Michigan Enacts Elective Flow-Through Entity Tax
On December 20th, 2021, Governor Gretchen Whitmer signed Michigan HB 5376, which creates an entity-level tax for pass-through entities (PTEs) that do business in the State of Michigan. Under this new law, PTEs would declare and pay tax on their Michigan taxable income on behalf of their shareholders or entity level partners, and would deduct these taxes from the federal taxable income of the PTE.
In turn, the shareholders or entity level partners would be entitled to a credit against their Michigan income tax in the amount of entity-level tax paid on their behalf. Essentially, this creates a composite-type tax for all owners, both Michigan resident and non-resident. The tax is retroactive to January 1, 2021, and an entity that wants to pay this tax must elect to do so before April 15, 2022.
The main function of this entity-level tax is to create a workaround for the $10,000 ( $5,000 if married filing separate) on Federal Schedule A for state and local taxes, better know as the SALT CAP. By declaring and paying the taxes at the entity level, PTE's (and their members) can take advantage of the unlimited deduction for taxes at the federal level. This can generate a significant tax saving for high net worth clients.
At this point, we know the following as true:
1) The new PTE tax is to be levied at the same rate and distributed in the same manner as the individual income tax. In other words, the Michigan tax rate of 4.25% is applied and allocated to apportioned business income of the PTE.
2) The Michigan Department of Treasury has not created vouchers or forms to declare and pay the tax as of the date of this writing.
3) There is a stopgap measure in place to allow "cash-basis" PTEs to pay and deduct this tax before December 31. On December 29th, the Flow through Entity Tax payment option will be available on the MTO (Michigan Treasury Online). The MTO site will be able to accept the composite payments under FAST PAY. Here is the PDF from the Help Center.
4) "Accrual basis" PTEs will be able to accrue and deduct the entity-level tax in 2021 as long as it is paid by April 15, 2022.
We will keep you posted as the State of Michigan releases more official guidance on this legislation.