by Peter G. Pupke
The Michigan Department of Treasury has issued guidance on 2022 legislation that enacted new partnership reporting requirements. (Michigan Treasury Update, Mich. Dept. Treas., 11/01/2022.)
L. 2022, P.A. 148 (“PA 148”), signed into law on July 19, 2022, introduced Chapter 18 in Part 3 of the Income Tax Act to create a new way for certain partnerships to report federal adjustments that impact the Michigan income tax liability of its partners (see State Tax Update, 07/21/2022).
Purpose for new legislation.
PA 148 is a response to modifications to the reporting of adjustments by partnerships at the federal level. The Bipartisan Budget Act (BBA) of 2015 modified partnership reporting procedures to permit the assessment and collection of tax directly from the partnership rather than through each separate partner. This so-called BBA Centralized Partnership Audit Reporting Regime applies both to adjustments determined by the Internal Revenue Service (IRS) through a partnership audit and adjustments self-determined by a partnership through the filing of an administrative adjustments request. The centralized method of reporting is intended to streamline the reporting of federal tax adjustments for certain partnerships which, although subject to various partnership-level elections, will generally be used by large partnerships with greater than 100 partners. In these cases, the centralized collection of tax eliminates the need for partners to file amended federal income tax returns.
Methods of reporting adjustments to Michigan.
Adjustments reported under BBA Centralized Partnership Audit Regime must be reported to Michigan. Without an amended federal income tax return filed by the partner, adjustments were necessary under the Income Tax Act to ensure that the partner’s share of any adjustments is reported for Michigan income tax purposes. For this reason, Chapter 18 provides that federal adjustments that are reported under the BBA Centralized Partnership Audit Regime are required to be reported by the partnership through one of two distinct methods:
- The “Push Out” method. The “Push Out” method requires—within 90 days of the “final determination date”—that the partnership report the distributive share of federal adjustments to the Michigan Department of Treasury and to each of its partners from the reviewed year. Except for those partners who participated on a composite return, each partner must separately report their share of the adjustments and either pay the additional Michigan income tax or claim any additional refund, as applicable. The report from the partner under the “Push Out” method must be filed no later than 180 days after the “final determination date.” Accordingly, the “Push Out” method requires that the relevant federal adjustments be communicated by the partnership to all partners so that each partner can separately report their respective share of those adjustments in Michigan.
- The “Pay Up” method. In lieu of the “Push Out” method, the “Pay Up” method allows a partnership to make an affirmative election to pay the tax or claim a refund on behalf of all of its partners. The election—which subjects the partnership to all laws related to reporting, assessment, payment, and collection of tax in Michigan—is required to be made within 90 days of the “final determination date.” Thereafter, within 180 days of that date, that partnership must report and pay the tax owed or claim the refund due on behalf of its direct or indirect partners for the reviewed year. Any report, payment, or refund claim made by a partnership under the “Pay Up” method will satisfy the reporting obligations of its partners; partner-level reports or payments are not permitted when this election has been made. In other words, the “Pay Up” method effectively provides for a centralized method of reporting the Michigan tax related to partnership adjustments.
Final determination date.
The timeliness of all elections, filings, and payments under Chapter 18 is determined by reference to the “final determination date.” The “final determination date” is generally dependent on the source of the federal adjustment. For example, the “final determination date” of an IRS-initiated partnership audit will refer to the first day on which no federal adjustment arising from the audit remains to be finally determined, including the period of any subsequent appeal. In contrast, the “final determination date” of a self-reported administrative adjustment request refers to the date on which that request was filed with the IRS. Partnerships will need to establish the appropriate “final determination date” to determine the timeliness of their reporting obligations under Chapter 18.
Actions of state partnership representative.
The “Push Out” or “Pay Up” methods each have important consequences for both the partnership and its partners and, in this regard, the decision to use either method can only be made by the “state partnership representative.” The state partnership representative refers to the person vested with sole authority to act on behalf of the partnership under Chapter 18. While the partnership may designate an alternate person, this will ordinarily be the same individual who was designated to serve as the partnership’s federal partnership representative for federal income tax purposes. Any actions of the state partnership representative under Chapter 18 will be legally binding upon both the partnership and all of its direct and indirect partners.
Effective date for Michigan reporting requirements.
Consistent with the implementation of the BBA Centralized Partnership Audit Regime, PA 148 is retroactive to tax years beginning on or after January 1, 2018. The Department is developing the forms, systems, and guidance necessary to administer the program, with initial reporting and payment functionality expected January 1, 2023. To accommodate this implementation period, the Department published a notice on August 26, 2022, explaining that all reporting, payment, and election deadlines under Chapter 18 will begin effective January 1, 2023, for any partnership that may otherwise be required to report an adjustment before that date (see State Tax Update, 08/30/2022).
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