As Michigan corporations work through the intricacies of the Tax Cuts and Jobs Act (TCJA) for their federal return, there are some significant questions that arise related to how these changes impact state tax filings. The Michigan Department of Treasury has recently issued guidance on three of the most significant changes related to the TCJA.
FOREIGN INCOME REPATRIATION
The TCJA requires a mandatory repatriation of foreign sourced earnings which is to be included in taxable income. Federal guidelines allow the tax related to this income be payable over eight years. As the Michigan Corporate Income Tax (CIT) base begins with federal taxable income, the income related to this federal "transition tax" must be included on the Michigan return. While the income will be reported in full on the Michigan return, the state does allow for a deduction for foreign dividends which would generally offset this income for taxpayer's 2017 CIT returns. While this may not result in any tax effect, taxpayers are required to properly report this income for their 2017 CIT return.
BASE EROSION AND ANTI-ABUSE TAX (BEAT)
The TCJA imposes a minimum tax on certain entities that have base erosion payments. Base erosion payments include amounts paid or accrued to foreign persons for services, interest, rent, royalties, etc. This tax, known as BEAT, is considered by Michigan to be a tax measured by net income. While this tax is generally not deductible for federal purposes, if BEAT is deducted in computing federal taxable income, the state would require the deduction be added back when calculating the CIT base.
GLOBAL INTANGIBLE LOW TAXED INCOME
The TCJA requires each US shareholder of a controlled foreign corporation to currently include in its income its global intangible low tax income (GILTI). GILTI is a calculated amount based on the earnings of the controlled foreign corporation in excess of it net deemed tangible income return. For Michigan reporting purposes, because GILTI is included in federal taxable income, the amount will be included in the taxpayers CIT base but may be deducted as a dividend from a foreign entity, thus resulting in a neutral tax effect.
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