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HB-5098, As Passed House, August 31, 2005

SUBSTITUTE FOR

HOUSE BILL NO. 5098

(As amended August 31, 2005)

[A bill to amend 1975 PA 228, entitled

"Single business tax act,"

by amending sections 3, 36, 38e, and 71 (MCL 208.3, 208.36, 208.38e, and

208.71), sections 3 and 71 as amended by 1999 PA 115, section 36 as

amended by 1995 PA 284, and section 38e as amended by 2003 PA 273, and by

adding section 79.]

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 3. (1) "Affiliated group" means 2 or more United States

corporations, 1 of which owns or controls, directly or indirectly,

80% or more of the capital stock with voting rights of the other

United States corporation or United States corporations. As used in

this subsection, "United States corporation" means a domestic

corporation as those terms are defined in section 7701(a)(3) and

(4) of the internal revenue code.

(2) "Business activity" means a transfer of legal or equitable

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title to or rental of property, whether real, personal, or mixed,

tangible or intangible, or the performance of services, or a

combination thereof, made or engaged in, or caused to be made or

engaged in, within this state, whether in intrastate, interstate,

or foreign commerce, with the object of gain, benefit, or

advantage, whether direct or indirect, to the taxpayer or to

others, but shall not include the services rendered by an employee

to his or her employer, services as a director of a corporation, or

a casual transaction. Although an activity of a taxpayer may be

incidental to another or other of his or her business activities,

each activity shall be considered to be business engaged in within

the meaning of this act.

(3) "Business income" means federal taxable income plus the

amount of a deduction claimed under section 199 of the internal

revenue code related to domestic production activities, except that

for a person other than a corporation it means that part of federal

taxable income derived from business activity plus the amount of a

deduction claimed under section 199 of the internal revenue code

related to domestic production activities. For a partnership,

business income includes payments and items of income and expense

~~which~~ that are attributable to business activity of the

partnership and separately reported to the partners of the

partnership.

[Sec. 36. (1) As used in this section:

(a) "Active shareholder" means a shareholder who receives at least $10,000.00 in compensation, director's fees, or dividends from the business, and who owns at least 5% of the outstanding stock.

(b) "Officer" means an officer of a corporation other than a subchapter S corporation including the chairperson of the board, president, vice-president, secretary, and treasurer, or persons performing similar duties.

(i) Add compensation and director's fees of active shareholders of a corporation.

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(ii) Make the adjustments provided in section 9(4)(a) and (b).

(iii) Add compensation and director's fees of officers of a corporation.

(d) "Shareholder" means a person who owns outstanding stock in the business or for tax years that begin on and after January 1, 2007, a member of a business entity that files as a corporation for federal tax purposes. An individual is considered as the owner of the stock owned, directly or indirectly, by or for family members as defined by section 318(a)(1) of the internal revenue code.

(e) "Loss adjustment" means the amount by which adjusted business income was less than zero in any of the 5 tax years immediately preceding the tax year for which eligibility for the credit provided by this section is being determined. In determining the loss adjustment for a tax year, a taxpayer is not required to use more of the taxpayer's total negative adjusted business income than the amount needed to qualify the taxpayer for the credit under this section. A taxpayer shall not be considered to have used any portion of the taxpayer's negative adjusted business income amount unless the portion used is necessary to qualify for the credit under this section. A taxpayer shall not reuse a negative adjusted business income amount used as a loss adjustment in a previous tax year or use a negative adjusted business income amount from a year in which the taxpayer did not receive the credit under this section.

(f) "Subchapter S corporation" means a corporation electing taxation under subchapter S of chapter 1 of subtitle A of the internal revenue code, sections 1361 to 1379 of the internal revenue code.

