Tax Alert

Michigan Flip-Flops on Treatment of Disregarded Entities

(Nov. 3, 2010)

The Michigan Department of Treasury has consistently issued guidance and form instructions indicating that the federal classification of domestic disregarded entities, such as single-member LLCs and qualified subchapter S subsidiaries, would be respected under the Michigan Business Tax (MBT). On Oct. 1, 2010, the Michigan Department of Treasury issued a notice reversing its position. The new guidance indicates that entities disregarded for federal tax purposes will be required to file a separate return under the MBT or file as a member of a unitary business group.

The change is retroactive to Jan. 1, 2008, the date on which the MBT became effective. The notice requires taxpayers that previously filed an MBT return including one or more disregarded entities must amend their returns for all open periods, even if the amended returns do not result in a different tax liability. If there are no changes to Michigan’s position, the amended returns must be filed by Jan. 31, 2011, to avoid penalties. A complete copy of the notice can be found here.

For now, we are recommending that taxpayers adopt a “wait-and-see” approach to the notice. Under the old Single Business Tax, the Michigan Department of Treasury issued a notice with a substantially similar holding. In that case, the Michigan Legislature enacted a law that overrode the Department of Treasury’s position.

For more information on how this notice might affect you, please contact Dallas Packer at 616-752-4204 or, Howard Wagner at 502.420.4567 or, or any Crowe Horwath LLP tax professional.

Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.

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