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Michigan Business Tax
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U40. (Answer rescinded, replaced by U62.) A dental practice organized as a sole proprietorship became a
professional limited liability company ("PLLC") effective January 1, 2008. For federal income tax purposes, the PLLC is a disregarded entity and the member reports his income as a sole proprietor on federal schedule C.
Can the owner of the dental practice continue to file as a sole proprietor for
Michigan individual and MBT purposes?
The owner or single member of the PLLC also owns the building the PLLC uses for
the dental practice, and effective January 1, 2008, will be renting the building
to the PLLC. The owner and spouse also own an additional rental property. Should
the rental income and be combined with the PLLC income for MBT purposes, or
should the PLLC and rental activity each be separately reported?
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Answer:
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A group of businesses that meets the definition of unitary group is a
taxpayer and is required to file a combined return for MBT. Under the MBT, a
unitary business group is defined in section 117 (MCL 208.1117(6)) as:
a group of United States persons, other than a foreign operating entity, 1 of
which owns or controls, directly or indirectly, more than 50% of the ownership
interest with voting rights or ownership interests that confer comparable rights
to voting rights of the other United States persons, and that has business
activities or operations which result in a flow of value between or among
persons included in the unitary business group or has business activities or
operations that are integrated with, are dependent upon, or contribute to each
other. For purposes of this subsection, flow of value is determined by reviewing
the totality of facts and circumstances of business activities and operations. [MCL
208.1117(6).]
A single member PLLC that is a disregarded entity for federal income tax
purposes is considered a sole proprietorship for Michigan and federal tax
purposes, and may be unitary with any other entities in which that individual
owner has a controlling interest if the individual has business activities or
operations (1) which result in a flow of value between or among persons included
in the unitary business group or (2) that are integrated with, are dependent
upon, or contribute to each other. MCL 208.1117(6).
In the case of an individual who owns and leases an office building or any other
real or tangible property to a sole proprietorship, single member limited
liability company, or any other business entity in which he or she has a
controlling interest (greater than a 50% ownership interest), the business
activity and rental activity will constitute a unitary group under MCL 208.1117
because the individual owns a controlling interest in each activity and there is
a flow of value between the business activity and the rental activity, and they
are integrated with, dependent upon, and contribute to each other.
If the individual owns another rental property that is not leased or rented to
the business entity owned by the individual, the rental property will be part of
the unitary group if there is a flow of value between the activities or if they
are integrated with, dependent upon, and contribute to each other. As a general
rule, rental properties owned and managed by the same individual owner will be
integrated with, dependent upon, and contribute to each other, and therefore be
considered a unitary group under the MBT.
For purposes of these ownership requirements, property owned by a spouse (other
than spouses who are legally separated under a decree of divorce or separate
maintenance) is deemed to be owned by the other spouse and vice versa.
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