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Michigan provides elective flow-through entity tax

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Michigan Gov. Gretchen Whitmer signed legislation on Dec. 20, 2021 to provide an elective flow-through entity (FTE) tax.1 As a result, Michigan is the latest state to enact an entity-level tax regime as a workaround to the federal $10,000 state and local tax (SALT) deduction limitation adopted under the Tax Cuts and Jobs Act (TCJA) of 2017.2 On the same day, Governor Whitmer also approved the Strategic Outreach and Attraction Reserve legislation package that will fund $1 billion in economic development in the state.3 The fund is meant to attract large employers looking to invest in the state long-term.4

Flow-through entity tax For tax years beginning on and after Jan. 1, 2021, contingent upon the existence of the TCJA SALT deduction limitation, the legislation creates an elective tax on FTEs with business activity in Michigan.5 In general, an FTE may elect to pay tax on certain income at the individual income tax rate.6 Members of the entity making the election are eligible to receive a refundable tax credit equal to the tax previously paid by the FTE on the income.7 For purposes of the election, an FTE is defined as “an S corporation or a partnership under the internal revenue code for federal income tax purposes.”8

The FTE tax election is made by submitting an electronic payment through Michigan Treasury Online (MTO). The election, once made, is irrevocable and remains in effect for a total of three tax years (the tax year for which the election is made and the next two years).9

The election due date is dependent upon whether an election is being made for a tax year beginning in 2021, or for a tax year beginning in 2022 or thereafter. For FTEs with calendar or fiscal years beginning in 2021, the election may be made through April 15, 2022, so that such election is irrevocable for the 2021, 2022, and 2023 tax years.10 FTEs can generally make the election for the 2021 tax year by specifying a payment for the 2021 tax year that includes the combined amount of any unpaid quarterly estimated payments due for the 2021 tax year.11 For FTEs with calendar or fiscal years beginning in 2022 or thereafter, the election must be made by the 15th day of the third month of the FTE’s tax year, so that such election is revocable for the 2022, 2023, and 2024 tax years.12 The election is activated through a payment through MTO, which must be designated as applicable to the 2022 tax year.13

Because the FTE tax is levied at the individual tax rate for the same tax year, the FTE tax rate is 4.25% for the 2021 tax year.14 The tax is imposed only on the Michigan portion of the post-apportioned / post-allocated positive “business income tax base” that is attributed to direct members of the electing FTE that are individuals, fiduciaries such as estates or trusts, or other FTEs.15 Any portion of the business income tax base attributed to direct members that are insurance companies, financial institutions, or C corporations is not subject to the FTE tax. The starting point of the FTE tax generally is the amount determined and reported by the entity for federal income tax purposes.16 After completing certain statutory adjustments, the business income tax base of the FTE is subject to allocation and apportionment.17

The annual FTE tax return must be filed by the last day of the third month after the end of the taxpayer’s tax year (March 31, 2022 for 2021 calendar year taxpayers), and while such return can be extended for an additional six months, the time to pay the FTE tax is not extended.18 FTEs that elect to pay the FTE are required to make quarterly estimated payments in each year that their annual tax liability is reasonably expected to exceed $800.19

Incentives package The incentives legislation package amends the Michigan Strategic Fund Act (MSF) to add two new funds to attract business to the state. The MSF has broad authority to promote economic development and create jobs in the state, primarily by providing business enterprises with sources of financing.20

House Bill 5603 H.B. 5603 was enacted to create the Michigan Site Readiness Program (MSRP).21 The MSRP will provide grants, loans, or other economic assistance for eligible applicants to create investment-ready sites to attract and promote investment in the state based on various eligibility factors. These factors include the importance of the project to the community, local community and financial support for the project, the applicant’s financial need, and the creation or retention of qualified jobs.22

Senate Bill 771 S.B. 771 creates the Critical Industry Program (CIP) to provide a $500 million fund for businesses for deal-closing, gap financing, and other economic assistance that creates new qualified jobs or makes capital investments.23 To qualify for CIP funds, the fund will consider a variety of criteria and will provide for a detailed application, approval, and compliance process to be published and available on the fund’s website.24

Senate Bill 769 and Senate Bill 85 S.B. 769 creates the Strategic Outreach and Attraction Reserve (SOAR) fund that will be the financing mechanism for H.B. 5603, S.B. 771, and S.B. 85.25 The funds will be transferred to the CIP or MSRP for disbursement to businesses.26 S.B. 85 provides a supplemental budget for the state for the fiscal year ending Sep. 30, 2022 and appropriates $1 billion to the SOAR fund.27