(2) The credit provided in this section shall be taken before any other credit under this act, and is available to any person whose gross receipts do not exceed $6,000,000.00 for tax years commencing on or after January 1, 1984 and before January 1, 1989; $7,000,000.00 for tax years commencing in 1989; $7,250,000.00 for tax years commencing in 1990; $7,500,000.00 for tax years commencing in 1991; or $10,000,000.00 for tax years commencing after 1991, and whose adjusted business income minus the loss adjustment does not exceed $475,000.00 for tax years commencing on or after January 1, 1985, subject to the following:

(a) An individual, a partnership, or a subchapter S corporation, or, for tax years that begin on and after January 1, 2007, a business entity that files as a partnership for federal tax purposes is disqualified if the individual, any 1 partner of the partnership, or any 1 shareholder of the subchapter S corporation, or, for tax years that begin on and after January 1, 2007, any 1 member of a business entity that files as a partnership for federal tax purposes receives more than $95,000.00 for tax years commencing on or after January 1, 1985 and before January 1, 1998 or more than $115,000.00 for tax years commencing after December 31, 1997 and before January 1, 2007, or more than $175,000.00 as adjusted under subsection (9) for tax years commencing after December 31, 2006 as a distributive share of the adjusted business income minus the loss adjustment of the individual, the partnership, or the subchapter S corporation.

(b) A corporation other than a subchapter S corporation is disqualified if either of the following occur for the respective tax

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year:

(i) Compensation and director's fees of a shareholder or officer exceed $95,000.00 for tax years commencing on or after January 1, 1985 and before January 1, 1998 or exceed $115,000.00 for tax years commencing after December 31, 1997 and before January 1, 2007, or exceed $175,000.00 as adjusted under subsection (9) for tax years commencing after December 31, 2006.

(ii) The sum of the following amounts exceeds $95,000.00 for tax years commencing on or after January 1, 1985 and before January 1, 1998 or exceeds $115,000.00 for tax years commencing after December 31, 1997 and before January 1, 2007, or exceed $175,000.00 as adjusted under subsection (9) for tax years commencing after December 31, 2006:

(A) Compensation and director's fees of a shareholder.

(B) The product of the percentage of outstanding stock owned by that shareholder multiplied by the difference between the sum of business income and the adjustments provided in section 9(4)(a) and (b) minus the loss adjustment.

(c) Subject to section 36d, for a taxpayer that is eligible for the credit under this subsection for tax years beginning after December 31, 1997 and before January 1, 2007, the credit determined under this subsection shall be reduced by the following percentages in the following circumstances:

(i) If an individual, any 1 partner of the partnership, any 1 shareholder of the subchapter S corporation receives as a distributive share of adjusted gross income minus the loss adjustment of the individual, partnership, or subchapter S corporation; if compensation and directors' fees of a shareholder or officer of a corporation other than a subchapter S corporation are; or if the sum of the amounts in subdivision (b)(ii)(A) and (B) is more than $95,000.00 but less than $100,000.00, the credit is reduced by 20%.

(ii) If an individual, any 1 partner of the partnership, or any 1 shareholder of the subchapter S corporation receives as a distributive share of adjusted gross income minus the loss adjustment of the individual, partnership, or subchapter S corporation if compensation and directors' fees of a shareholder or officer of a corporation other than a subchapter S corporation are; or if the sum of the amounts in subdivision (b)(ii)(A) and (B) is $100,000.00 or more but less than $105,000.00, the credit is reduced by 40%.

(iii) If an individual, any 1 partner of the partnership, or any 1 shareholder of the subchapter S corporation receives as a distributive share of adjusted gross income minus the loss adjustment of the individual, partnership, or subchapter S corporation if compensation and directors' fees of a shareholder or officer of a corporation other than a subchapter S corporation are; or if the sum of the amounts in subdivision (b)(ii)(A) and (B) is $105,000.00 or more but less than $110,000.00, the credit is reduced by 60%.

