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What is the Investment Tax Credit (ITC)?

Investment Tax Credit (ITC) - List of Topics

> ITC General Information > ITC Calculation
> Recapture of the ITC

For tax years beginning after 1999, a taxpayer may claim an Investment Tax Credit (ITC) (Form C-8000ITC, SBT Investment Tax Credit) against the SBT 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. Assets purchased or acquired for use outside the state and later moved into the state, would also qualify for the ITC. The costs of mobile tangible assets, wherever located, are subject to apportionment in the same manner as the tax base. The ITC must be taken before any other credit.

 ITC General Information

For what years is this credit available?

The Investment Tax Credit is available for tax years beginning after 1999.

What form must be used to claim the ITC?

A taxpayer wishing to claim ITC must file on Form C-8000, Single Business Tax Annual Return with Form C-8000ITC, SBT Investment Tax Credit as a supporting schedule.

May the ITC be taken on form C-8044, SBT Simplified Return?

Form C-8044, SBT Simplified Return cannot be used.

Must depreciation still be added back?

Yes. Depreciation must continue to be added to the tax base to the extent deducted in arriving at federal taxable income.

Is anyone ineligible for the credit?

The ITC is not available if a gross receipts reduction (Form C-8000S, SBT Reductions to Adjusted Tax Base) to the adjusted tax base is taken to arrive at the tax liability.

If a taxpayer elects a compensation reduction (Form C-8000S), the ITC must also be reduced.

The gross receipts and compensation reductions to the adjusted tax base are optional.

A taxpayer should calculate the tax based on which method is most beneficial. P.A. 429 of 2000 amended the Single Business Tax Act to make insurance companies ineligible for the credit.

May a member of a controlled group claim the ITC before all members of the group have filed?

No, the ITC cannot be claimed until Form C-8010AGR, Single Business Tax Adjusted Gross Receipts for Controlled Groups, is completed. This is not possible until all members have filed.

Do the theories and policies outlined in Revenue Administrative Bulletin (RAB) 1992-3, Single Business Tax -Capital Acquisition Deduction, pertain to the ITC also? To what extent?

Yes, the information contained in RAB 92-3 pertains to the ITC in many cases, particularly in regards to qualifying assets, cost, and method of accounting and recapture. However, RAB 92-3 has not been updated for changes to the law that have occurred since 1992.

RAB 92-3, Section 3E, refers to transfers of property through certain tax free events that receive special treatment. Will this same treatment be afforded under the ITC? Will an ITC carryforward be treated like a business loss carryover under similar circumstances (i.e., Will the transferee in these transactions be entitled to any unused ITC carryforward?)

Yes. Specifically, RAB 92-3 Section 3E states that "a transferor is not required to recapture Capital Acquisition Deduction (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, when the transferee disposes of the property it must calculate CAD recapture based 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 if transferor completely discontinues operations promptly after the transfer and is no longer a taxpayer under the Single Business Tax Act (SBTA)."

This same treatment will be afforded the ITC under similar circumstances. An ITC carryforward will be treated like a business loss carryover (i.e. the transferee will be entitled to any unused ITC carryforward).

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 ITC Calculation

How is the ITC calculated?

The amount of the credit is calculated by multiplying net capital investments made in Michigan during the taxable year by an annualized ITC percentage. This percentage is determined by dividing the SBT tax rate in effect for the year by the pre-1999 rate of 2.3% . The result is then multiplied by the appropriate adjusted gross receipts percentage as applicable:

Adjusted Gross Receipts ITC Adjusted Gross Receipts Percentage (AGR%)
$1,000,000 or less 2.3%
$1,000,001-$2,500,000 1.5%
$2,500,001-$5,000,000 1.0%
$5,000,001 and above 0.85%

"Adjusted gross receipts" for the purpose of the ITC means Gross receipts, apportioned or allocated to Michigan, plus:

For tax years beginning before 2001

  • the CAD recapture adjustments provided in MCL 208.23b (a) to (g) (adjusted gross proceeds or benefit derived from the disposition or withdrawal from Michigan of assets acquired in tax years beginning before 2000), plus
  • the ITC recapture adjustments provided in MCL 208.35a(1)(d) to (f) (adjusted gross proceeds or benefit derived from the disposition or withdrawal from Michigan of assets acquired in tax years beginning after 1999).

For tax years beginning after 2000

  • For tax years beginning after 2000 the "gross receipts" already include gross proceeds from sale of tangible assets that are subject to capital acquisition deduction recapture. To avoid double reporting of these receipts when calculating the adjustments subtract the gain from gross receipts or add the loss to gross receipts.

