With Governor Whitmer signing a SALT Cap Workaround to avoid the $10,000 limit on individual deductions for state and local taxes at the federal level, Michigan manufacturers should know that:
- This is effective for tax years beginning on and after January 1, 2021
- The rules allow for certain flow-through entities to make an election to pay a pass-through entity tax (PTE)
- It applies to flow-through entities defined as S corporations and entities treated as partnerships under the internal revenue code, but not publicly traded partnerships or disregarded entities
Flow-through entities may elect to file a return and pay the Michigan tax. In doing so it becomes an entity level business expense that is deductible from business income. This reduces the federal taxable income that flows to the owner’s return, avoiding the state and local tax cap on itemized deductions. The owner of the flow-through entity can then claim a credit for their share of the Michigan taxes paid on their personal Michigan return. Any excess tax is refundable to the taxpayer; however, no interest is available on refunds related to the credit for tax years ending in 2021.
The Michigan Department of Treasury stated that flow-through entities wishing to make the election must do so online by making a payment through Michigan Treasury Online (MTO). The election is irrevocable for the next two subsequent tax years. In calculating the tax at the entity level, the tax is only computed on the business income tax base allocated to individuals, flow-through entities, estate or trusts and excludes the business income tax base allocable to corporations, insurance companies, or financial institutions.
The election for a tax year is due on or before the 15th day of the third month of that tax year. However, for any tax year beginning in 2021, the election must be made April 15, 2022. Calendar year taxpayers not planning to make the election for the 2021 tax year, but intending to in 2022 must make the election by March 15, 2022.
Note that estimates are due April 15th, June 15th, September 15th, and January 15th. The IRS issued Notice 2020-75 stating regulations will soon clarify that state and local taxes imposed on a qualifying pass-through entity would be deductible in computing federal taxable income in the year of payment. This language implies that electing entities should make the estimates before the end of the tax year.
An estimated 20 states have adopted SALT Cap workaround legislation. Each has its own rules related to elections, due dates, and eligibility. For businesses filing in multiple states, it is important to analyze whether it would be beneficial to make the election for the state and ensure that deadlines aren’t inadvertently missed.