On December 20, 2021, Michigan Governor Gretchen Whitmer signed House Bill 5376 into law. House Bill 5376 is widely expected to save pass-through entity owners nearly $200 million in federal income taxes on an annual basis. Pass-through entities (PTEs) include S corporations and partnerships (including limited liability companies treated as partnerships for federal income tax purposes).
As a general rule, PTEs are not subject to an entity-level tax in Michigan. Instead, the PTE owners pay, on their individual tax returns, the Michigan income tax due on the income of the PTE that is passed through to them. For individuals, the ability to take an itemized deduction on their federal return for their state and local taxes (SALT) is limited by the $10,000 SALT cap ($5,000 for married individuals filing separately). For individuals who are owners of businesses organized as PTEs, House Bill 5376 will allow the PTEs to elect to pay the Michigan income tax on the PTE taxable income. The taxes paid at the PTE level would be a deduction on the PTE’s federal income tax return and not be subject to the federal SALT limitation applicable to individuals. The timing of the deduction would be based on the PTE’s accounting method for federal income tax purposes. The individual owners of electing PTEs are entitled to claim a tax credit in the amount of their respective shares of the entity-level tax against the Michigan income tax due on their Michigan individual income tax returns.
This new PTE tax election is available for the 2021 tax year. To take advantage of this election for taxable years beginning in 2021, a PTE must make the election no later than March 15, 2022. The time period of subsequent years is the 15th day of the third month following the close of the entity’s taxable year. Once made, the election is irrevocable for a period of three years.
Warner’s Tax Law Practice Group continues to monitor federal and state tax issues as they develop and issues eAlerts on legislation and other matters as needed. For more information regarding federal or state tax issues, please contact a member of Warner’s Tax Law Practice Group.
