Taxes - M65. What impact would a merger in 2008 have on the ability of the surviving entity to utilize SBT business loss carryforwards? How will losses incurred after December 31, 2007 be impacted by the merger?

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M65. What impact would a merger in 2008 have on the ability of the surviving entity to utilize SBT business loss carryforwards? How will losses incurred after December 31, 2007 be impacted by the merger?

The MBT provides for a limited deduction of SBT business loss carry forward in the 2008 MBT tax year in calculating the Modified Gross Receipts tax base only. MCL 208.1203(4) provides that 65% of any SBT business loss carry forward that was actually incurred in the 2006 or 2007 SBT tax years and that was not previously deducted in tax years beginning before January 1, 2008 may be deducted against the Modified Gross Receipts tax base. Any business loss carry forward incurred before January 1, 2006 is not eligible for the deduction.

In a merger two or more entities combine into one, through a purchase acquisition or a pooling of interests. A merger differs from a consolidation in that no new entity is created. The surviving entity may utilize what would have been the business loss of each of the separate entities had each entity filed a separate return. Any SBT business loss carryforward that is not deducted against the 2008 Modified Gross Receipts tax base of the surviving entity is lost.

A taxpayer's Business Income tax base is its business income subject to certain statutory adjustments before allocation or apportionment. MCL 208.1201(2). Business income is generally defined as "that part of federal taxable income derived from business activity." MCL 208.1105(2). To this extent, the calculation of the MBT business income tax base of the surviving entity will follow federal regulations.

The MBT provides for the deduction of a business loss incurred after December 31, 2007. This deduction may only be taken against the Business Income tax base of an entity. Losses incurred after December 31, 2007 may not be deducted against the Modified Gross Receipts tax base. "Business loss" is defined as a negative business income taxable amount after allocation or apportionment. Any unused business loss may be carried forward to the year following the loss year and the next 9 successive tax years or until the loss is used up, whichever occurs first, but for not more than 10 taxable years after the loss year. MCL 208.1201(5). The surviving entity of a merger that files a 2008 MBT return will be able to begin deducting any resulting 2008 business loss against its 2009 Business Income tax base as permitted by statute.