Commentary For tax years beginning in 2018 through 2025, the TCJA amended IRC Sec. 164 to limit the deductibility of state taxes to $10,000 for individuals, but imposed no similar limitation on business entities. With the enactment of H.B. 5376, Michigan has joined a growing number of states that have enacted entity-level taxes as a mechanism to bypass the federal $10,000 SALT deduction limitation on individuals provided in the TCJA. This type of tax has become very popular and was enacted by 15 states during 2021.28 In fact, a total of 22 states have now enacted a similar type of entity-level tax.29

While many had expected Michigan to enact its FTE legislation in the middle of 2021, Governor Whitmer vetoed the legislation when originally presented, in part due to the lack of funding designated to the Michigan Department of Treasury to implement the FTE. Despite significant delays, the state managed to cure the funding issue and enact the FTE, with the legislation remaining effective for tax years beginning on and after Jan. 1, 2021. The Department went to great lengths to develop the MTO, an online portal, to accept elections and payments prior to the end of 2021, and provided detailed guidance soon thereafter.30 As a result of the enactment so late in 2021, the legislation includes some temporary provisions that apply to elections made for the 2021 tax year. Taxpayers considering the election should keep the deadlines in mind. Also, taxpayers are advised to carefully consider the federal and state income tax effects of making the election, especially because unlike most of the elective entity-level tax regimes, the FTE election lasts for a total of three tax years and is irrevocable.

The expansion of the Michigan Strategic Fund Act provides a wider range of opportunities for rewards while increasing incentive value for projects choosing to locate within Michigan, particularly for large employers looking to invest long-term in the state.31 Although H.B. 5603 and S.B. 771 provide a list of qualifications for the funds, they also provide for the funds to set forth their own application, approval, and compliance processes.32 However, the funds have yet to establish these processes, so interested applicants must rely on the eligibility factors set forth in the Act for the time being.



1 Act 135 (H.B. 5376), Laws 2021.
2 P.L. 115-97 (2017). The TCJA capped the individual SALT deduction at $10,000 for individuals and most married couples for the 2018-2025 tax years. IRC § 164(b)(6)(B).
3 Act 132 (S.B. 85), Act 134 (H.B. 5603), Act 136 (S.B. 771), and Act 137 (S.B. 769), Laws 2021.
4 Press Release, Governor Whitmer Signs Legislation Enabling Michigan to Attract Billions in Investment, Create Tens of Thousands of Good-Paying Jobs, Executive Office of the Michigan Governor, Dec. 20, 2021.
5 MICH. COMP. LAWS §§ 206.801–206.847; Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
6 MICH. COMP. LAWS §§ 206.813; 206.815.
7 MICH. COMP. LAWS §§ 206.254; 206.675.
8 MICH. COMP. LAWS § 206.805(3). Note that the following entity types may not make the FTE tax election: publicly traded partnerships as defined under IRC § 7704; FTEs subject to the financial institutions tax; entities disregarded for federal income tax purposes; and LLCs that file federal corporate income tax returns as corporations.
9 MICH. COMP. LAWS § 206.813.
10 Id.
11 Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
12 MICH. COMP. LAWS § 206.813.
13 Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
14 MICH. COMP. LAWS § 206.51.
15 MICH. COMP. LAWS § 206.815.
16 MICH. COMP. LAWS § 206.803(2).
17 MICH. COMP. LAWS §§ 206.815; 206.817.
18 MICH. COMP. LAWS § 206.833; Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
19 MICH. COMP. LAWS § 206.831. FTEs that elected to pay the FTE tax before Jan. 18, 2022, should include any unpaid estimates with the next quarterly estimated payment due. Entities that have not elected to pay the FTE tax as of Jan. 18, 2022 should remit any unpaid estimated tax payments when making a timely election to pay the tax. Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
20 Act 270, Laws 1984, codified as MICH. COMP. LAWS §§ 125.2001-125.2094.
21 Act 134 (H.B. 5603), Laws 2021, enacting MICH. COMP. LAWS § 125.2088t.
22 Id.
23 Act 136 (S.B. 771), Laws 2021, enacting MICH. COMP. LAWS § 125.2088s.
24 Id.
25 Act 137 (S.B. 769), Laws 2021, enacting MICH. COMP. LAWS § 12.254.
26 Id.
27 Act 132 (S.B 85), Laws 2021.
28 Note that most states refer to these as pass-through entity (PTE) taxes.
29 For a discussion of PTE taxes, see GT SALT Alert: Top 10 SALT stories of 2021. In this SALT Alert, we determined that the widespread adoption of PTE tax regimes was the most significant SALT development of 2021.
30 Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax, Michigan Department of Treasury, Jan. 14, 2022, updated Jan. 26, 2022.
31 Press Release, Governor Whitmer Signs Legislation Enabling Michigan to Attract Billions in Investment, Create Tens of Thousands of Good-Paying Jobs, Executive Office of the Michigan Governor, Dec. 20, 2021.
32 MICH. COMP. LAWS §§ 125.2088s; 125.2088t.



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