Governor Whitmer signed H.B. 5376 on December 20, 2021, enacting a flow-through entity tax for those doing business in Michigan. This legislation was passed as a workaround to the federal $10,000 state and local tax deduction limitation that has frustrated many business owners since it was passed in 2017 as part of the Tax Cuts and Jobs Act.
What is the Michigan Flow-Through Entity Tax and Who is Eligible?
Entities treated as a partnership or S Corporation for federal income tax purposes are eligible to make a three-year election to remit the new entity tax. Disregarded entities, financial institutions, insurance companies and publicly traded partnerships are excluded.
A flow-through can elect to file and pay tax on the income attributable to owners that are individuals, estates, trusts and eligible flow-through entities. Estates and trusts are required to report their share of tax to their beneficiaries. Entities with non-eligible owners, such as a corporate member, elect to file and remit the tax on the portion of the tax base attributable only to its eligible owners. Corporate members will continue to report income from flow-through entities according to part II of the Michigan Income Tax Act.
Flow-Through Entity Considerations
Election
A taxpayer must elect into the flow-through entity tax. The election is irrevocable for three years and must be made through Michigan Treasury Online by the 15th day of the third month following the taxpayer’s year-end. However, for tax year 2021 the election may be made by April 15, 2022.
Due Date
The return is due on the last day of the third month following the year-end. Entities may obtain a six-month extension. This is noteworthy since after the 2021 tax year the election is due before the return.
Estimates
Taxpayers are required to make quarterly tax estimates through Michigan Treasury Online if the liability is expected to exceed $800. The Department has issued guidance indicating that underpayment penalties and interest will be waived for the 2021 tax year if tax is paid before March 31, 2022.
