Michigan Flow-Through Tax Election Deadline Approaching
February 19, 2024 by Gordon Advisors
Since 2021, Michigan small businesses and entrepreneurs have access to a tax strategy that allows business owners to choose to pay and deduct Michigan tax payments related to their business income at the entity level rather than at the individual level. The Michigan Flow-Through Entity Tax election can provide certain tax benefits and flexibility for business owners, such as allowing them to potentially reduce their overall federal tax liability and simplify their tax reporting process.
To maintain those benefits, entities that initially elected the Michigan Flow-Through Entity Tax for the 2021 tax year must submit a new election for the upcoming three-year tax period starting in 2024. This second election is essential for qualified entities looking to continue leveraging this federal tax strategy and must be made by submitting an election payment by March 15th, 2024.
What Is the Michigan Flow-Through Entity Tax?
The Michigan Flow-Through Entity (“FTE”) Tax was introduced by the State of Michigan to provide a solution for the limitations imposed on state and local income tax deductions at the federal level. This strategy offers business owners greater tax flexibility, enabling business owners to take advantage of deductions and credits on personal tax returns to reduce tax liability. Many Michigan flow-through entities opted to make their initial three-year elections starting in 2021, the earliest year in which elections were permitted by the state of Michigan. As these initial elections are set to expire at the end of the 2023 tax year, entities must act promptly to secure a new three-year election if they wish to maintain the benefits of this tax strategy from 2024 onwards.
Items To Consider Before the Election
It’s crucial for partnerships and S corporations to carefully evaluate whether making a second three-year Michigan FTE election is in their best interest. Key considerations include:
- Assess the benefits your organization has derived from the first election. Has it been beneficial for your company’s owners?
- Is your organization anticipating significant taxable income for the years 2024 through 2026?
- The decision to make a second election is binding for the entire three-year period and cannot be revoked. If it is not currently beneficial to make a second election beginning in 2024, your organization can reevaluate in future years to return to this strategy.
Important Reminders
We urge our clients to mark the deadline of March 15th, 2024, for submitting the election payment, which is different from and precedes the first quarter estimated payment due on April 15th for the 2024 tax year.
The FTE election must be made by submitting an electronic payment to the Treasury through Michigan Treasury Online (MTO). Any other manner of making the election (e.g., submitting a written election statement or making a payment outside of MTO) is not a valid election. Failure to meet the March 15th deadline may result in the State of Michigan denying the second election.
At Gordon Advisors, we are committed to serving as trusted advisors in navigating complex tax matters for our clients. If you have any questions or require guidance regarding the Michigan Flow-Through Entity Tax Election for 2024, our tax team is here to help. Reach out to our team to learn more.