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Revenue Administrative Bulletin 1992-3Approved: January 9, 1992
SINGLE BUSINESS TAX - CAPITAL ACQUISITION DEDUCTION
(Replaces Revenue Administrative Bulletin 1989-45)
RAB-92-3. This bulletin updates Revenue Administrative Bulletin 1989-45 by incorporating the changes made to the capital acquisition deduction (CAD) by Public Acts 77 and 128 of 1991. In all other respects, this bulletin restates the substantive content of Revenue Administrative Bulletin 1989-45.
The Michigan Department of Treasury has established the following criteria for the taking and reporting of the CAD and its recapture (MCL 208.23 and 208.23b: MSA 7.558(23) and 7.558(23b)) for Single Business Tax (SBT) purposes. This bulletin is in outline form and includes a Topical Index and a Cross-Reference to the Internal Revenue Code.
TABLE OF CONTENTS
1. The Capital Acquisition Deduction
CROSS-REFERENCE TO INTERNAL REVENUE CODE
1. The Capital Acquisition Deduction (CAD)
A. The CAD is a deduction of the entire cost of certain tangible assets in the year of acquisition. This is contrasted with the cost recovery under the Internal Revenue Code (IRC) which allocate deductions over the "useful life" of an asset by means of depreciation or amortization. The tangible asset must be an asset of a type that is or will become eligible for depreciation or amortization for federal income tax. However, the CAD may be allowed in years where no depreciation is allowed for federal income tax purposes. Cost of an asset to be deducted as CAD is the amount paid or accrued during the taxable year. The sale, exchange, or other disposition of property of qualifying tangible assets will cause a recapture of CAD (see paragraph 7).
B. Tax Years Beginning Before October 1, 1989
A CAD is allowed for the cost of all tangible assets as defined in Section 1250 of the IRC. The Section 1250 property must be physically located in this state. Section 1250 property located outside this state is not eligible for a CAD. A CAD for the cost of tangible assets other than Section 1250 property is apportioned to this State by the use of the average of the payroll and property factors.
C. Tax years Beginning After September 30, 1989
A CAD is allowed for the cost of all tangible assets eligible for depreciation or
amortization for federal income tax purposes. Where the taxpayer is subject to tax in more
than one jurisdiction, the CAD is apportioned using the same apportionment formula used to
apportion its tax base.
Total qualifying 1991 acquisitions x 1991 apportionment %
2. Qualifying Tangible Assets
A. In general, any tangible asset of a type that is eligible or will become eligible for the federal income tax allowance for depreciation or amortization qualifies for CAD subject to the other provisions of this bulletin.
B. Type of assets subject to depreciation are those assets defined as tangible property in U.S. Department of Treasury Regulation 1.167(a)-2, which includes such property as buildings, machinery, trucks, and office furniture. However, it does not include intangible property, land or property subject tot he federal income tax depletion allowance.
C. Type of assets subject to amortization include such property as leasehold improvements, certain facilities, but does not include intangible property or certain organizational costs.
D. CAD is available to the person who has the right to deduct depreciation or amortization on such qualifying tangible assets. It is the capitol investment in property and not necessarily legal title to property that determines this right.
(1) If a lease agreement is determined to be a conditional sale for federal income tax purposes, then the lessee has the right to take depreciation deductions and is entitled to a CAD for the cost used as a basis for federal depreciation.
(2) If a lease is capitalized for book purposes, but is not a sale for federal income tax purposes, the lessee is not entitled to the CAD.
(3) Exceptions: A lessee is entitled to the CAD for the cost paid for tangible assets that are subject to a leaseback agreement under Section 168(f)(8) of the IRC, even though the lessor has the right to depreciation under Section 168(f)(8) of the IRC, [ MCL 208.23; MSA 7.558(23)].
A. Cost is the amount paid or accrued for the acquisition of a qualifying tangible asset, hereafter, referred to as property. This cost usually equals the basis of property that will be recovered through depreciation, amortization, or other means of write-off.
