Michigan Pass-Through Entity Election
On Monday, Dec. 20, Michigan Gov. Gretchen Whitmer signed HB 5376, allowing eligible owners of pass-through entities to have the pass-through entity pay Michigan taxes at the entity level, and then receive a refundable credit on their own tax return for their share of the entity level Michigan tax paid. For individual owners, the new provisions provide relief from the federal income tax $10,000 SALT cap in place at the federal level.
How it works:
- An election to pay tax at the entity level is made by the pass-through entity and is available for tax years beginning on or after 1/1/2021.
- The election is binding for three years.
- The due date for the 2021 election is April 15, 2022, and for subsequent years the election is due by March 15 of that tax year.
- The entity level tax is a 4.25% tax on the Michigan-sourced business income of the pass-through entity that is attributable to owners that are not corporations, insurance companies, or financial institutions.
- Owners for which tax has been paid will be allowed a credit for their share of the tax paid at the entity level. This election and entity level tax will require additional reporting of the pass-through entity’s ownership and Michigan activity.
The election is not available for specific types of pass-through entities, including:
- Publicly traded partnerships
- An entity disregarded for federal income tax purposes
- An entity subject to tax under Chapter 13, relating to financial institutions
Each taxpayer situation should be analyzed to ensure that a net beneficial outcome exists. For example, owners of electing pass-through entities may have already made significant estimated payments against their projected 2021 income tax liability. The tax payment at the entity level would result in a temporary double payment, which would resolve on refund of the overpayment on the owner’s return. Another example, particularly for owners who are under the 32% federal income tax bracket: the cost of additional reporting could outweigh the tax benefit.
Critical action to take
In order for the tax benefits of the federal income tax SALT cap workaround to apply to the 2021 tax year, cash basis pass-through entities that would like to make the election will need to make their tax payment before the end of the year for individual owners to receive the federal level relief on their 2021 tax returns. For taxpayers making a 2021 election, the payments to the state of Michigan must be made in the MTO System by 3/15/22 in order for the pass-through entity owners to benefit from the credit on their 2021 individual returns.
The Michigan Treasury has issued Instructions for Electing Into and Paying the Flow-Through Entity Tax. The guidance outlines that a timely payment to the Michigan Tax Organization (MTO) will be considered a valid election for the tax year during which specified payment is made. Please note that MTO is the only option available to make PTE elections and payments. Payments remitted outside of MTO will not constitute an election and will not be applied towards PTE payments.
Please reach out to your trusted Rehmann advisor if you would like assistance in completing an analysis of this election.
Dept. of Treasury: Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax
