HB-5893, As Passed Senate, June 27, 2008

SUBSTITUTE FOR

HOUSE BILL NO. 5893

A bill to amend 2007 PA 36, entitled

"Michigan business tax act,"

by amending sections 201 and 203 (MCL 208.1201 and 208.1203),

section 201 as amended by 2007 PA 145.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 201. (1) Except as otherwise provided in this act, there

is levied and imposed a business income tax on every taxpayer with

business activity within this state unless prohibited by 15 USC 381

to 384. The business income tax is imposed on the business income

tax base, after allocation or apportionment to this state, at the

rate of 4.95%.

(2) The business income tax base means a taxpayer's business

income subject to the following adjustments, before allocation or

apportionment, and the ~~adjustment in subsection (5)~~ adjustments in

subsections (5), (6), and (7) after allocation or apportionment:

(a) Add interest income and dividends derived from obligations

or securities of states other than this state, in the same amount

that was excluded from federal taxable income, less the related

portion of expenses not deducted in computing federal taxable

income because of sections 265 and 291 of the internal revenue

code.

(b) Add all taxes on or measured by net income and the tax

imposed under this act to the extent the taxes were deducted in

arriving at federal taxable income.

the extent deducted in arriving at federal taxable income.

(d) 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.

(e) To the extent included in federal taxable income, add the

loss or subtract the income from the business income tax base that

is attributable to another entity whose business activities are

taxable under this section or would be subject to the tax under

this section if the business activities were in this state.

(f) Except as otherwise provided under this subdivision, to

the extent deducted in arriving at federal taxable income, add any

royalty, interest, or other expense paid to a person related to the

taxpayer by ownership or control for the use of an intangible asset

if the person is not included in the taxpayer's unitary business

group. The addition of any royalty, interest, or other expense

described under this subdivision is not required to be added if the

taxpayer can demonstrate that the transaction has a nontax business

purpose other than avoidance of this tax, is conducted with arm's-

length pricing and rates and terms as applied in accordance with

sections 482 and 1274(d) of the internal revenue code, and

satisfies 1 of the following:

(i) Is a pass through of another transaction between a third

party and the related person with comparable rates and terms.

(ii) Results in double taxation. For purposes of this

subparagraph, double taxation exists if the transaction is subject

to tax in another jurisdiction.

(iii) Is unreasonable as determined by the treasurer, and the

taxpayer agrees that the addition would be unreasonable based on

the taxpayer's facts and circumstances.

(g) To the extent included in federal taxable income, deduct

interest income derived from United States obligations.

(h) To the extent included in federal taxable income, deduct

any earnings that are net earnings from self-employment as defined

under section 1402 of the internal revenue code of the taxpayer or

a partner or limited liability company member of the taxpayer

except to the extent that those net earnings represent a reasonable

return on capital.

(i) Subject to the limitation provided under this subdivision,

if the book-tax differences for the first fiscal period ending

after July 12, 2007 result in a deferred liability for a person

subject to tax under this act, deduct the following percentages of

the total book-tax difference for each qualifying asset, for each

of the successive 15 tax years beginning with the 2015 tax year:

(i) For the 2015 through 2019 tax years, 4%.

(ii) For the 2020 through 2024 tax years, 6%.

(iii) For the 2025 through 2029 tax years, 10%.

(3) The deduction under subsection (2)(i) shall not exceed the

amount necessary to offset the net deferred tax liability of the

taxpayer as computed in accordance with generally accepted

accounting principles which would otherwise result from the

imposition of the business income tax under this section and the

modified gross receipts tax under section 203 if the deduction

provided under this subdivision were not allowed. The deduction

under subsection (2)(i) is intended to flow through and reduce the

surcharge imposed and levied under section 281. For purposes of the

calculation of the deduction under subsection (2)(i), a book-tax

difference shall only be used once in the calculation of the

deduction arising from the taxpayer's business income tax base

under this section and once in the calculation of the deduction

arising from the taxpayer's modified gross receipts tax base under

section 203. The adjustment under subsection (2)(i) shall be

calculated without regard to the federal effect of the deduction.