B. Fair market value or other value is substituted as cost for the following acquisitions:
(1) Property converted from personal use to business use. Cost is the amount used as federal adjusted basis for depreciation at time of conversion.
(2) Property converted from inventory to property used in a trade or business. Cost is the amount used as federal adjusted basis for depreciation at the time of conversion.
(3) Property contributed to a corporation or a partnership in exchange for equity in the entity, except through a tax-free event as defined in paragraph 3E. Cost is the amount used as federal adjusted basis for depreciation by the corporation or partnership.
(4) Property transferred or distributed by a corporation or a partnership in a complete or partial liquidation of the corporation or partner's interest, except through a tax-free event as defined in Paragraph 3E. Cost is the amount used as the adjusted basis for federal income tax purposes of the property in the hands of the distributee.
Examples: Property distributed to shareholders where no gain or loss is recognized by the corporation under IRC 333 or 336 (cost for Sec. 336 property is fair market value at liquidation).
Property transferred in liquidation and no gain or loss is recognized under IRC 332; however, the basis of such property is adjusted by IRC 334(b)(2).
(5) Property transferred through proceedings under the Bankruptcy Code, except through a tax-free event as defined in paragraph 3E. Cost is the amount used as federal adjusted basis for depreciation by transferee.
(6) Property deemed acquired by the purchasing corporation as the result of an election under IRC 338. Cost is the amount used as federal adjusted basis for depreciation by the purchasing corporation.
C. Cost different than the adjusted basis for federal income tax purposes is used for the following:
(1) Total cost of property acquired through involuntary conversion as defined in the IRC, without adjustment to the basis.
(2) Cost of property acquired through a like-kind exchange and trade-ins is the fair market value of the old asset, decreased by the amount of boot received and increased by the amount of boot given in connection with such exchange.
D. No cost is eligible for a CAD for the following acquisitions:
(1) Property acquired by gift.
(2) Property acquired from a decedent.
(3) Property acquired through a tax-free event as defined in paragraph 3E.
E. Transfers of property through certain tax-free events described in sub-paragraphs (1) through (8) of this section receive the following treatment for SBT purposes: transferor is not required to recapture CAD on such property; transferee is not entitled to a CAD on such property; transferee holds the property as if such property was in the hands of the transferor, therefore, the transferee must recapture CAD depending on the acquisition date of the property by the transferor; and transferee is entitled to an SBT business loss carryover for any unused business loss of the transferor when transferor completely discontinues operations and is no longer a taxpayer under the Single Business Tax Act (SBTA).
(1) Transfer to a controlled corporation. The transfer of property where no gain or loss is recognized under IRC 351.
(2) Contribution to a partnership. The transfer of property where no gain or loss is recognized under IRC 721.
(3) Property acquired by a corporation from another corporation in the following liquidations and reorganizations as provided under the IRC. (Section references are to the IRC.)
(A) The complete liquidation of a subsidiary corporation where no gain or loss is recognized in accordance with the provisions of Section 332, but only if the basis of the assets distributed to the acquiring corporation is not adjusted by Section 334(b)(2);
(B) A statutory merger or consolidation qualifying under Section 368(a)(1)(A) to which Section 361 applies;
(C) A reorganization qualifying under Section 368(a)(1)(C);
(D) A reorganization qualifying under Section 368(a)(1)(D) if the requirements of Section 354(b)(1)(A) and (B) are satisfied; and
(E) A mere change in identity, form, or place of organization qualifying under Section 368(a)(1)(F).
(4) Property distributed by a partnership to a partner(s) in a partial or complete liquidation of the partner(s) interest and the property is used in a business activity of an organization in which the partner(s) own a controlling interest (i.e., partners having at least 80% ownership in original partnership must have at least 80% ownership in new entity).
(5) Corporate reorganization under certain receivership and bankruptcy proceedings to the extent Section 371 of the IRC applies.
(6) Initiation of proceedings under the Bankruptcy Code.
(7) Proceedings under the Bankruptcy Code when at least a 51% interest of the entity emerging from the bankruptcy proceedings is retained by the original entity.
(8) Liquidation of partnership interest with no sale or exchange of property is a tax-free event providing such partnership is considered as continuing under Section 708 of the IRC.