(iv) If an individual, any 1 partner of the partnership, or any 1 shareholder of the subchapter S corporation receives as a distributive share of adjusted gross income minus the loss adjustment of the

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individual, partnership, or subchapter S corporation if compensation and directors' fees of a shareholder or officer of a corporation other than a subchapter S corporation are; or if the sum of the amounts in subdivision (b)(ii)(A) and (B) is $110,000.00 or more but less than $115,000.00, the credit is reduced by 80%.

(3) For the purposes of determining disqualification under subsection (2), an active shareholder's share of business income shall not be attributed to another active shareholder.

(4) A person who qualifies pursuant to subsection (2) is allowed a credit against the tax imposed by section 31. For tax years commencing before January 1, 1989, the credit is a percentage reduction in tax liability. For tax years commencing on and after January 1, 1989 and through tax years commencing in 1991, the credit is the greater of the amount by which the tax imposed by section 31 exceeds 4% of adjusted business income or 3% of adjusted business income for tax years commencing after 1991 or a percentage reduction in tax liability. However, beginning October 1, 1994, the percentage of adjusted business income shall be 2%. The department shall annualize the rates provided under this subsection as necessary for tax years that end after September 30, 1994 and the applicable annualized rate shall be imposed for those tax years. The credit under this subsection is the greater of the amount by which the tax imposed by section 31 exceeds the following percentage of adjusted business income for the specified tax years or a percentage reduction in tax liability:

(a) For tax years commencing on and after January 1, 1989 and through tax years commencing in 1991, 4%.

(b) For tax years commencing after 1991 and before October 1, 1994, 3%.

(d) Beginning January 1, 2008 and before January 1, 2009, 1.8%.

(e) Beginning January 1, 2009 and before January 1, 2010, 1.6%.

(f) Beginning January 1, 2010, 1.4%.

(5) The percentage reduction provided in subsection (4) is calculated by subtracting from 100% the percentage computed by dividing adjusted business income by 45% of tax base.

(6) If gross receipts exceed $5,000,000.00 for tax years commencing on or after January 1, 1984 and before January 1, 1989; $6,000,000.00 for tax years commencing in 1989; $6,250,000.00 for tax years commencing in 1990; $6,500,000.00 for tax years commencing in 1991; or $9,000,000.00 for tax years commencing after 1991, the credit shall be reduced by a fraction, the numerator of which is the amount of gross receipts over $5,000,000.00 for tax years commencing on or after January 1, 1984 and before January 1, 1989; $6,000,000.00 for tax years commencing in 1989; $6,250,000.00 for tax years commencing in 1990; $6,500,000.00 for tax years commencing in 1991; or $9,000,000.00 for tax years commencing after 1991, and the denominator of which is $1,000,000.00. The credit shall not exceed 50% for tax years commencing before January 1, 1984; 90% for tax years commencing on or after January 1, 1984 and before January 1, 1988; or 100% for tax years commencing on and after January 1, 1988 of the tax liability imposed by section 31.

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(7) An affiliated group as defined in this act, a controlled group of corporations as defined in section 1563 of the internal revenue code and further described in 26 C.F.R. 1.414(b)-1 and 1.414(c)-1 to 1.414(c)-5, or an entity under common control as defined by the internal revenue code shall not take the credit allowed by this section unless the business activities of the entities are consolidated. For purposes of this subsection, business activities include all activities within and outside of this state.

(8) The department shall permit a taxpayer who elects to claim the credit allowed by this section based on the amount by which the tax imposed by section 31 exceeds the percentage of adjusted business income for the tax year as determined under subsection (4), and who is not required to reduce the credit pursuant to subsection (2) or (6), to file and pay the tax imposed by this act without computing the tax imposed under section 31.

(9) For tax years that begin after December 31, 2007, the maximum amount under subsection (2)(a), (b)(i), and (b)(ii) shall be adjusted by the percentage increase in the rate of personal income growth as reported by the federal government for the immediately preceding calendar year.

(10) As used in this section, the term "corporation" includes a business entity that files as a corporation for federal tax purposes.]