If the adjustment under subsection (2)(i) is greater than the

taxpayer's business income tax base, any adjustment that is unused

may be carried forward and applied as an adjustment to the

taxpayer's business income tax base before apportionment in future

years. In order to claim this deduction, the department may require

the taxpayer to report the amount of this deduction on a form as

prescribed by the department that is to be filed on or after the

date that the first quarterly return and estimated payment are due

under this act. As used in subsection (2)(i) and this subsection:

(a) "Book-tax difference" means the difference, if any,

between the person's qualifying asset's net book value shown on the

person's books and records for the first fiscal period ending after

July 12, 2007 and the qualifying asset's tax basis on that same

date.

(b) "Qualifying asset" means any asset shown on the person's

books and records for the first fiscal period ending after July 12,

2007, in accordance with generally accepted accounting principles.

(4) For purposes of subsections (2) and (3), the business

income of a unitary business group is the sum of the business

income of each person, other than a foreign operating entity or a

person subject to the tax imposed under chapter 2A or 2B, included

in the unitary business group less any items of income and related

deductions arising from transactions including dividends between

persons included in the unitary business group.

(5) Deduct any available business loss incurred after December

31, 2007. As used in this subsection, "business loss" means a

negative business income taxable amount after allocation or

apportionment. The business loss shall be carried forward to the

year immediately succeeding the loss year as an offset to the

allocated or apportioned business income tax base, then

successively to the next 9 taxable years following the loss year or

until the loss is used up, whichever occurs first, but for not more

than 10 taxable years after the loss year.

(6) Deduct any gain from the sale of any residential rental

units in this state to a qualified affordable housing project that

enters an agreement to operate the residential rental units as rent

restricted units for a minimum of 15 years. If the qualified

affordable housing project does not agree to operate all of the

residential rental units as rent restricted units, the deduction

under this subsection is limited to an amount equal to the gain

from the sale multiplied by a fraction, the numerator of which is

the number of those residential rental units purchased that are to

be operated as a rent restricted unit and the denominator is the

number of all residential rental units purchased. In order to claim

this deduction, the department may require the taxpayer and the

qualified affordable housing project to report the amount of this

deduction on a form as prescribed by the department that is to be

signed by both the taxpayer and the qualified affordable housing

project and filed with the taxpayer's annual return. The department

shall record a lien against the property subject to the operation

agreement for the total amount of the deduction allowed under this

subsection. The department shall notify the qualified affordable

housing project of the maximum amount of the lien that the

qualified affordable housing project may be liable for if the

qualified affordable housing project fails to qualify and operate

as provided in the operation agreement within 15 years after the

purchase. The lien shall become payable in an amount as provided

under this subsection to the state by the qualified affordable

housing project if the qualified affordable housing project fails

to qualify as a qualified affordable housing project and fails to

operate all or some of the residential rental units as rent

restricted units in accordance with the operation agreement entered

upon the purchase of those units within 15 years after the

deduction is claimed by a taxpayer under this subsection. An amount

equal to the product of 100% of the amount of the deduction allowed

under this subsection multiplied by a fraction, the numerator of

which is the difference between 15 and the number of years the

affordable housing project qualified and operated rent restricted

units in accordance with the agreement and the denominator is 15,

shall be added back to the tax liability of the qualified

affordable housing project for the tax year that the qualified

affordable housing project fails to comply with the agreement.

(7) Subject to the limitations provided in this subsection,

for a person that is a qualified affordable housing project, deduct

an amount equal to the product of that person's taxable income that

is attributable to residential rental units in this state owned by

the qualified affordable housing project multiplied by a fraction,

the numerator of which is the number of rent restricted units in

this state owned by that qualified affordable housing project and

the denominator of which is the number of all residential rental

units in this state owned by the qualified affordable housing

project. The amount of the deduction calculated under this

subsection shall be reduced by the amount of limited dividends or

other distributions made to the partners, members, or shareholders

of the qualified affordable housing project. Taxable income that is

attributable to residential rental units does not include income

received by the management, construction, or development company

for completion and operation of the project and those rental units.