Adjusted gross receipts must be annualized if the return is for a period of less than 12 months.

Example: Assume a 12-month return ending December 31, 2000, with a tax rate of 2.1% and net capital investments of $100,000. Also assume adjusted gross receipts are more than $5,000,000. Investment Tax Credit = Net Capital Investments x Investment Tax Credit Percentage (ITC%)

To Calculate ITC%:

SBT Tax Rate X Adj. Gross Receipts % = ITC%
 .023 (2.3%)

OR

ITC% = .021 (2.1%) X .0085 (0.85%) = .007760 (.7760%)
            .023 (2.3%)

To Calculate the Investment Tax Credit:

Net Capital Investment of $100,000 x ITC% of .007760 = Investment Tax Credit of $776

What are net capital investments? How is the cost of investments determined?

Net capital investments equal the cost paid or accrued in a taxable year for:

  • tangible assets located in Michigan,
  • apportioned mobile tangible assets, wherever located, and
  • the federal basis for eligible items moved into the state, less
  • a recapture calculation for like assets upon their sale, disposition or removal from the state.

The assets must be of a type that are, or will become, eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes (including Section 179 expensing).

The value of assets in the ITC calculation depends on the nature of the asset.

Tangible Assets Located in Michigan: Calculate the cost, including fabrication and installation, paid or accrued in the taxable year of tangible assets, other than mobile tangible assets, physically located in this state for use in a business activity.

Mobile Assets: Calculate the cost, including fabrication and installation, paid or accrued in the taxable year of mobile tangible assets. This amount must be multiplied by the same apportionment factor for the tax year as is applied to the tax base.

"Mobile tangible assets" means all of the following:

  1. Motor vehicles that have a gross vehicle weight rating of 10,000 pounds or more and are used to transport property or persons for compensation.
  2. Rolling stock (railroad freight, or passenger cars, locomotives, or other rail cars), aircraft, and watercraft used by the owner to transport persons or property for compensation or used by the owner to transport the owner's property for sale, rental, or further processing.
  3. Equipment used directly in completion of, or in construction contracts for, the construction, alteration, repair, or improvement of property.

Tangible Assets Brought Into Michigan: For tangible assets, other than mobile tangible assets, purchased or acquired for use in a business activity outside of this state in a tax year beginning after 1996 and physically located in this state in a tax year beginning after 1999, calculate the federal basis used for determining gain or loss as of the date the tangible assets were physically located in this state for use in a business activity, plus the cost of fabrication and installation of the tangible assets in this state.

How is the ITC calculated when the compensation reduction to the tax base is utilized?

A taxpayer who reduces the adjusted tax base under MCL 208 section 31(4) must reduce the ITC credit by a percentage (not to exceed 100%) determined by

  • dividing the applicable tax rate for the year by the ITC percentage determined previously (tax rate for the year/ 2.3% x the adjusted gross receipts percentage, i.e. .85%, 1.0%, 1.5%, or 2.3%) and
  • multiplying the result by the percentage reduction to the adjusted tax base claimed by the taxpayer for the tax year under Section 31(4).

The greater a compensation reduction percentage received, the greater the ITC will be reduced.

Example: Again assume a 12-month return ending December 31, 2000, with a tax rate of 2.1% and net capital investments of $100,000. Also assume adjusted gross receipts exceed $5,000,000. In addition, the taxpayer has taken a 25% compensation reduction in calculating its tax liability. Investment Tax Credit = Net Capital Investments x Investment Tax Credit Percentage (ITC%)

To Calculate the ITC%:

SBT Tax Rate X Adj. Gross Receipts % = ITC%
.023 (2.3%)

OR

ITC% = 021 (2.1%) X .0085 (0.85%) = .007760 (.7760%)
           .023 (2.3%)

To Calculate the Investment Tax Credit:

Net Capital Investment of $100,000 x ITC% of .007760 = Investment Tax Credit of $776

To Calculate a Reduction:

SBT Tax Rate x Compensation Reduction % x Investment Tax Credit
     ITC%

OR

Reduction = .021 (2.1%) x 25% x $776 = $525
  
                 .776%

To Calculate the Reduced ITC:

Investment Tax Credit of $776 minus Reduction amount of $525 = Reduced Investment Tax Credit of $251

If a negative ITC must be added to the tax liability, is that amount reduced if an excess compensation reduction is taken to compute the tax base?

No. MCL 208.35a(3) states: "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." This does not allow a reduction to the amount added to the tax liability.

Is the calculation different for members of a group of related taxpayers?