Sec. 38e. (1) A taxpayer may claim a credit against the tax

imposed by this act equal to the sum of 50% of the qualified

expenses incurred before January 1, 2006 as defined in subsection

(5)(d)(i) and (ii) and 100% of the qualified expenses incurred before

January 1, 2006 as defined in subsection (5)(d)(iii) paid by the

taxpayer in the tax year in each of the following circumstances:

(a) Except for apprentices trained under subdivision (b) or

(c), an amount not to exceed $2,000.00 for each apprentice trained

by the taxpayer in the tax year.

(b) For companies that have a classification under the North

American industrial classification system (NAICS) of 333511,

333512, 333513, 333514, or 333515 and for tax years that begin

after December 31, 2003, an amount not to exceed $4,000.00 for each

apprentice trained by the taxpayer in the tax year.

American industrial classification system (NAICS) of 333511,

333512, 333513, 333514, or 333515 and for tax years that begin

after December 31, 2003, an amount not to exceed $1,000.00 for each

special apprentice trained by the taxpayer in the tax year.

(2) If the credit allowed under this section exceeds the tax

liability of the taxpayer under this act for the tax year, that

portion of the credit that exceeds the tax liability shall be

refunded.

(3) The credit allowed under this section shall be claimed on

the annual return required under section 73, or for a taxpayer that

is not required to file an annual return, the department shall

provide that the credit under this subsection may be claimed on the

C-8044 form, a successor form for persons not required to file an

annual return, or other simplified form prescribed by the

department.

(4) For each year that this credit is in effect, the

department of labor and economic growth shall prepare a report

containing information including, but not limited to, the number of

companies taking advantage of the apprenticeship credit, the number

of apprentices participating in the program, the number of

apprentices who complete a program the costs of which were the

basis of a credit under this section, the number of apprentices

that were hired by the taxpayer after the apprenticeship training

was completed for which the taxpayer claimed a credit under this

section for the costs of training that apprentice, information on

the employment status of individuals who have completed an

apprenticeship to the extent the information is available, and the

fiscal impact of the apprenticeship credit. This report shall then

be transmitted to the house tax policy and senate finance

committees and to the house and senate appropriations committees.

This report shall be due no later than the first day of March each

year.

(5) As used in this section:

(a) "Apprentice" means a person who is a resident of this

state, is 16 years of age or older but younger than 20 years of

age, has not obtained a high school diploma, is enrolled in high

school or a general education development (G.E.D.) test preparation

program, and is trained by a taxpayer through a program that meets

all of the following criteria:

(i) The program is registered with the bureau of apprenticeship

and training of the United States department of labor.

(ii) The program is provided pursuant to an apprenticeship

agreement signed by the taxpayer and the apprentice.

(iii) The program is filed with a local workforce development

board.

(iv) The minimum term in hours for the program shall be not

less than 4,000 hours.

(b) "Enrolled" means currently enrolled or expecting to enroll

after a period of less than 3 months during which the program is

not in operation and the apprentice is not enrolled.

established by the chief elected official of a local unit of

government pursuant to the job training partnership act, Public Law

97-300, 96 Stat. 1322, that has the responsibility to ensure that

the workforce needs of the employers in the geographic area

governed by the local unit of government are met.

(d) "Qualified expenses" means all of the following expenses

paid by the taxpayer in a tax year that begins after December 31,

1996 for expenses used to calculate a credit under subsection

(1)(a) and after December 31, 2003 for expenses used to calculate a

credit under subsection (1)(b) that were not paid for with funds

the taxpayer received or retained that the taxpayer would not

otherwise have received or retained and that are used for training

an apprentice:

(i) Salary and wages paid to an apprentice.

(ii) Fringe benefits and other payroll expenses paid for the

benefit of an apprentice.

