Single Business Tax Return Must be Within the Four Year Statute of Limitations
Last week Friday, August 31st, I posted a Blog on the TMW Enterprises Court of Appeals decision. (TMW Enterprises, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 302870, August 14, 2012) That Blog has generated a considerable amount of attention. We have not heard from the Department of treasury and we do not know if an appeal is in the works.
The August 14, 2012 decision of the Michigan Court of Appeals stated that S Corporation income, which flows through to the shareholder for federal income tax purposes, is not included in "business income" for Michigan Single Business Tax. However, built-in gains and excess passive income would constitute "business income" for Single Business Tax.
Following is from the Court of Appeals decision:
The SBT imposed a tax on a taxpayer's adjusted tax base. TMW, 285 Mich App at 173. "Tax base" was defined to mean "business income, before apportionment or allocation as provided in chapter 3, even if zero or negative, subject to the adjustments in this section." MCL 208.9(1); TMW, 285 Mich App at 174. And, for corporations, "business income" was defined as federal taxable income. Id. "Thus, if a person is a corporation, its business income is its federal taxable income, which in turn is also its tax base." Id.
The analysis thus becomes very simple. Plaintiff, as an S corporation, had no federal taxable income, except for its built-in gains and excess passive income. Therefore, only the amount of those built-in gains and excess passive income would constitute "business income" under the SBTA. And, thus, it only owed an SBT on that amount, as the trial court concluded.
What Does the Court of Appeals Decision Mean?
All S Corporations, within the four year statute of limitations, should file an amended return to exclude S Corporation income, other than built in gains and excess passive income, from "business income". The TMW Enterprises decision only address "business income", therefore all other aspects of the return (compensation, additions, subtractions) would remain as filed.
Within the Four Year Statute of Limitations
The four year statute of limitations starts with the later of the statutory due date for the return or the extended due date. It is unclear if the actual file date for the return is used when filed before the extended due date. To extend the due date the taxpayer must file an extension form. The running of the statute of limitations is suspended during a period of audit and/or appeal.