2003 Legislation Allows Composite Return Filings
Composite Return Issues
Administrative Changes Based on New Legislation

Michigan Department of Treasury Revenue Administrative Bulletin 2004-01 describes the procedures for filing composite income tax returns by flow-through entities with business activity in Michigan and non-resident members as a result of the recent legislation establishing composite filing provisions in the Michigan Income Tax Act.

The bulletin discusses various issues including the definition of a composite return, when the filing of a composite return is authorized, who may participate in the filing, the due date of the return, prerequisites to filing a composite return, and administrative changes arising as a result of the new law.

2003 Legislation Allows Composite Return Filings

Effective October 1, 2003, Public Act 49 of 2003 was enacted by legislative amendment and authorized the Department to allow composite income tax return filings. Prior to this enactment, composite return filing was administratively allowed under procedures established by the Department.

However, the Michigan tax statutes did not include language expressly allowing composite filings. Since its inception, Section 315 of the Michigan Income Tax Act, Michigan Compiled Laws 206.315, as amended by PA 49, specifically provides for composite filings, and includes provisions establishing clarifying requirements for participation and filing by members as well as establishing due dates.

Composite Return Issues

The composite filing method is an alternative filing method that may be used by a flow-through entity with two or more non-resident member partners or shareholders to file one consolidated income tax return in a state taxing jurisdiction on behalf of all non-resident members who elect to participate. The composite return reports the combined distributive share income, deductions and credits of the participating membership, and is in lieu of the individual members filing separate non-resident returns.

The revised composite return filing policies and procedures will be effective for tax years beginning in calendar year 2003. Returns are due on or before April 15 of the immediately succeeding tax year. For flow through entities who file fiscal year federal returns, the due date of the composite return will be April 15 of the year following the entity’s fiscal year end.

The following flow-through entities, as defined in MCL 206.12, may file a composite return and pay the collective tax due on behalf of all electing non-resident members: an S corporation, partnership, limited partnership, limited liability partnership or limited liability company, non-resident members who are not domiciled in Michigan, a non-resident estate or trust or a flow through entity with a non-resident member.

Since the new law now specifically provides for composite income tax filings, the Department will no longer require the execution and filing of a separate Composite Filing Agreement, Michigan Department of Treasury Form 750, as a prerequisite to filing a composite return. The information and documentation previously requested on the filing agreement Form 750 will be included on the composite return to the extent required by the Department for general tax administration purposes.

Administrative Changes Based on New Legislation

Historically, the Department has limited participation in composite filings to non-resident individuals, estates or trusts that would otherwise have an income tax filing requirement with the State of Michigan based on the distributive share income from the flow-through entity, and that have no other income from Michigan sources. However, members of a flow-through entity that are other flow-through entities with non-resident partners or shareholders may now participate in composite filings.

The Department may require the composite filer to provide a schedule listing certain specified information relating to partners or shareholders of the member flow-through entity as a prerequisite to that member’s participation in the composite filing.

Filing a composite return is not performed in lieu of flow-through withholding discussed in recently enacted RAB 2003-4. Regardless of whether a separate return or composite return is filed, the entity makes withholding payments at the entity level rather than on an individual basis. Nonresident individuals may elect to file a separate return (in which case the entity would determine each individuals withholding amount) or the individuals can file a composite return. As a result, estimated payments are no longer made by individuals or by the entity.

Additionally, the State of Michigan now allows members of a flow-through entity with income from other Michigan sources to participate in a composite filing if otherwise qualified. The member would be required to file a Michigan income tax return to report the additional income and claim a credit on that return for any taxes paid on the member’s behalf through the composite filing.

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