(8) If a qualified affordable housing project no longer meets

the requirements of subsection (9)(b) or fails to operate those

residential rental units as rent restricted units in accordance

with the operation agreement and the requirements of subsection

(9)(c), the taxpayer is entitled to the deductions under

subsections (6) and (7) as long as the qualified affordable housing

project continues to offer some of the residential rental units

purchased as rent restricted units in accordance with the operation

agreement.

(9) For purposes of subsections (6), (7), and (8) and this

subsection:

(a) "Limited dividend housing association" means a limited

dividend housing association, corporation, or cooperative organized

and qualified pursuant to chapter 7 of the state housing

development authority act of 1966, 1966 PA 346, MCL 125.1491 to

125.1496.

(b) "Qualified affordable housing project" means a person that

is organized, qualified, and operated as a limited dividend housing

association that has a limitation on the amount of dividends or

other distributions that may be distributed to its owners in any

given year and has received funding, subsidies, grants, operating

support, or construction or permanent funding through 1 or more of

the following sources and programs:

(i) Mortgage or other financing provided by the Michigan state

housing development authority created in section 21 of the state

housing development authority act of 1966, 1966 PA 346, MCL

125.1421, the United States department of housing and urban

development, the United States department of agriculture for rural

housing service, the Michigan interfaith housing trust fund,

Michigan housing and community development fund, federal home loan

bank, housing commission loan, community development financial

institution, or mortgage or other funding or guaranteed by Fannie,

Ginnie, federal housing association, United States department of

agriculture, or federal home loan mortgage corporation.

(ii) A tax-exempt bond issued by a nonprofit organization,

local governmental unit, or other authority.

(iii) A payment in lieu of tax agreement or other tax abatement.

(iv) Funding from the state or a local governmental unit

through a HOME investments partnership program authorized under 42

USC 12741 to 12756.

(v) A grant or other funding from a federal home loan bank's

affordable housing program.

(vi) Financing or funding under the new markets tax credit

program under section 45D of the internal revenue code.

(vii) Financed in whole or in part under the United States

department of housing and urban development's hope VI program as

authorized by section 803 of the national affordable housing act,

42 USC 8012.

(viii) Financed in whole or in part under the United States

department of housing and urban development's section 202 program

authorized by section 202 of the national housing act, 12 USC

1701q.

(ix) Financing or funding under the low-income housing tax

credit program under section 42 of the internal revenue code.

(x) Financing or other subsidies from any new programs similar

to any of the above.

rental income is restricted in accordance with section 42(g)(1) of

the internal revenue code as if it was a qualified low-income

housing project, or receives rental assistance in the form of HUD

section 8 subsidies or HUD housing assistance program subsidies, or

rental assistance from the United States department of agriculture

rural housing programs, or from any of the other programs described

under subdivision (b).

Sec. 203. (1) Except as otherwise provided in this act, there

is levied and imposed a modified gross receipts tax on every

taxpayer with nexus as determined under section 200. The modified

gross receipts tax is imposed on the modified gross receipts tax

base, after allocation or apportionment to this state at a rate of

0.80%.

(2) The tax levied and imposed under this section is upon the

privilege of doing business and not upon income or property.

(3) The modified gross receipts tax base means a taxpayer's

gross receipts subject to the adjustment in subsection (6), if

applicable, less purchases from other firms before apportionment

under this act. The modified gross receipts of a unitary business

group is the sum of modified gross receipts of each person, other

than a foreign operating entity or a person subject to the tax

imposed under chapter 2A or 2B, included in the unitary business

group less any modified gross receipts arising from transactions

between persons included in the unitary business group.

(4) For the 2008 tax year, deduct 65% of any remaining

business loss carryforward calculated under section 23b(h) of

former 1975 PA 228 that was actually incurred in the 2006 or 2007

tax year to the extent not deducted in tax years beginning before

January 1, 2008. A deduction under this subsection shall not

include any business loss carryforward that was incurred before

January 1, 2006. If the taxpayer is a unitary business group, the

business loss carryforward under this subsection may only be

deducted against the modified gross receipts tax base of that

person included in the unitary business group calculated as if the

person was not included in the unitary business group.