4. Method of Accounting
A. In general, the cost of qualifying tangible assets (property) is deducted in the taxable year that such costs are recorded in the taxpayer's books and records. Permissible methods of accounting are the cash receipts and disbursements method and/or accrual methods consistent with the taxpayer's method of accounting used for federal income tax purposes.
B. Under the cash disbursement method, cost of property is deducted in the taxable year in which such cost, in part or total, is paid.
C. Under the accrual method, the cost of property is deducted in the taxable year that all of the events have occurred which establish the fact of the liability giving rise to such cost (in part or total), and the cost can be determined with reasonable accuracy.
D. A taxpayer may be entitled to a capital acquisition deduction in a year different from the year that depreciation is allowed because the paid or accrued rule is applicable for CAD purposes and the "placed in service" rule is applicable for federal income tax purposes.
(1) Total cost of property recorded as construction in progress during the taxable year is deducted without regard to when such property is placed in service for depreciation purposes under the IRC.
(2) A cash receipts and disbursements taxpayer may receive a capital acquisition deduction on a partial payment of an obligation to purchase qualifying property and/or make a deposit on property which the taxpayer is obligated to purchase. The accrual basis taxpayer receives a deduction when all the events have accrued which fixes the liability.
A. Tax Years Beginning Before October 1, 1989
(1) In general, qualifying property that is classified for federal income tax purposes as Section 1250 property is allocated to Michigan. All qualifying property other than Section 1250 property (generally Section 1245 property) is apportioned to Michigan by multiplying the total cost of such property during the taxable year by the average of the property and payroll factors.
(2) Certain depreciable real property is Section 1245 property and subject to apportionment.
Example: Depreciable real property subject to amortization and/or qualifying for the federal investment tax credit [i.e., 1245(a)(3)(B), (C), (D) and (E)].
(3) Transportation, financial organizations, and other taxpayers who apportion their tax base using a formula excluding the property and/or payroll factor(s) must use the property factor [ MCL 208.46; MSA 7.558(46)] and payroll factor [ MCL 208.49; MSA 7.558(49)] to apportion the CAD.
(A) Transportation companies, in determining the numerator and denominator of rolling stock property, must use the revenue mileage formula as provided in MCL 208.57(1); MSA 7.558(57)(1).
B. Tax Years Beginning After September 30, 1989
(1) The cost of qualifying CAD assets are apportioned using the same apportionment formula that is used to apportion the tax base. For most taxpayers this will require that the CAD be determined on a three factor formula of property, payroll and sales. For taxpayers who utilize one factor formulas, that same formula will be utilized in calculating the CAD.
6. Sequence of Deduction
A. In general, the CAD is an offset against the apportioned/allocated tax base plus recapture of CAD. The CAD is taken before the deductions for business loss carryovers, statutory exemption, and reductions as provided in Section 31 (i.e., gross receipts method).
B. Unused CAD is the amount of CAD in excess of the apportioned tax base plus recapture of a CAD. This amount becomes an integral part of the business loss carryover.
C. The CAD is assumed taken in any taxable year beginning on or after January 1, 1976, whether or not single business tax is levied.
(1) For a person who is not required to file an SBT return because of gross receipts less than the filing threshold ($34,000 for tax years beginning before January 1, 1976, $40,000 for tax years beginning after December 31, 1975 and before January 1, 1991, $60,000 for tax years beginning after December 31, 1990 and before January 1, 1992, and $100,000 for tax years beginning after December 31, 1991), acquisition of qualifying property during such taxable year is considered taken as a deduction. Any disposition of such property is subject to the recapture rule in paragraph 7.
(2) For a corporation that establishes nexus in Michigan after January 1, 1976, acquisition of qualifying property on or after January 1, 1976 and prior to nexus in Michigan, is assumed taken as a deduction. Any disposition of such property is subject to the recapture rule in paragraph 7.
