State & local tax alert: Michigan flow-through entity withholding repealed

February 20, 2017 Article 1 min read
Authors:
Mike Merkel Curtis Ruppal
Public Act 158 of 2016 eliminated the requirement for flow-through entities (“FTE”) doing business in Michigan to withhold Michigan income tax on the distributive income allocated to nonresident individual and business entity owners.

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The elimination of the withholding requirement is effective for FTE tax yearsthat begin on or after July 1, 2016. Therefore, calendar year FTEs no longer have a withholdingresponsibility beginning with tax year 2017.

All owners of FTEs with Michigan business activity should account for their distributive share of Michigan incomein the computation of their individual, trust or corporate income tax estimated payments. A FTE will still be allowedfor 2017 and later years to file a composite income tax return on behalf of nonresident individual and trust ownersand may remit composite tax estimates on behalf of such owners. Composite tax estimates are to be remittedusing Fiduciary Voucher for Estimated Income Tax (Form MI-1041ES).

Application of the repeal of FTE withholding and the requirement for calendar year owners to remit estimated taxpayments based on the tax year of the FTE is as follows:

  • Calendar year FTE for tax year 2017: A calendar tax year owner will account for the distributive share ofMichigan income in the computation of Michigan income tax estimates for the owner’s 2017 tax year.Withholding is not required or allowed.
  • Fiscal year FTE with tax year beginning in 2016 on or after July 1 and ending in 2017: A calendar taxyear owner will account for the distributive share of Michigan income in the computation of Michiganincome tax estimates for the owner’s 2017 tax year. Withholding is not required or allowed.
  • Fiscal year FTE with tax year beginning in 2016 before July 1 and ending in 2017: Since the FTE is stillrequired to comply with FTE withholding for its tax year, a calendar tax year owner will not account forthe distributive share of Michigan income in the computation of Michigan income tax estimates for theowner’s 2017 tax year.
  • Fiscal year FTE with tax year beginning in 2017 and ending in 2018: A calendar tax year owner willaccount for the distributive share of Michigan income in the computation of Michigan income tax estimatesfor the owner’s 2018 tax year. Withholding is not required or allowed.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

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