15 Feb Are You Taking Advantage of Michigan’s Pass-Through Entity Tax?
Michigan Pass-Through Entity Tax Enacted – Quick Action May Be Needed for 2021
Michigan’s Governor signed legislation on December 20, 2021, allowing Michigan pass-through entities to elect to pay a newly enacted 4.25% income tax and for the owners of those entities to claim a tax credit against that tax on their Michigan individual income tax returns.
With the passage of the TC&JA, a $10,000 cap was placed on the federal itemized deduction for taxes paid by individuals, thereby increasing the tax burden for taxpayers with tax payments exceeding the cap. In response to this, a number of states sought legislation to offset the effect of this additional tax burden without negatively impacting state tax revenues. HB 5376 is Michigan’s response to the TC&JA cap limitation.
Importantly, the new tax election is available retroactively for years beginning in 2021, and therefore pass-through entities (a legal business entity that passes all its income on to the owners or investors of the business) and their owners may want to consider making this election for the tax year 2021.
The bill (H.B. 5376) allows owners of LLCs, partnerships, S corps, and other pass-through entities to pay their state and local taxes at the business-entity level instead of individually. The new tax election is not available to disregarded entities, but only those entities treated as partnerships for federal tax purposes such as S Corporations and multiple-member LLCs, as well as estates and trusts.
All payments under the flow-through entity tax are required to be submitted through Michigan Treasury Online (MTO). A payment submitted timely through MTO will be deemed to be a valid election for the tax year specified on that payment. Therefore, flow-through entities that wish to make an election or payment may do so simultaneously through an MTO electronic payment. Payments submitted outside of MTO will neither be accepted nor be regarded as a valid election into the flow-through entity tax. In addition, other payments made by flow-through entities (e.g., for composite return estimated payments) or members (e.g., for MI-1040 estimated payments) will not be applied toward the flow-through entity tax and will not constitute an election into the tax.
For further questions, please contact the Business Taxes Division at 517-636-6925 and follow the prompts for Corporate Income Tax/Flow-Through Entity. We are finding that some accounting firms are very familiar with this late-year law change and many others are not. This can be evident when owners of a pass-through entity have different accountants. At DeHoek & Company, PLLC, we are familiar with this tax ruling and use it to our clients’ advantage where it applies.
The bill is estimated to save the roughly 240,000 pass-through entity owners subject to tax in Michigan about $200 million in federal taxes annually. The law should level the playing field with competing for out-of-state businesses because Michigan will join states that have already enacted SALT cap workarounds to benefit local business owners. According to a legislative bill analysis, the new Michigan law will have no impact on state revenue, with the exception of the incremental cost to administer the new tax.
Action to consider for the tax year 2021
Because the new tax and related tax credit are effective retroactively for years beginning in 2021, pass-through entities and their owners may wish to consider making the election to pay the new tax for the 2021 tax year. Annual returns are generally due by March 31 unless extended, but the election can be made for 2021 until April 15, 2022.
The new law generally requires estimated payments and imposes penalties and interest for the underpayment of those estimated taxes by the pass-through entity, but Treasury has indicated that no penalties will be imposed on pass-through entities that make the election for 2021 and pay the new 4.25% tax when filing their annual return by April 15, 2022. Interest may be assessed for taxes paid after March 31, 2022, but Treasury may also waive interest in the initial year for taxes paid by March 31, 2022.
In part from the National Law Review, Volume XI, Number 356