Michigan Flow-Through Withholding - 2012 (Page 4 of 24) in pdf

A different apportionment rule applies if the flow-through

Exemptions from Flow-Through Withholding

entity is unitary with a CIT taxpayer. For more information on

Flow-Through Entities That Are Exempt

what constitutes a unitary relationship and on the combined

unitary apportionment percentage, please see the instructions

Publicly Traded Partnerships and disregarded entities are

not required to withhold on their members under FTW. For

to Schedule of Unitary Apportionment for Flow-Through

Withholding (Form 4919).

purposes of FTW, “publicly traded partnership” means that

term as defined under Section 7704 of the Internal Revenue

Intermediate Flow-Through Entities: If the flow-through

Code. This exemption from the requirements of FTW applies

entity completing the Annual Reconciliation is an intermediate

to publicly traded partnerships that are treated as corporations

member in a tiered structure that has been withheld on by

as well as those that are treated as partnerships under IRC

its source flow-through entity, then the intermediate flow-

7704(c). An entity is disregarded for purposes of FTW if it is a

through entity must call the Department at (517) 636-6925

disregarded entity for federal income tax purposes.

before filing its Annual Reconciliation. This phone call

must be made to allow the intermediate flow-through entity

Nonresident Individual Exemptions

to properly claim the amounts that have been withheld on its

A flow-through entity is not required to withhold on a

behalf and to allow it to properly distribute those amounts to its

nonresident individual member if:

members.

• The income available for distribution consists entirely of

income exempt from IIT

Flow-Through Withholding for Members That Are

• The aggregated income available for distribution of all

Nonresident Individuals

nonresident individual members is less than $1,000 for any

Business Income

quarter.

Income flowing through to a member of a flow-through

MBT Election Exemption

entity is business income and is subject to the allocation and

A flow-through entity is not required to withhold on a member

apportionment provisions of the IIT as discussed below. This

that elects to file and pay the MBT.

income is referred to as the member’s distributive share of

business income. The distributive share of business income of

Opt-Out Exemption

a flow-through entity is subject to FTW even if it is not actually

C Corporation members of a flow-through entity are also able

distributed or paid to the member.

to exempt the flow-through entity from the FTW requirements

by filing an exemption certificate with the flow-through entity.

Portfolio income from a flow-through entity is business income

If an exemption certificate is received by the flow-through

and is subject to allocation or apportionment. Portfolio income

entity then the flow-through entity is entirely exempt from the

includes interest income, dividend income, royalty income, and

FTW requirements pertaining to that C Corporation member

net short-term and long-term capital gain (loss) from federal

for the entire tax year. This is true no matter when the flow-

Schedule D Capital Gains and Losses. Resident or nonresident

through entity receives the exemption certificate, so long as the

individual taxpayers having portfolio income from a flow-

flow-through entity receives the exemption certificate within

through entity with business activity in multiple states must

the tax year.

allocate or apportion this income in the same manner as all

other business income from the flow-through entity.

To qualify for this exemption, the C Corporation must provide

the flow-through entity with an exemption certificate. Treasury

Income protected by Public Law 86-272 is not subject to IIT

will not be providing an exemption certificate. Instead, the

and is not subject to FTW.

exemption certificate may be any document created by the

Apportionment

C Corporation member that is signed by a person that is

The flow-through entity’s distributive share of business income

authorized to sign on behalf of the C Corporation member and

shall be allocated or apportioned to the state where the business

states that the C Corporation member will:

activity takes place using a single-factor sales apportionment

• File the returns required under the CIT;

formula. When determining which sales are to be included in

• Pay the tax due under the CIT on the distributive share of

the sales factor for nonresident individual members, the flow-

the business income received from any flow-through entity in

through entity will use the sales sourcing provisions within

which the corporation is a member; and

the IIT section of the Michigan ITA.. For more information on

• Submit to the taxing jurisdiction of Michigan for purposes

the single-factor sales apportionment formula, please see the

instructions to Line 6 of Form 4918.

of collecting the tax due under the CIT and the associated

penalty and interest with respect to the distributive share of the

It should be noted that the computation of the sales factor is

business income of that corporation.

not the same for IIT as it is for the Michigan Business Tax

(MBT) or the CIT. Most notably, IIT requires throwback sales

The C Corporation member does not have to file a copy of the

to be included in the sales factor. When computing the sales

exemption certificate with Treasury and the flow-through entity

does not have to attach a copy of the exemption certificate to its

factor, throwback sales for IIT follow Public Law (PL) 86-272

standards. The MBT and the CIT do not require throwback

Form 4918. However, the C Corporation and the flow-through

entity must retain a copy of the exemption certificate and Treasury

sales be included in the numerator of the taxpayer’s sales

factor.

may request that the exemption certificate be made available.

Michigan Flow-Through Withholding - 2012 Page 4

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