October 21, 2003

Internal Policy Directive 2003-4
SINGLE BUSINESS TAX
INVESTMENT TAX CREDIT RECAPTURE IN A YEAR THAT A GROSS RECEIPTS REDUCTION IS TAKEN

Must an amount be included in the Investment Tax Credit (ITC) recapture calculation and subsequently added to the Single Business Tax (SBT) tax liability if no credit can be taken in the year of disposition, e.g. if a gross receipts reduction is taken? Is there statutory authority to require this addition?

There is no statutory provision to require a recapture of the ITC in years that a gross receipts reduction is taken. The investment tax credit is defined in MCL 208.35a(1) as based on net acquisitions and dispositions. MCL 208.35a(6) states that a taxpayer that reduces the adjusted tax base under section 31(2) may not claim an investment tax credit. This precludes any calculation of the credit, whether for acquisitions or dispositions.

For tax years beginning after 1999, an SBT taxpayer may claim an investment tax credit for a percentage of the net costs paid or accrued in a taxable year for qualifying tangible assets physically located in Michigan for use in a business activity in the state. The assets must be of a type that are or will become eligible for depreciation or amortization for federal income tax. Mobile tangible assets, wherever located, which would be subject to apportionment in the same manner as the tax base, and assets purchased or acquired for use outside the State and later moved into the State would also qualify for the ITC. In addition, a recapture is required in any year in which a disposition of such property occurs. If the total recapture exceeds the cost of qualifying assets for a taxable period, the absolute value of the computed ITC must be added to the tax liability.

Under the SBT, if a taxpayer’s adjusted tax base is greater than 50% of the adjusted gross receipts, the adjusted tax base may be reduced by the excess. The ITC is not available if a gross receipts reduction to the adjusted tax base is taken to arrive at the tax liability. However, the Department’s policy has been that a recapture of capital investments must still be added to the tax base.

The following ITC question and answer is currently published on the Treasury web site:

Question: Must an amount be included in the ITC recapture calculation if no credit was taken in the year of acquisition (tax benefit issue)? What about if no credit will be taken in the year of disposition, e.g. if a gross receipts reduction is taken?

Answer: Yes. A recapture will be required in any year in which a disposition occurs. If the total recapture exceeds the cost of qualifying assets for a taxable period, the computed ITC must be added to the tax liability. In addition, if a disposition occurs in a year that a gross receipts reduction is taken, the amount that is added to the tax liability is based on dispositions only, not net of acquisitions.

This is based on a policy decision made during the implementation of the credit in 1999 which is reflected in the question and answer above, and was also used in the programming of the SBT Processing System.

A strict reading of the statute, however, finds no statutory authority to require a recapture of the ITC in years that a gross receipts reduction is taken.

The investment tax credit is defined in MCL 208.35a(1) as based on net acquisitions and dispositions.

MCL 208.35a(1) For a tax year beginning after December 31, 1999, a taxpayer may claim a credit against the tax imposed by this act of equal to the percentage determined under subsection (2) multiplied by the result of subtracting the sum of the amounts calculated under subdivisions (d), (e), and (f) from the sum of the amounts calculated under subdivisions (a), (b), and (c):

MCL 208.35a(3) For a tax year in which the amount calculated under subsection (1) and multiplied by the percentage determined under subsection (2) is negative, the absolute value of that amount is added to the taxpayer's tax liability for the tax year.

MCL 208.35a(6) states that a taxpayer that reduces the adjusted tax base under section 31(2) may not claim an investment tax credit.

MCL 208.35a(6) A taxpayer that reduces the adjusted tax base under section 31(2) shall not claim a credit under this section.

This precludes any calculation of the credit, whether for acquisitions or dispositions.