Instructions For Form Mi-1040h, Schedule Of Apportionment

2016 MI-1040H, Page 2

Instructions for Form MI-1040H, Schedule of Apportionment

Purpose

NOTE: The numerator of the sales factor for individual income

tax may include “throwback sales.” Throwback sales are sales

Business income from business activity that is taxable both

of tangible personal property that originate in Michigan made to

within and outside Michigan is apportioned to Michigan for

a purchaser in another state or country, and are “thrown back”

individual income tax (IIT) purposes using this form.

to the numerator as Michigan sales because they are not taxable

General Instructions

by the other state. Throwback sales follow federal P.L. 86-272

standards; the business must have physical presence in the other

In order to determine if apportionment is required rather than

state or activity beyond solicitation of sales in order to exclude

allocation, a taxpayer must determine if the business activity

sales into another state or country from the numerator.

causes the taxpayer’s income to be subject to tax in both

Michigan and another state. The Michigan Income Tax Act

Sales of other than tangible personal property (e.g., services) are

definition of “state” includes a foreign country.

in Michigan if:

1. The business activity is performed in Michigan, or

A taxpayer’s business income is taxable in another state if:

2. The business activity is performed both in Michigan and in

1. In that state the taxpayer is subject to a net income tax, a

another state(s), but based on cost of performance, a greater

franchise tax measured by net income, a franchise tax for the

proportion of the business activity is performed in Michigan.

privilege of doing business, a corporate stock tax, or

There are special apportionment formulas for transportation

2. That state has jurisdiction to subject the taxpayer to a net

companies and other authorized taxpayers. Those formulas are

income tax regardless of whether the state does or does not.

identified in Chapter 3 of the Michigan Income Tax Act.

Michigan IIT uses the standards prescribed by federal Public

Combined Apportionment Under the Unitary

Law (P.L.) 86-272 to determine whether another state has

Business Principle

jurisdiction to subject the taxpayer to a net income tax.

In 2013, the Michigan Supreme Court held that combined

If apportioned business capital gains (losses) are reported on

apportionment under the unitary business principle may be used

line 3 and/or line 8 of Form MI-1040D, do not include those

to calculate IIT taxable income at the election of the taxpayer,

amounts on line 9 of this form.

Malpass v. Department of Treasury, 494 Mich 237 (2013).

Treasury previously applied the unitary business principle to

A separate Form MI-1040H should be used for each business

activity that requires apportionment. If you have more than

each discrete legal entity’s business operations. A taxpayer

one MI-1040H and are a Michigan resident, do not net income

now has the option to apportion each discrete legal entity’s

and losses from multiple forms together. Instead, net losses on

income (loss) separately or to combine apportionment when

line 11 with other losses on line 11 and report the total losses

entities are unitary with one another.

from other states on Schedule 1, line 4; net income on line 11

Entities that are unitary with one another have a flow of value

with other income on line 11; report total income from other

between their various operations. An individual may elect to

states on Schedule 1, line 13. Nonresidents with more than one

combine apportionment when the business operations show:

Form MI-1040H should net income and losses from line 11 of

• Economic realities

all MI-1040H forms together before recording the amount on

Schedule NR, column C.

• Functional integration

• Centralized management

Sales Factor

• Economies of scale

Business income subject to apportionment is sourced to

• Substantial mutual interdependence.

Michigan by applying a sales factor. To compute the sales

These factors are not exhaustive or exclusive and the ability to

factor, divide the total sales in Michigan during the tax year by

elect combined apportionment will depend on the totality of

the total sales everywhere during the tax year.

the circumstances.

“Sales” includes gross receipts from sales of tangible property,

Unlike the Corporate Income Tax, there is no “water’s edge.”

rental of property and providing of services that constitute

business activity. Exclude all receipts of nonbusiness income.

The holding by the Michigan Supreme Court in the Malpass

case is retroactive. Amended returns are required if business

Sales of tangible personal property are in Michigan if:

income is subject to apportionment and the taxpayer elects

1. The property is shipped or delivered to a purchaser (other

to apply the combined method to a year open to the statute of

than the United States government) within Michigan regardless

limitations.

of the free on board (F.O.B.) point or other conditions of the

NOTE: If you are reporting combined apportionment, you

sale, or

must attach a separate schedule showing your computations.

2. The property is shipped from an office, store, warehouse,

See “MI-1040H Unitary Apportionment Worksheet Example”

factory or other place of storage in Michigan and the purchaser

available on Treasury’s Web site.

is the United States government or the taxpayer is not taxable in

the state of the purchaser.

Instructions For Form Mi-1040h, Schedule Of Apportionment - 2016

Related Articles

Related forms

Related Categories