a consolidated or combined basis and reports such tax on a single Form C-8000. The following are specific requirements for reporting purposes:
- Combined Business Income. Combined business income is federal consolidated taxable income as described in U.S. Department of Treasury Regulation 1.1502-11. Combined business income is determined as specified in the above Regulation whether or not a consolidated federal income tax return is filed. This calculation is then adjusted to reflect combined business income of member corporations filing a single business tax combined return.
- Corporations Using the Gross Receipts Method. For corporations filing pursuant to the 50% gross receipts method [MCL 208.31(2)], intercorporate sales ARE included when computing gross receipts.
- Tax Base. Additions (except compensation) and subtractions to arrive at tax base are made to the extent such items are included, excluded or deducted in arriving at federal consolidated taxable income described in item 1 above.
- Apportionment Formula. Intercorporate sales are not included when computing the sales factor for apportionment purposes because an affiliated group is treated as one corporation. However, each member corporation separately calculates the numerator and denominator of its apportionment factors (payroll, sales and property), then the factors of each corporation are added to arrive at one apportionment factor for the consolidated group. The allocation of sales to arrive at the sales numerator is made as though each corporation is filing a separate return.
The cost of rentals from intercorporate transactions are excluded from the property factor of the lessee.
- Capital Acquisition Deduction and Recapture. The capital acquisition deduction and the recapture of the capital acquisition deduction are computed as though the member corporations were filing as one corporation. The combined property and payroll apportionment factors are used to apportion the capital acquisition deduction on tangible personal property other than Section 1250 property.
Any transfer, sale, or exchange of properties (acquired during a member's separate taxable year) between members are treated as though the selling member is filing a separate return and its separate apportionment formula is used to determine recapture of the capital acquisition deduction. The capital acquisition deduction for such acquisition is computed as though the members were filing as one corporation.
- Business Loss Deduction, Statutory Exemption, and Section 31 Reductions. The business loss deduction, statutory exemption, and Section 31 reductions are computed as though the member corporations were filing as one corporation.
A business loss carryover from a member's single business tax return filed for a separate return year is limited to that member's allocated or apportioned tax base after application of the capital acquisition deduction, net of recapture of capital acquisition deduction, and computed as though such member were filing separate returns.
- Small Business Credit. The small business credit is determined as though the member corporations were filing as one corporation.
The shareholder and officer disqualifiers are computed on a separate return basis.
- College, Library and Public Broadcasting Credit and the Community Foundation Credit. These credits are computed as though the member corporations were filing separate returns.
Where the tax is computed on the basis of consolidated or combined reporting, the Department may assess the entire amount of the tax and all additional taxes, penalty and interest computed on the basis of consolidated or combined reporting against any one or more of the taxpayers covered by a return.
Quarterly estimated tax payments shall be based upon the separate tax liability of each corporation until approval for consolidated or combined filing has been granted by the Commissioner. Applicable penalties and interest shall be assessed for any underpayment of quarterly estimated tax when the estimate is based upon the affiliated group's tax liability and taxpayer's request for consolidated or combined filing is denied.
All corporations included in the consolidated or combined return must use the same accounting period.
Corporation T operates a retail store. Its subsidiary Corporation J finances all of Corporation T's accounts receivable. The business activities of both corporations are entirely within Michigan. The intercorporate transactions are substantial to both T and J. Since Corporation J is subject to an apportionment formula as a financial organization, whether or not the corporation has activities without the State, and that formula is not applicable to Corporation T's business activity, the affiliated group of Corporations T and J is NOT eligible for consolidated or combined filing.
Corporation A owns 100% of Corporations B, C and D. Corporations A, B and C are Michigan taxpayers. Corporation A manufactures a product and has annual sales of $1 million, of which 25% is sold to Corporation B and 25% sold to Corporation D. Since Corporation D is not a Michigan taxpayer and, therefore, not an allowable member, Corporation A has intercorporate transactions equal to 25% of total sales. The only activity of Corporations B and D is selling Corporation A's products. Corporations C's only activity is renting a building to Corporation A. The Commissioner may require or permit Corporations A, B and C to file consolidated or combined returns. Corporations A, B and C each have substantial intercorporate transactions. Corporation D is not a Michigan taxpayer and, therefore, can NOT be included in the affiliated group.
Assume the same facts as in Example 2, except Corporation B sells products other than those purchased from Corporation A. Corporation B has a "cost of goods sold" plus other ordinary business deductions of $3 million of which $250,000 represents cost of products acquired from Corporation A. These transactions are no longer substantial intercorporate transactions of Corporation B. Therefore, B can NOT be a member of the affiliated group. Also, these intercorporate transactions can NOT be considered in determining A's eligibility because these transactions are not with other eligible members. Corporations A and C can NOT file a consolidated return because Corporation A does not have substantial transactions with Corporation C. (It is assumed here that the rental expense of Corporation A from Corporation C is less than 10% of Corporation A's cost of operations.)
Assume the same facts as in Example 2, except Corporation C's only activity is financing the accounts receivable of Corporations A, B and D. Corporation C is a financial organization and uses a different apportionment formula than the other corporations. Therefore, Corporation C can NOT be included in the consolidated return. The Commissioner may require or permit Corporations A and B to file consolidated or combined returns.
Assume (see below) Corporation A owns 100% of Corporations B and C and all members qualify as members of an affiliated group for the purpose of filing a consolidated or combined single business tax return. Corporation A is a Michigan taxpayer and also has plants in Ohio and New York. Corporation B is a Michigan corporation with plants in Ohio and Wisconsin. Corporation C operates only in Michigan. For purposes of calculating the sales factor, intercompany transactions have been excluded.
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