Michigan’s SALT Cap Workaround

On Monday, December 20, 2021, Governor Gretchen Whitmer signed HB 5376 into law, amending the Income Tax Act to create a flow-through entity tax in Michigan. Generally, the flow-through entity tax allows certain flow-through entities (often limited liability companies or partnerships) to elect to file a return and pay Michigan taxes at the entity level. This law then allows members or owners of that entity to claim a refundable tax credit on their individual return equal to their share of the entity level Michigan tax previously paid on that income. Upon enactment, this tax is retroactive to tax years beginning on or after January 1, 2021, for flow-through entities that make a valid election. With the signing of this law, Michigan joins at least 20 other states with similar state and local tax workarounds.

Election Considerations

• The election must be made by the pass-through entity.
• The election is binding for three tax years.
• The due date for the 2021 election is April 15, 2022, while the election due date for subsequent years is March 15 of that tax year.
• This election and entity-level tax results in additional reporting of the pass-through entity’s ownership and Michigan activity.
• The election is not available for the following types of pass-through entities:

1. Publicly traded partnerships;

2. Entities disregarded for federal income tax purposes; or

3. Entities subject to tax under Chapter 13, relating to financial institutions.

• Note that this election provides relief for the maximum $10,000 state and local tax deduction available at the Federal level.

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

All payments under the flow-through entity tax are required to be submitted through Michigan Treasury Online (MTO). A payment submitted timely through MTO will be deemed to be a valid election for the tax year specified on that payment. As a result, flow-through entities that want to make an election or payment can do so at the same time through an MTO electronic payment. Any payment made outside of MTO will not be accepted as such a payment or a valid election. Furthermore, other payments made by flow-through entities (e.g., for composite return estimated payments) or members (e.g., for MI-1040 estimated payments) will not be applied toward the flow-through entity tax or be treated as an election into that tax.

For any questions about the information in this alert, please contact, For more information, please contact Michael Cumming (mcumming@dykema.com or 248-203-0740), Scott Kocienski (skocienski@dykema.com or 248-203-0868), Victoria Remus (vremus@dykema.com or 248-203-0553), or your Dykema relationship attorney.