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More Information on Michigan Flow-Through Entity Tax

More Information on Michigan Flow-Through Entity Tax

On December 22, Michigan enacted a flow-through entity tax as a workaround to the state and local tax limitations on individuals from the Tax Cuts and Jobs Act. The new flow-through entity tax will allow business owners to once again deduct their Michigan income taxes related to flow-through entities on their federal tax return. The state began accepting payments yesterday.

How can you benefit from this?

The flow-through entity that you are a shareholder/partner/member of simply elects to be subject to the flow-through entity tax. At this time the election is made by making a payment to the state of Michigan.

How to make the payment?

Payments will only be accepted through the Michigan Treasury Online portal. The state will not accept an election or payment in any other fashion. MTO began accepting payments on December 29, 2021. If you have an MTO account, you should be able to sign in and go to Fast Pay to make the payment The state provided step-by-step payment instructions for using the Fast Pay option.

If you do not have an MTO account, click on create a profile and follow the on-screen instructions. Then make the payment following the Fast Pay instructions.

Do single member LLCs or sole proprietorships qualify for this?

No. Only entities that are treated as a partnership or S corporation under federal law are eligible to make the election to be subject to the flow-through entity tax.

Are there other considerations?

There are several other considerations. First, once elected to pay the withholding tax, the entity is subject to the withholding tax for the current year and two subsequent years. Other items to consider include a) other flow-through entity losses which may be available to offset the income from the profitable entity, b) shareholder/partner/member overall tax situation, c) whether the shareholder/partner/member has passive loss carryovers or net operating losses to offset the flow-through income.

This ultimately may be a timing issue. If the entity wants to elect to pay the withholding tax in 2022, the deduction may be allowed in 2022 instead of 2021, but the deduction will be allowed.

Finally, what happens with the SALT legislation in the Build Back Better Act may make this a moot point.




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