On December 20, 2021, Michigan Governor Whitmer signed legislation making Michigan the latest state to allow pass-through entities the option to be taxed at the entity level. The 2017 Tax Cuts and Jobs Act signed into law on December 22, 2017, capped the amount of state and local taxes that can be deducted as itemized deductions on a federal return at $10,000. This new legislation is designed as a workaround to that limitation.  On January 26, 2022, Michigan Treasury has issued updated guidance on the new law.

Here is how it works:

• LLC’s taxed as partnership, Partnership and S Corporations may elect to pay the follow-through entity tax in Michigan
• A Flow-Through Entity makes an election to be taxed at the entity level.
  • For calendar year 2021 only, the election must be made by 4/15/2022. (The return is due 3/31/2022 and any payment after that date will be subject to interest from 3/31/2022 to 4/15/2022). Any election after 4/15/2022, will not be accepted as a valid election for 2021.
  • For an election to be timely in subsequent years, an estimated payment must be made and received by the 15^th day of the third month of the entity’s tax year.
  • Payments made before the 15^th day of the third month after the tax year, will qualify for a member credit for the same tax year. Payments made after the 15^th day of the third month after a tax year, will not qualify for the credit that year but as a credit in the succeeding tax year.
  • The election is irrevocable for the year of the election and the subsequent two tax years.
  • The election is considered effective when a payment for the tax is made directly on the Michigan Treasury Online portal (The payment must be designated as applicable to a specific tax year).
• The electing flow-through entity is subject to a 4.25% tax on the positive Business Income Tax Base after adjustments and subject to allocations and apportionment.
• The tax is a deduction for the flow-through entity reducing the income on Federal form K-1 to the individual owners.
• The individual owner receives a passthrough credit from the flow-through of the MI tax paid on their individual returns so the income is not taxed again.

Trust and Estates

• If a Trust/Estate receives a K-1 from a flow-through entity with the Michigan credit, the credit must be prorated between the amount of income retained by the Trust to the total income of the Trust.
• Non resident fiduciaries must multiply the credit by 95.75% because they are not required to addback flow through entity taxes.

Entities that have made payments on behalf of nonresident members participating on a composite return will not be able to apply those payments to the flow-through entity return.

If you have any questions, please contact your relationship manger at Polk and Associates.

Polk & Associates

Large enough to serve a diverse clientele, yet small enough to maintain a hands-on approach, we are committed to maintaining the highest accounting and ethical standards with continuous education, extensive research resources, and excellent quality control.

Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.