(5) Nothing in this act shall prohibit a taxpayer who

qualifies for the credit under section 445 or a taxpayer who is a

dealer of new or used personal watercraft from collecting the tax

imposed under this section in addition to the sales price. The

amount remitted to the department for the tax under this section

shall not be less than the stated and collected amount.

(6) Subject to the limitations provided in this subsection,

for a person that is a qualified affordable housing project, deduct

an amount equal to that person's total gross receipts attributable

to residential rental units in this state owned by the qualified

affordable housing project multiplied by a fraction, the numerator

of which is the number of rent restricted units in this state owned

by the qualified affordable housing project and the denominator of

which is the number of all rental units in this state owned by the

qualified affordable housing project. The amount of the deduction

calculated under this subsection shall be reduced by the amount of

limited dividends or other distributions made to the partners,

members, or shareholders of the qualified affordable housing

project. Gross receipts attributable to residential rental units do

not include amounts received by the management, construction, or

development company for completion and operation of the project and

those rental units.

(7) If a qualified affordable housing project no longer meets

the requirements of subsection (8)(b) or fails to operate those

residential rental units as rent restricted units in accordance

with the operation agreement and the requirements of subsection

(8)(c), the qualified affordable housing project is entitled to the

deduction under subsection (6) as long as the qualified affordable

housing project continues to offer some of the residential rental

units purchased as rent restricted units in accordance with the

operation agreement.

(8) For purposes of subsections (6) and (7) and this

subsection:

(a) "Limited dividend housing association" means a limited

dividend housing association, corporation, or cooperative organized

and qualified pursuant to chapter 7 of the state housing

development authority act of 1966, 1966 PA 346, MCL 125.1491 to

125.1496.

(b) "Qualified affordable housing project" means a person that

is organized, qualified, and operated as a limited dividend housing

association that has a limitation on the amount of dividends or

other distributions that may be distributed to its owners in any

given year and has received funding, subsidies, grants, operating

support, or construction or permanent funding through 1 or more of

the following sources and programs:

(i) Mortgage or other financing provided by the Michigan state

housing development authority created in section 21 of the state

housing development authority act of 1966, 1966 PA 346, MCL

125.1421, the United States department of housing and urban

development, the United States department of agriculture for rural

housing service, the Michigan interfaith housing trust fund,

Michigan housing and community development fund, federal home loan

bank, housing commission loan, community development financial

institution, or mortgage or other funding or guaranteed by Fannie,

Ginnie, federal housing association, United States department of

agriculture, or federal home loan mortgage corporation.

(ii) A tax-exempt bond issued by a nonprofit organization,

local governmental unit, or other authority.

(iii) A payment in lieu of tax agreement or other tax abatement.

(iv) Funding from the state or a local governmental unit

through a HOME investments partnership program authorized under 42

USC 12741 to 12756.

(v) A grant or other funding from a federal home loan bank's

affordable housing program.

(vi) Financing or funding under the new markets tax credit

program under section 45D of the internal revenue code.

(vii) Financed in whole or in part under the United States

department of housing and urban development's hope VI program as

authorized by section 803 of the national affordable housing act,

42 USC 8012.

(viii) Financed in whole or in part under the United States

department of housing and urban development's section 202 program

authorized by section 202 of the national housing act, 12 USC

1701q.

(ix) Financing or funding under the low-income housing tax

credit program under section 42 of the internal revenue code.

(x) Financing or other subsidies from any new programs similar

to any of the above.

rental income is restricted in accordance with section 42(g)(1) of

the internal revenue code as if it was a qualified low-income

housing project, or receives rental assistance in the form of HUD

section 8 subsidies or HUD housing assistance program subsidies, or

rental assistance from the United States department of agriculture

rural housing programs, from any of the other programs described

under subdivision (b).