News and Insights

Michigan Single Business Tax and Federal Disregarded Entities: No Harm/No Foul 

Tax Development Mar 26, 2010

Some Michigan Single Business Taxpayers (SBT) may not have to meet the challenge of preparing a quarterly reserve for potential post filing SBT consequences. Before adjourning for its spring recess, the Michigan Senate unanimously (38-0) passed House Bill 5937. As it was passed in the same form as passed the Michigan House of Representatives on March 16, 2010, the bill was ordered enrolled and sent to Governor Granholm for her signature. The Governor is expected to sign the measure into law prior to March 31, 2010 with immediate effect.

The bill would amend the Michigan Revenue Act to give direction to the Department of Treasury (“Department”) regarding the treatment of a taxpayer that filed a SBT return that included an entity disregarded for Federal Income Tax purposes, and the treatment of the disregarded entity. As published in the Senate Fiscal Agency Committee analysis:

“Specifically, for a taxpayer that filed a tax return under the former Single Business Tax Act that included an entity disregarded for Federal income tax purposes under the Internal Revenue Code, both of the following would apply:

  • The Department of Treasury could not assess the taxpayer an additional tax or reduce an overpayment because the taxpayer included the disregarded entity on its SBT return.
  • The Department could not require the disregarded entity to file a separate tax return.

In addition, if the taxpayer filed an SBT return that included an entity disregarded for Federal income tax purposes, the taxpayer could not claim a refund based on the disregarded entity’s filing a separate return as a distinct taxpayer.”

This legislation was created as the result of a Michigan Court of Appeals decision in Kmart Michigan Property Services LLC v Department of Treasury (283 Mich App 647, May 12, 2009 cert denied). The Kmart LLC filed SBT returns as a separate entity from its owner contrary to Michigan Revenue Administrative Bulletin 1999-9. The Department challenged the filing resulting in litigation. The Michigan Court of Appeals sustained Kmart filing position. Because of the language in this enrolled bill, the new legislation should not affect Kmart.

After consultation with the Michigan Attorney General, the Department published a notice of its position regarding the legislation. The position required that both new and amended returns be filed creating a significant administrative burden on thousands of SBT. This enrolled bill would reverse the Department’s policy.

Once signed by the Governor, this legislation would bring most SBT with federal disregarded entities back to the filing position they were in prior to the Kmart decision.