2017 MI-1040H, Page 2
Instructions for Form MI-1040H, Schedule of Apportionment
Purpose
Business income from business activity that is taxable both
within and outside Michigan is apportioned to Michigan for
individual income tax (IIT) purposes using this form.
General Instructions
In order to determine if apportionment is required rather than
allocation, a taxpayer must determine if the business activity
causes the taxpayer’s income to be subject to tax in both
Michigan and another state. The Michigan Income Tax Act
denition of “state” includes a foreign country.
A taxpayer’s business income is taxable in another state if:
1. In that state the taxpayer is subject to a net income tax, a
franchise tax measured by net income, a franchise tax for the
privilege of doing business, a corporate stock tax, or
2. That state has jurisdiction to subject the taxpayer to a net
income tax regardless of whether the state does or does not.
Michigan IIT uses the standards prescribed by federal Public
Law (P.L.) 86-272 to determine whether another state has
jurisdiction to subject the taxpayer to a net income tax.
If apportioned business capital gains (losses) are reported on
line 3 and/or line 8 of Form MI-1040D, do not include those
amounts on line 9 of this form.
A separate Form MI-1040H should be used for each business
activity that requires apportionment. If you have more than
one MI-1040H and are a Michigan resident, do not net income
and losses from multiple forms together. Instead, net losses on
line 11 with other losses on line 11 and report the total losses
from other states on Schedule 1, line 4; net income on line 11
with other income on line 11; report total income from other
states on Schedule 1, line 13. Nonresidents with more than one
Form MI-1040H should net income and losses from line 11 of
all MI-1040H forms together before recording the amount on
Schedule NR, column C.
Sales Factor
Business income subject to apportionment is sourced to
Michigan by applying a sales factor. To compute the sales
factor, divide the total sales in Michigan during the tax year by
the total sales everywhere during the tax year.
“Sales” includes gross receipts from sales of tangible property,
rental of property and providing of services that constitute
business activity. Exclude all receipts of nonbusiness income.
Sales of tangible personal property are in Michigan if:
1. The property is shipped or delivered to a purchaser (other
than the United States government) within Michigan regardless
of the free on board (F.O.B.) point or other conditions of the
sale, or
2. The property is shipped from an ofce, store, warehouse,
factory or other place of storage in Michigan and the purchaser
is the United States government or the taxpayer is not taxable in
the state of the purchaser.
NOTE: The numerator of the sales factor for individual income
tax may include “throwback sales.” Throwback sales are sales
of tangible personal property that originate in Michigan made to
a purchaser in another state or country, and are “thrown back”
to the numerator as Michigan sales because they are not taxable
by the other state. Throwback sales follow federal P.L. 86-272
standards; the business must have physical presence in the other
state or activity beyond solicitation of sales in order to exclude
sales into another state or country from the numerator.
Sales of other than tangible personal property (e.g., services) are
in Michigan if:
1. The business activity is performed in Michigan, or
2. The business activity is performed both in Michigan and in
another state(s), but based on cost of performance, a greater
proportion of the business activity is performed in Michigan.
There are special apportionment formulas for transportation
companies and other authorized taxpayers. Those formulas are
identied in Chapter 3 of the Michigan Income Tax Act.
Combined Apportionment Under the Unitary
Business Principle
In 2013, the Michigan Supreme Court held that combined
apportionment under the unitary business principle may be used
to calculate IIT taxable income at the election of the taxpayer,
Malpass v. Department of Treasury, 494 Mich 237 (2013). A
taxpayer now has the option to apportion each discrete legal
entity’s income (loss) separately or to combine apportionment
when entities are unitary with one another.
When a taxpayer elects to combine apportionment factors
of the unitary business the taxpayer must control the entities
included in the combined apportionment ling and those
entities must have a ow of value between their various
operations. A taxpayer with control may elect to combine
apportionment when the business operations show:
• Economic realities
• Functional integration
• Centralized management
• Economies of scale
• Substantial mutual interdependence.
These factors are not exhaustive or exclusive and the ability to
elect combined apportionment will depend on the totality of
the circumstances.
Unlike the Corporate Income Tax, there is no “water’s edge.”
The holding by the Michigan Supreme Court in the Malpass
case is retroactive. Amended returns are required if business
income is subject to apportionment and the taxpayer elects
to apply the combined method to a year open to the statute of
limitations.
NOTE: If you are reporting combined apportionment, you
must include a separate schedule showing your computations.
See “MI-1040H Unitary Apportionment Worksheet Example”
available on Treasury’s Web site.
