After years of working with the Michigan Association of CPAs (MICPA) and Treasury trying to correct some of the administrative issues with the original law around Michigan’s flow-through entity (FTE) tax election, there is finally a signed bill. House Bill 5022 amended the Income Tax Act, specifically targeting the FTE tax. The bill, which enacted several key changes, was signed by Governor Whitmer on Jan. 17, 2025.
So, what are the changes to Michigan’s flow-through entity tax?
1. Election filing deadline
Previously, an entity needed to elect into the tax by the 15th day of the third month of their tax year. This meant that a qualifying entity that filed on a calendar year basis needed to elect into the FTE tax by March 15th of 2024 for the 2024 tax year.
Now, for tax years beginning on or after Jan. 1, 2024, FTEs must file their election to pay the FTE tax before the last day of the ninth month after the end of the tax year. This means that same calendar year taxpayer now has until Sept. 30, 2025, to make an election. This affords them time that may be necessary to determine if the election will be advantageous.
2. Penalties and interest
The bill outlines conditions under which penalties and interest aren’t assessed. If taxpayers submit four equal payments totaling at least 90% of the current year’s tax liability or 100% of the previous year’s tax liability, they won’t incur penalties or interest. The bill also addresses penalty relief for those electing into the tax after the year to prevent penalties on quarterly estimates that couldn’t have been made before the election took place.
3. Application of credit for FTE owners expanded
Previously, an FTE owner would only have received credit for any FTE payments made by the 15th day of the third month after the FTE’s tax year. This meant that an entity that filed on a calendar year basis would have needed to pay any FTE tax by March 15th of 2024 for the credit to flow through to the ultimate owners 2023 tax return. This caused a mismatch of income to credit and caused some taxpayers to be underpaid when completely relying on the FTE credit to cover their tax liability.
Now, for tax years that begin on and after Jan. 1, 2024, the member’s share of the tax imposed on the FTE is creditable on the member’s return if the payment is made before the date for the filing of the annual return, including any extension. This means that there may be an additional 6.5 months of time in which payments will be creditable to the member’s return when compared to the prior rules. This may help alleviate penalties that were being imposed on members in certain situations prior to the law change and eliminate the mismatching of income and corresponding credits.
4. Reasonable proof for credits
The Department of Treasury may require reasonable proof from taxpayers claiming credits against their individual or corporate income tax liability for the amount of flow-through tax paid. This is somewhat ambiguous, but it’s meant to help Treasury administer the tracing of credits, which has been difficult in the past.
Additional details regarding this change to Michigan’s flow-through entity tax
This bill isn’t expected to significantly impact state revenues or the administrative costs of the Department of Treasury. It was supported by the Department of Treasury, MICPA, National Federation of Independent Businesses, and Michigan Manufacturers Association.
For qualifying pass-through entities that missed making an election for a tax year beginning on or after Jan. 1, 2024, or if you have any questions on this change to the Michigan FTE tax, contact a tax advisor.
