On Dec. 20, 2021, Michigan enacted a law that allows S corporations and most partnerships to pay income tax at the entity level.

Here are the benefits of this law:

  1. If you pay income tax at the entity level, taxes paid by your entity are deductible from the entity’s federal taxable income.
  2. Paying tax at the entity level reduces the amount of income owners report on their federal income tax returns.
  3. The amount of tax that owners pay to the Internal Revenue Service (IRS) will decrease if they itemize their deductions and are subject to the $10,000 limitation on state and local taxes. The election won’t change the amount of tax that owners pay to Michigan.

IMMEDIATE ACTION REQUIRED

If you want the benefit of this election for the 2021 tax year and you’re a calendar-year cash-basis entity, you must make an electronic payment by Dec. 31, 2021. This payment confirms your election to pay income tax at the entity level.

Payments must be submitted through Michigan Treasury Online. Michigan is currently developing the online payment functionality and expects to have an option available by Dec. 29, 2021.

Please contact your Doeren Mayhew professional if you’d like to make this election and calculate your payment.

Read the Instructions for Electing and Paying Flow-Through Entity Tax

Additional Information

  • Calendar-year accrual-basis entities have until March 31, 2022, to make a payment that’s deductible on their 2021 federal tax returns.
  • This is a three-year election. If you make the election in 2021, it applies to 2022 and 2023 tax years.
  • Pass-through entity owners that are corporations, insurance companies, or financial institutions aren’t eligible for this election. However, the entity can still make the election for its other owners.
  • Owners will receive a credit on their Michigan income tax return.

Please contact your Doeren Mayhew professional if you have any questions about this law. We can help you understand whether this election is right for your business, determine if you qualify, and calculate the payment you may need to make by Dec. 31, 2021.