On December 20, 2021, Michigan became the most recent state to adopt an elective Pass-Through Entity (PTE) tax. Under the PTE tax, Michigan pass-through entities may elect to pay tax at the entity level, effective retroactively for tax years beginning on or after January 1, 2021. The owners of those entities may then claim a refundable income tax credit for their share of the tax paid.
The PTE tax allows for bypass of the SALT cap, which was introduced in the Tax Cuts and Jobs Act of 2017 and limited itemized deduction of personal state and local taxes to $10,000. The tax is in effect only for years in which the federal SALT deduction is limited and will not be in effect in future years if the full SALT deduction is restored.
What entities may make the election?
Entities treated as S corporations, partnerships (other than publicly traded partnerships), and limited liability companies for federal income tax purposes may make the election. However, the election is not available to disregarded entities.
What is the tax rate?
The tax is levied at the current individual income tax rate (4.25% for tax year 2021) on an electing entity's positive business income tax base, after allocation and apportionment of income to Michigan and certain adjustments. The entity must pay the tax only on the business income tax base allocable to members who are individuals, flow-through entities, trusts, or estates, and not on the business income tax base allocable to members that are corporations, financial institutions, or insurance companies.
How is the election made?
Generally, an entity must file its election with the Department of Treasury by the 15th day of the third month of the tax year. However, for 2021, the election can be made up until April 15, 2022. Once made, the election is irrevocable for the next two tax years. A payment of the tax is considered an election into the tax for the tax year specified on that payment.
How are payments made?
Entities are required to make PTE tax payments electronically through Michigan Treasury Online (MTO). MTO expects to have functionality for payment of the tax available on December 29, 2021 for entities wishing to make payment on or before December 31, 2021.
Are estimated tax payments required?
If an electing entity reasonably expects its tax liability to exceed $800 for the year, it must file an estimated return and pay an estimated tax for each quarter of the tax year. Penalties and interest generally apply to underpayments of estimated tax; however, the state will not assess penalties and interest if the preceding year's tax liability was $20,000 or less and the amount of that liability was submitted in four equal installments.
When are returns due?
Unless an extension is granted, annual returns for the tax are due by the last day of the third month after the end of the tax year (March 31 for calendar year taxpayers).
What should entities do next?
Entities and owners should review their own unique set of facts and circumstances in relation to the benefit of the PTE tax to determine if any action is required before year end. Please contact your tax advisor or Kruggel Lawton’s team of experienced tax professionals to determine the next steps.