Michigan: Treasury Issues IRC section 163(j) Guidance

On June 8, 2020, the Michigan Department of Treasury (MDOT) issued a notice addressing computation of the IRC section 163(j) limitation for purposes of the Michigan Corporate Income Tax (CIT). The notice is based on the proposed regulations for 163(j) that were issued in late 2018, and the Department notes that conclusions may change based when the federal regulations become final. The notice reminds taxpayers that MDOT has consistently recognized that consolidated and combined filings are not the same.

A member of a Michigan Unitary Business Group (UBG) that is included in a federal consolidated return is required to separately compute a pro-forma federal return. Despite the results of the consolidated return, each pro forma corporation that was subject to a business expense limitation federally must separately calculate a pro forma business interest expense to arrive at its pro forma federal taxable income. Business interest expense allowed in pro forma federal taxable income is computed using the rules set out in IRC section 163(j) and its supporting regulations, as applied to a pro forma corporation on a standalone basis. For example, a pro forma corporation considers only its own business interest expense, business interest income, and adjusted taxable income in determining its limitation for Michigan CIT purposes. In addition, for purposes of computing its pro forma business interest expense limitation, a pro forma corporation does not eliminate transactions with companies that were included in the federal consolidated return.   To the extent included in the corporate income tax base, a UBG member must eliminate the pro-forma business interest expense attributable to transactions with other members of the UBG. 

A UBG member is not permitted to use the carryforward or disallowed business interest expense of another UBG member. Likewise, any unused business interest expense limitation of one UBG member may not be used by another member. Finally, the notice provides that if there is a tax deficiency caused by incorrectly calculating business interest expense in accordance with the notice and that is the only reason for the deficiency, the MDOT will consider it to be sufficient evidence of reasonable cause to justify a waiver of penalties upon a taxpayer’s request. Please contact Mike Bozimowski at (248)-756-5832 with questions on the notice.