Michigan eliminates flow-through entity withholding requirements
On June 8, 2016, Michigan Governor Rick Synder signed House Bill 5131 into law, eliminating 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 members. The elimination of the withholding requirement is effective for FTE tax years that begin on or after July 1, 2016.
Background
For FTE tax years that begin before July 1, 2016, all FTEs conducting business in Michigan are required to withhold income tax based on each nonresident individual member’s distributive share of taxable income. The FTE should withhold tax in an amount computed by applying a 4.25 percent tax rate (for 2015) to the distributive share of Michigan taxable income reasonably expected to accrue after allocation and apportionment under the applicable individual income tax apportionment rules, and after deducting allowable personal and dependency exemptions.
The withholding requirement also applies to FTEs with greater than $200,000 in business income after allocation or apportionment if the member is a corporation or FTE. Total business income should be apportioned using the corporate income tax sourcing rules and a single sales factor apportionment fraction where the numerator is Michigan sales and the denominator is total sales everywhere.
Effective for FTE tax years beginning on or after July 1, 2016, the FTE withholding requirements above have been eliminated.
Planning items
For a calendar year FTE’s 2016 tax year, the FTE is required to continue complying with the FTE withholding requirements, including filing 2016 FTE withholding estimates (due 4/15, 7/15, 10/15, and 1/15) and file a 2016 Form 4918 due February 28, 2017. Beginning with the 2017 tax year, the FTE is no longer required to withhold, and all members in FTEs with Michigan business activity should account for their distributive share of Michigan income in the computation of individual or corporate income tax estimated payments.
A fiscal year taxpayer will need to comply with the FTE withholding requirements for its tax years beginning prior to July 1, 2016. For example, a fiscal year taxpayer with a March 31 year end will need to comply with FTE withholding through its fiscal year ending March 31, 2017. Since a calendar tax year member applies FTE withholding to the calendar year in which the FTE’s tax year ends, a calendar year member of the FTE that has a March 2017 year end will apply the FTE withholding to the member’s calendar 2017 tax year.
A calendar tax year member of a FTE that has a fiscal year beginning in 2016 before July 1st will need to include its distributive share of Michigan income from the FTE in the calculation of the member’s individual or corporate income tax estimated payments beginning with the member’s 2018 tax year. A calendar tax year member of a FTE that has a fiscal year beginning in 2016 on or after July 1st will need to include its distributive share of Michigan income from the FTE in the calculation of the member’s individual or corporate income tax estimated payments beginning with the member’s 2017 tax year.
