A taxpayer that is a corporation other than an S-corporation will be disqualified from taking the small business alternative credit if a shareholder receives more than $180,000 in compensation or if the sum of the shareholder's share of business income and compensation exceed this amount. MCL 208.1417(1)(b). These disqualifiers are computed for the tax year. Id. Thus, a part-year shareholder will need to prorate its stock ownership to calculate the disqualifiers when reporting for a full tax year.

Note that a part-year shareholder of an S-corporation will also need to perform the following steps but the resulting disqualifier is computed only on the sum of the shareholder's compensation and share of business income.

For the compensation disqualifier, the part-year shareholder must annualize compensation for the length of time as a shareholder to reach what compensation would have been for the entire year. The annualized amount is then measured against the compensation disqualifier. To annualize, the part-year shareholder will take compensation for the period that it was a shareholder, multiply by 12, and then divide that result by the number of months as a shareholder.

The business income disqualifier is calculated by multiplying percentage of ownership by the business income (net of a carryback or carryover of a net operating loss or capital loss to the extent deducted in arriving at federal taxable income and the loss adjustment.) For a part-year shareholder this means that the shareholder must prorate its percentage of ownership for the year in order to determine its proper annual percentage of ownership and share of business income for the tax year. To prorate, the part-year shareholder will divide the number of shares it held for the year by the total shares, then multiply the result by a fraction, the numerator of which is the number of months that the part-year shareholder was a shareholder and the denominator of which is 12. The result will be the part-year shareholder's percentage of ownership for the tax year. This percentage of ownership is then applied to the adjusted business income of the taxpayer to determine the part-year shareholder's share of business income. Finally, the resulting share of business income is added to the part-year shareholder's annualized compensation.

The following examples illustrate the calculations:

1) Corporation A has 50,000 shares of outstanding stock for the 2009 calendar year and business income of $100,000 for the year. Individual C obtains 15,000 shares on July 1 of 2009. C also received $45,000 in compensation for July through December. Corporation A must compute the disqualifiers for the 2009 tax year.

1. Compensation: (45,000 x 12) /6 = $90,000
2. Percentage of Ownership: 15,000/50,000 = 30% x 6/12 = 15%
3. Share of Business Income: 15% x 100,000 = $15,000
4. Compensation combined with share of business income: $90,000 + $15,000 = $105,000

Corporation A is not disqualified on C's compensation alone, which is $90,000 for the tax year. Nor is it disqualified by compensation plus C's share of business income which equals $105,000 for the tax year. This part-year shareholder does not cause the taxpayer to be disqualified from the small business alternative credit.

2) Next, consider an S-corporation taxpayer. The taxpayer has 100,000 shares of outstanding stock and $300,000 in business income for the 2009 calendar year. Its employee, X, becomes a shareholder on November 1, 2009, obtaining 20,000 shares. X is paid $25,000 in compensation for November through December and is considered an active shareholder.

1. Compensation: (25,000 x 12) /2 = $150,000
2. Percentage of Ownership: 20,000/100,000 = 20% x 2/12 = 3.3%
3. Share of Business Income: 3.3% x 300,000 = $9,900
4. Compensation combined with share of business income: $150,000 + $9,900 = $159,900.

This part-year shareholder's combined compensation and share of business income do not cause the taxpayer to be disqualified.