State Amends Tax Act to Benefit Flow-Through Entities

Ursula Scroggs likes the fact that Michigan Gov. Gretchen Whitmer signed a bill into law in late December that establishes the availability for flow-through entities to pay and deduct Michigan income taxes at the entity level.

She believes the new law will ease the tax burdens on the owners of “S” Corporations, partnerships and others.

Scroggs, managing director at Troy-based DKSS CPAs + Advisors (the firm also has an office in St. Clair Shores), just wishes Whitmer had signed it sooner.

“Signing it as late as she did didn’t give us (tax preparers) much time to advise our clients,” Scroggs said. “It’s a great advantage, and cash-basis taxpayers who couldn’t take advantage (in 2021) can certainly see the tax relief in the future.”

The law signed by Whitmer on Dec. 20 – PA 135 of 2021 –amends the state Income Tax Act to create a flow-through entity tax in Michigan.  According to information released by the state, the flow-through entity tax allows certain flow-through entities to elect to file a return and pay tax on income in Michigan, and allows members or owners of that entity to claim a refundable tax credit equal to the tax previously paid.

For 2021, the state’s announcement read, that while the initial election into the flow-through entity tax and any payment required are due on certain dates in 2022, many flow-through entities may have wished to make an election or payment on or before Dec 31. However, the website to do so wasn’t available until Dec. 29.

“That didn’t leave companies who wished to do so much time,” Scroggs said.

In an article posted to the firm’s website, Plante Moran pointed out the 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, Plante Moran pointed out.

In an item posted to its website, legal firm Varnum LLP explained that taxpayers who are shareholders or members of pass-through entities or certain trusts can “elect to calculate and pay” Michigan income tax at the entity level.

The tax rate at the entity level, the Varnum article explained, is 4.25%, the same as the individual income tax rate. With an election in place and payment of the necessary taxes, the pass-through entity can then deduct the amount of taxes paid without limitation on their federal tax returns (Form 1120S for S corps, Form 1065 for partnerships).

Shareholders/members of such pass-through entities can then claim a credit on their Michigan individual income tax returns for their share of Michigan income taxes paid at the entity level.

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.