Yes. Members of

  • an affiliated group as defined in the SBT act,
  • a controlled group of corporations as defined in Section 1563 of the Internal Revenue Code (IRC), or
  • an entity under common control as defined by IRC Section 414 (c)

must determine adjusted gross receipts for purposes of the ITC percentage on a consolidated basis. Each member's business activities attributable to its tax year ending within a calendar year must be consolidated on Form C-8010AGR, Single Business Tax Adjusted Gross Receipts for Controlled Groups. The credit will be disallowed if Form C-8010AGR is not attached.

Can excess ITC be carried forward?

Yes. If the ITC for a tax year exceeds the tax liability for the year, it may be carried forward as an offset to the tax liability for nine subsequent tax years. The ITC may not be refunded.

What is the Department's policy if a taxpayer who has ITC carryforward fails to file a subsequent year on Form C-8000, SBT Annual Return, or claim the ITC carryforward?

  • If a taxpayer that has ITC carryforward files a subsequent year on Form C-8044, SBT Simplified Return, the ITC carryforward will be considered terminated. No additional ITC carryforward will be available for subsequent years.
  • If a taxpayer that has ITC carryforward files a subsequent year on Form C-8030, Notice of No Return, the ITC carryforward will still be available for subsequent years within the 9-year limitation.
  • If a taxpayer that has an ITC carryforward files a subsequent year on Form C-8000, SBT Annual Return, and neglects to claim the ITC carryforward, the return will be adjusted to allow the credit carryforward. The ITC must be used before any other credits. This is true even if the tax liability is based on 50% of the taxpayer's gross receipts. A gross receipts reduction or compensation reduction to an adjusted tax base will have no bearing on whether an ITC carryforward may be taken.

A missing return in a subsequent year will eliminate any ITC carryforward to future years.

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 Recapture of the ITC

When is a recapture of the ITC necessary and how is it computed?

Sale, exchange, or other disposition of qualifying tangible assets, including its removal from the state, will cause a recapture of the ITC. Recapture of assets in the ITC calculation depends on the nature of the asset.

Recapture of Tangible Assets Located in Michigan: If the cost of eligible tangible assets located in Michigan was paid or accrued in a tax year beginning after 1999:

  • Calculate the gross proceeds or benefit derived from the sale or other disposition of the tangible assets
  • Subtract the gain or add the loss from sale or other disposition reflected in federal taxable income, multiplied by the same apportionment factor for the tax year as is applied to the tax base, and
  • Subtract the gain from sale or other disposition added to the tax base in Section 9(6).

Recapture of Mobile Assets: If the cost of mobile tangible assets was paid or accrued in a tax year beginning after December 31, 1999:

  • Calculate the gross proceeds or benefit derived from the sale or other disposition of the tangible assets
  • Subtract the gain or add the loss from sale or other disposition reflected in federal taxable income and
  • Subtract the gain from sale or other disposition added to the tax base in Section 9(6).

This amount must be multiplied by the same apportionment factor for the tax year as is applied to the tax base.

Recapture of Tangible Assets Transferred from Michigan: For assets purchased or acquired in a tax year beginning after 1996 that were eligible for a deduction as either tangible assets located in Michigan or transferred into Michigan and that were subsequently transferred out of this state:

  • Calculate the federal basis used for determining gain or loss as of the date of the transfer.

What treatment is necessary when recapture is greater than investments for the year?

The computed ITC is added to the tax liability, utilizing the same formula used to compute a credit.

  • This amount is not reduced if the compensation reduction (Form C-8000S, SBT Reductions to Adjusted Tax Base) to the adjusted tax base is taken.
  • This amount is not added to tax liability, however, if the gross receipts reduction (also on Form C-8000S) is used.

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

A recapture will be required in any year in which a disposition occurs regardless of whether a credit was initially claimed. If the total recapture exceeds the cost of qualifying assets for a taxable period, the computed ITC must be added to the tax liability. However, if a disposition occurs in a year that a gross receipts reduction is taken, the ITC recapture is not required.

Has the Capital Acquisition Deduction been eliminated? Do sales or disposals of assets acquired in tax years beginning prior to 2000 still need to be recaptured?

Yes, however, a recapture of the CAD upon sale or disposal will continue to apply for all eligible assets acquired in tax years beginning prior to 2000.

P.A. 115 of 1999 replaced the CAD with a Michigan ITC. P.A. 44 of 2000 later modified the ITC percentage to an amount based on adjusted gross receipts. The CAD provisions apply only to acquisitions in tax years beginning prior to 2000.

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