Michigan Pass-Through Entity Tax Enacted – What You Need to Know for 2021 and 2022

Post updated 2/24/2022

Michigan Gov. Gretchen Whitmer signed House Bill 5376 on December 20, 2021, which allows owners of Flow-Through Entities (S-Corporations & Partnerships) the option to pay and deduct their state and local income taxes at the business-entity level instead of individually.

The new tax election option is not available to disregarded entities. 

The Entity Level tax rate is 4.25% (Same rate as the Michigan individual income tax rate). 

This new tax mirrors the so-called State and Local Tax (SALT) cap workaround enacted by several other states and is designed to avoid the $10,000 federal limit on individual itemized deductions for state and local taxes.

Importantly, the new tax election is available retroactively for years beginning in 2021.  Therefore, pass-through entities, and their owners, may want to consider making this election for the current tax year.

·       The election to file for the 2021 tax year must be made by the 15th day of the fourth month after the taxpayer’s tax year-end and the tax due must be paid with the election (April 15, 2022 for calendar year taxpayers).

·       The election to file for tax years 2022 and beyond must be made by the 15th day of the third month after the taxpayer’s year end and the first quarter tax estimate must be made with the election (March 15, 2022 for calendar year taxpayers).

·       This election is an irrevocable election for a three-year filing period.

To ensure a 2021 Federal tax deduction, cash basis taxpayers had to act quickly as the Michigan estimate needed to be paid before December 31, 2021, to be deductible at the Federal level.  If taxpayers were unable to make a payment by December 31, 2021, the benefit is not lost – it is simply deferred to the 2022 tax year.

The Michigan Department of Treasury continues to issue ongoing guidance relative to the implementation of the law and administration of payment and tax filing procedures.  At this time, all payments are to be made through the Michigan Treasury Online website (MTO) and all returns will need to be electronically filed through the same site by the taxpayers, or their designated representatives.

Your FMD Advisors are following this closely.  If you have any questions, please contact your FMD Advisor right away.   

For further information on this topic feel free to visit the following link to the State of Michigan Website:  https://www.michigan.gov/taxes/0,4676,7-238-43976-574512--,00.html