7. Recapture of Capital Acquisition Deduction
A. In general, the gross proceeds or other benefit derived from the sale or other disposition of qualifying tangible assets is added to the allocated or apportioned tax base. This adjustment is decreased by the gain (increased by the loss) from the disposition of such property that is reported in federal taxable income.
(1) A reduction in the basis of qualifying tangible assets acquired on or after January 1, 1976, for the amount of the discharge of indebtedness under Section 1017 of IRC must be treated as a reduction of cost for CAD. This adjustment to cost is required in the taxable year that the federal basis is adjusted. If the adjustment exceeds the total cost of similar qualifying property (Section 1250 or 1245) for such taxable year, then the excess is added to the allocated or apportioned tax base in a manner similar to the recapture of CAD as provided in this paragraph.
B. A disposition means any disposition or conversion of qualifying tangible assets acquired on or after January 1, 1976. This includes sales, exchanges, abandonments, retirements, trade-ins, involuntary conversions, property converted to non-qualifying property and any other event in which such property ceases to be qualifying property in the hands of the taxpayer.
(1) Property acquired on or after January 1, 1976 and deemed sold by the target corporation as the result of an election under IRC 338 is a disposition. The gross proceeds or other benefit derived is the amount used as federal adjusted basis for depreciation purposes by the purchasing corporation.
C. Transfers of property identified below are not dispositions and do not cause the recapture of the CAD. When such property is disposed of by the immediate donee or transferee, the status (i.e., acquisition date) of such property, as if the hands of the transferor, is used to determine if the disposition causes a recapture of CAD (see paragraph 3E).
(1) Property transferred by gift.
(2) Property transferred from a decedent.
(3) Property transferred in a tax-free event as defined in paragraph 3E.
D. The gross proceeds or other benefit derived means the total benefit derived from the disposition. This includes the sales price, the allowance given on trade-ins, insurance proceeds and other recovery for damages, or the fair market value of property on certain dispositions. The following are examples of benefit derived from dispositions other than sales (see taxable events described in paragraphs 3B and C):
(1) The inventory value on conversions of CAD property to inventory.
(2) The fair market value on conversions of CAD property to personal use.
(3) If no benefit is derived from retiring or abandoning an asset, only the recognized loss reflected in federal taxable income is recaptured.
E. To report recapture of a CAD, the method of accounting must be consistent with the taxpayer's method used for federal income tax purposes, except:
(1) Dispositions through taxable events as described in paragraphs 3E(3)(B) and ( C) causes recapture of CAD by the person who converts, contributes, distributes or transfers such property. The recapture is required by such person without regard to the person's accounting methods.
(A) A recapture of CAD resulting from liquidation of partnership interest when such partnership is terminated under Section 708 of the IRC is reported by the partnership at time of the liquidation.
(B) A recapture of CAD resulting from a transfer of property under IRC 337, where the gain or loss is recognized by the shareholders, is reported by the corporation at time of the disposition.
(2) An installment sale of qualifying property reported on the installment method (for federal income tax purposes) causes a recapture of the entire gross proceeds in the year of sale. The recapture is reduced by any gain reported in federal taxable income in the year of sale. The gain attributed to this installment sale that is reported in subsequent years is subtracted from the tax base for such years.
F. A taxpayer who is subject to the apportionment provisions of the SBTA must apportion the recapture of CAD.
(1) Property Acquired in Tax Years Beginning Before October 1, 1989
For quality property other than Section 1250 property, the total proceeds and benefits, plus the losses minus the gains, are apportioned to Michigan by suing the average of the property and payroll factors. For Section 1250 Property, total proceeds and benefits are allocated to Michigan, except the gain or loss on such property reflected in taxable income is apportioned by use of the average payroll, property, and sales factors before adjusting the recapture by such amounts. The apportionment factors in the year of reporting the recapture of CAD must be used.
(2) Property Acquired in Tax years Beginning After September 30, 1989
The recapture of CAD must be calculated based on the apportionment formula utilized for the tax base in the year of disposition. For most taxpayers this will be the three factor apportionment. For those taxpayers who are required to use a one factor apportionment formula (financial organizations, transportation companies), the one factor formula must be used to determine the CAD recapture.
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