(iii) Costs of classroom instruction and related expenses

identified as costs for which the taxpayer is responsible under an

apprenticeship agreement, including but not limited to tuition,

fees, and books for college level courses taken while the

apprentice is enrolled in high school.

(e) "Special apprentice" means a person who is not an

apprentice as defined by section (5)(a), is a resident of this

state, is 16 years of age or older but younger than 25 years of

age, and is trained by a taxpayer through a program that meets all

of the criteria under subdivision (a)(i) to (iv).

Sec. 71. (1) A taxpayer that reasonably expects liability for

the tax year to exceed $600.00 or adjustments under section 23 to

exceed $100,000.00 shall file an estimated return and pay an

estimated tax for each quarter of the taxpayer's tax year.

(2) For taxpayers on a calendar year basis the quarterly

returns and estimated payments shall be made by April 30, July 31,

October 31, and January 31. Taxpayers not on a calendar year basis

shall file quarterly returns and make estimated payments on the

appropriate due date which in the taxpayer's fiscal year

corresponds to the calendar year.

(3) The estimated payment made with each quarterly return of

each tax year shall be for the estimated tax base for the quarter

or 25% of the estimated annual liability. The second, third, and

fourth estimated payments in each tax year shall include

adjustments, if necessary, to correct underpayments or overpayments

from previous quarterly payments in the tax year to a revised

estimate of the annual tax liability.

(4) The interest and penalty provided by this act shall not be

assessed if any of the following occur:

(a) If the sum of the estimated payments equals at least 85%

of the liability or 1% of the gross receipts for the tax year and

the amount of each estimated payment reasonably approximates the

tax liability incurred during the quarter for which the estimated

payment was made.

(b) If the preceding year's tax liability was $20,000.00 or

less and if the taxpayer submitted 4 equal installments the sum of

which equals the previous year's tax liability.

the amendatory act that added this subdivision became effective, if

the underpayment is due to the changes made to section 36 by the

amendatory act that added this subdivision.

(5) Each estimated return shall be made on a form prescribed

by the department and shall include an estimate of the annual tax

liability and other information required by the commissioner. This

form may be combined with any other tax reporting form prescribed

by the department.

(6) With respect to a taxpayer filing an estimated tax return

for the taxpayer's first tax year of less than 12 months, the

amounts paid with each return shall be proportional to the number

of payments made in the first tax year.

(7) Payments made under this section shall be a credit against

the payment required with the annual tax return required in section

73.

(8) When the commissioner considers it necessary to insure

payment of the tax or to provide a more efficient administration of

the tax, the commissioner may require filing of the returns and

payment of the tax for other than quarterly or annual periods.

(9) A taxpayer that elects under the internal revenue code to

file an annual federal income tax return by March 1 in the year

following the taxpayer's tax year and does not make a quarterly

estimate or payment, or does not make a quarterly estimate or

payment and files a tentative annual return with a tentative

payment by January 15, in the year following the taxpayer's tax

year and a final return by April 15 in the year following the

taxpayer's tax year, shall have the same option in filing the

estimated and annual returns required by this act.

(10) Instead of the quarterly return prescribed in subsections

(1) and (2) the taxpayer may elect either of the following options:

(a) To file and pay before the sixteenth day of each month an

estimated return computed at the rate of 1% of the gross receipts

for the preceding month.

(b) To file and pay before the sixteenth day of the months

specified in subsection (2) an estimated return computed at the

rate of 1% of the gross receipts for the preceding quarter.

(11) A penalty for underpayment of an estimated tax under this

act shall not be assessed for the taxpayer's first tax year

beginning after December 31, 1999 if the taxpayer claimed a credit

under section 35a for the first time on the taxpayer's annual

return for that tax year and a penalty would not have applied if

the taxpayer had made adjustments under section 23 or 23b on that

return.

Sec. 79. For tax years that begin on and after January 1,

2006, a taxpayer that files a consolidated or combined return under

this act shall not claim a credit carryforward or loss carryforward