Michigan enacts elective flow-through entity tax, creating a planning opportunity
On Dec. 20, 2021, Michigan Governor Whitmer signed House Bill 5376 into law, which amends the Michigan Income Tax Act by implementing an elective flow-through entity tax. Effective for tax years beginning on or after Jan. 1, 2021, the law allows individual taxpayers with interests in partnerships or S corporations to reduce their federal income tax burden by allowing Michigan income taxes to be calculated and paid at the entity level.
This optional flow-through entity tax acts as a workaround to the SALT cap, which was introduced in the Tax Cuts and Jobs Act of 2017 to limit the amount of state and local taxes allowed as a federal itemized deduction to $10,000. Michigan now joins many states that have enacted similar measures to counteract the SALT cap.
The flow-through entity tax is computed at the same rate as the individual income tax, which, for the 2021 tax year, is 4.25%. The tax is imposed on the positive business income tax base after allocation and apportionment.
Other administrative guidance
For tax years beginning in 2021, flow-through entities must make this election by April 15, 2022. Once this election is made, it cannot be revoked for the following two tax years. The flow-through entity tax and its associated credit to Michigan individual income tax is only applicable in years where the federal SALT deduction is limited and will cease to function if the full federal deduction is restored in future tax years.
As of the date of publication, the State of Michigan has not yet issued official administrative guidance on the implementation of the new election. Current unofficial guidance is that payments of the entity tax will be made via Michigan Treasury Online (MTO).
What should taxpayers do next?
An expeditious review of your individual tax situation and possible benefits of the election should be undertaken to determine whether immediate action is needed before the end of the year. If you have any questions relating to the new election and the impacts it may have on your business or individual tax situation, please contact your Plante Moran tax advisor.