Michigan taxation of subchapter S corporations and their shareholders.

This article discusses the Michigan taxation of subchapter S corporations and their shareholders. The primary focus is on the single business tax and the income tax, although the intangibles tax and inheritance tax are also covered. Taxation of resident versus nonresident shareholders is considered. Taxation of the Corporation

In General. For federal income tax purposes an S corporation is a conduit. The shareholders, not the corporation, are taxed. The same treatment applies for Michigan income tax purposes. However, Michigan imposes a Single Business Tax (SBT) on all persons engaged in a business activity within the state, including S corporations. The threshold for taxation is whether or not the corporation conducts a business activity in Michigan. Business activity includes owning and leasing real or personal property and rendering professional services. The laws of the state under which the corporation is formed, or where its principal office is located, are irrelevant.

The computation of the single business tax starts with the corporation's business income. Business income for an S corporation is defined as that part of federal taxable income derived from business activity, and includes payments and items of income and expense which are attributable to business activity of the corporation and separately allocated to its shareholders (i.e. schedule K-1 items).

Basically, this is the ordinary income (or loss) on Federal Form 1120-S plus (or minus) the items of income (or deduction) separately stated for the shareholders on Federal Form 1120-S.

A discussion of all of the computations to determine SBT liability is beyond the scope of this article. However, certain aspects in which S corporations received special treatment are discussed.

Capital Acquisition Deduction. A significant benefit to a capital intensive corporation, such as one owning a building and equipment, is the capital acquisition deduction (CAD). This provision allows a reduction in the tax base for the entire cost of any depreciable real property located in Michigan. Depreciable personal property also qualifies for the CAD, but if the corporation does business in more than one state, only a portion is eligible. To the extent that the CAD creates a business loss, it can be carried forward for up to 1 0 years to reduce the tax base in future years.

When the CAD property is sold or otherwise disposed of, the CAD is recaptured by adding to the SBT …