|Michigan Governor Gretchen Whitmer signed House Bill 5376 into law on December 20, 2021 which amended the Income Tax Act and implemented an elective flow-through entity tax in Michigan. The new legislation is effective for tax years beginning on or after January 1, 2021 and allows for individual taxpayers with interests in partnerships or S corporations to reduce their federal income tax burden by allowing Michigan income taxes to be paid at the entity level. This flow-through entity tax acts as a workaround to the state and local tax cap that 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.
The flow through entity tax is computed at the same rate as the Michigan individual income tax rate of 4.25%. Payments made under the new flow-through entity tax will be required to be submitted through the Michigan Treasury Online (MTO) which can be found at https://mto.treasury.michigan.gov/. Currently, a payment submitted timely through MTO is deemed as a valid election for the tax year that is specified for the payment. The election can be made for tax year 2021 until April 15, 2022. Once made, the election is irrevocable for the next two tax years. The new law requires estimated payments to be made if the electing entity expects its tax liability to exceed $800 for the year and has provisions to impose penalties and interest for underpayment of those estimated taxes. However, the Treasury has indicated that no penalties will be imposed on entities that make the election for 2021 and pay the tax by the due date of their annual return.
AHP continues to monitor guidance as it relates to this new tax law. Taxpayers will need to move quickly to receive the full benefits of this new tax for 2021 as the tax will need to be paid by December 31, 2021 to be deductible at the federal level. If you wish to make the election, we would advise partnerships and S corps to pay in 4.25% of the projected current year income by Friday, December 31st through the MTO website to be able to receive the tax deduction for 2021. It is unclear at the moment whether accrued tax payments will meet the economic performance requirements so both cash and accrual basis entities should plan to have their payments submitted by December 31st, 2021 to ensure a 2021 tax year deduction.
If you have any questions relating to the new flow-through entity tax election and the impacts it may have on your business or individual tax situation, please contact your AHP tax advisor.
|Link: Flow-Through Entity Payments. These are detailed instructions on how to complete this task.