In Letter Ruling 2013-3 (LR 2013-3), the Michigan Department of Treasury recently ruled that irrevocable trusts are not subject to the small business alternative credit disqualifiers or percentage reductions applicable to individual taxpayers under the Michigan Business Tax (MBT).
Michigan Business Tax Small Business Alternative Credit
Under the MBT, the small business alternative credit is generally available to any taxpayer with gross receipts that do not exceed $20,000,000, and with adjusted business income minus any loss adjustment that does not exceed $1,300,000, as adjusted annually for inflation. See M.C.L. § 208.1417(1). A loss adjustment is a loss incurred in any of the 5 immediately preceding tax years. M.C.L. § 208.1417(9)(d).
Credit Disqualifiers and Percentage Reductions
An individual, partnership, limited liability company, or S corporation is disqualified from claiming the credit if the individual, or any one owner of the entity, realizes more than $180,000 as a distributive share of the adjusted business income minus any loss adjustment of the individual or entity. See M.C.L. § 208.1417(1)(a). These provisions are commonly known as “credit disqualifiers”.
Moreover, the credit is reduced by 20% to 80% if an individual or any owner of the partnership, limited liability company, or S corporation realizes a distributive share of the adjusted business income minus any loss adjustment of the individual or entity which is more than $160,000 but not more than $180,000. See M.C.L. § 208.1417(1)(c). These provisions are commonly known as the “percentage reductions”.
Irrevocable Trusts are Not Subject to the Disqualifiers or Percentage Reductions
LR 2013-3 plainly states that irrevocable trusts are not subject to the credit disqualifiers or percentage reductions because irrevocable trusts are not specifically listed as being subject to such disqualifiers or reductions in the text of M.C.L. §§ 208.1417(1)(a) and (c).
MBT Planning Considerations and Potential Refund Opportunities
LR 2013-3 may benefit any irrevocable trust that operated a business and generated a MBT liability, so long as the trust’s gross revenues did not exceed $20,000,000, and adjusted business income minus the loss adjustment did not exceed $1,300,000, as adjusted for inflation.
Specifically, LR 2013-3 may provide the basis for a refund claim by an irrevocable trust that either did not claim the credit at all due to the credit disqualifiers, or claimed a reduced credit due to the percentage reductions.
LR 2013-3 does not specifically address grantor trusts. However, if a grantor trust filed MBT returns as a separate entity, there may be an opportunity to file amended returns to claim additional tax benefits if the grantor trust either did not claim the credit, or claimed a reduced credit in the original returns.
However, recent MBT guidance indicates that grantor trusts that filed MBT returns as disregarded entities may not amend their MBT returns to be classified as separate entities. In that instance, the individual owner of the grantor trust is the relevant taxpayer. Unlike irrevocable trusts, M.C.L. § 208.1417 specifically identifies individuals as subject to the credit disqualifiers and percentage limitations. Therefore, LR 2013-3 does not provide a basis for an individual owner of a grantor trust to file a refund claim.