On December 20, 2021, Governor Gretchen Whitmer signed legislation (H.B. 5376) allowing owners of S corporations and partnerships (including limited liability companies taxed as partnerships) to pay their state and local taxes at the business entity level instead of individually.
For tax years beginning in 2021, Michigan pass-through entities can make an election to pay a 4.25% income tax, which can be taken as a tax credit on the owner’s individual Michigan tax return. Michigan follows the trend of several other states in an attempt to create a workaround to the current federal limitation of $10,000 for individual taxpayer deductions on state and local taxes. This bill is expected to save Michigan pass-through entity owners roughly $200 million annually in federal taxes.
This legislation allows for an election to be made retroactively for the 2021 tax year. Pass-through entities intending to make such election for 2021 must do so by April 15, 2022. This initial election is irrevocable for the two subsequent tax years and a separate election will need to be made for future years if the entity wants the election to continue. For cash basis taxpayers this may be time sensitive. Even though a taxpayer may have until April 15, 2022 to make the election, in order to claim deduction for 2021 payment needs to be made by December 31.
