FED BUSINESS INTEREST EXPENSE; UNITARY FILING S.B. 195:
ANALYSIS AS ENROLLED
House Committee: Tax Policy
RATIONALE
The Federal Tax Cuts and Jobs Act, which took effect on December 22, 2017, amended the Internal Revenue Code (IRC) to revise tax rates and credits for United States taxpayers. One of the revisions limited the amount of interest expenses that may be deducted from corporate income. While this broadened the tax base, the Act included a rate reduction that offset this increase, resulting in a tax cut at the Federal level. For the purpose of calculating the State's Corporate Income Tax (CIT), Michigan generally defines taxable income as that term is defined under Federal law. Thus, with the Tax Cuts and Jobs Act, the State's tax base also was widened; however, there was no concurrent reduction in the tax rate. Moreover, subsequent Internal Revenue Service regulations evidently have allowed unitary business groups to treat interest expenses in a manner that differs from the Michigan Department of Treasury's enforcement of the CIT by allowing interest expenses to be claimed at a group level instead of at an entity level.
Because of this combination of factors, Michigan businesses claim they have seen an increase in their State income tax liabilities that will affect Michigan's business climate. In order to address these issues, it has been suggested that the State allow entities within a unitary business group (i.e., a group of two or more corporations, insurance companies, or financial institutions that satisfy both a control test and one of two relationship tests, and that is treated as a single taxpayer) to share their deductible business interest expenses on a group-wide basis.
CONTENT
The bill would amend the Income Tax Act to prescribe a formula that would apply, beginning with the 2021 year, for determining a person's Federal taxable income under the corporate income tax and for applying the business interest expense limitation under the Federal income tax, if the person were included in a unitary business group.
The bill states that is intended to be retroactive and would apply retroactively beginning on and after the 2021 tax year.
Definitions
"Business interest" would mean that term as defined in Section 163(j) of the IRC. "Business interest carryforward" would mean the amount of a person's excess business interest not deducted for the tax year by any person included in a unitary business group and is treated as business interest paid or accrued in the succeeding tax year. "Business interest limitation" or "limitation" would mean the limitation imposed under Section 163(j) of the IRC. (Section 163(j) of the IRC pertains to the limitations on business interest deduction, which may not exceed the sum of business interest income of a taxpayer for a taxable year, 30% of the adjusted taxable income of a taxpayer for a taxable year, and the floor plan financing interest of a taxpayer for a taxable year.)
Determination of Taxable Income; Unitary Business Group
Except as otherwise provided, a unitary business group must file a combined return that includes each United States person that is included in the unitary business group. Each United States person included in a unitary business group or a combined return must be treated as a single person, and all transactions between those entities included in the unitary business group must be eliminated from the corporate income tax base, the apportionment formulas, and for purposes of determining exemptions, credits, and the filing threshold under Part 2 of the Income Tax Act (which provides for the CIT).
Beginning with the 2021 tax year, to determine a person's Federal taxable income under Part 2 and applying the Section 163(j) of the IRC, if that person were included in a unitary business group then the provisions below would apply.
If a person met any of the following conditions, that person would not be subject to the business interest limitation for the tax year:
-- The person's business interest deduction was not limited under the IRC for that tax year.
-- The person was exempt from the business interest limitation under the IRC for that tax year.
-- The person was engaged or treated as engaged in an exc