- 2017’s Tax Cuts and Jobs Act (“TCJA”) significantly reduced the ability of taxpayers to take a deduction for state and local taxes
- Many states, including Michigan, enacted workarounds for these deductions by allowing pass-through entities to incur the tax, rather than their partners or members
- Michigan modified its rules to be more taxpayer friendly to those entities that wish to make a so-called pass-through entity tax (“PTET”) election
Background
2017’s Tax Cuts and Jobs Act imposed a limitation of $10,000 on the deductibility of state and local taxes on individual federal income tax returns. IRS Notice 2020-75, in turn, generally permitted pass-through entities treated as either partnerships or S corporations under federal and state law full deductibility for state and local taxes. As a result, many states, including Michigan, passed so-called PTET regimes, allowing partners and S corporation shareholders to receive the state and local tax deduction.
Modified Deadline
Under Mich. Comp. Laws Section 206.813, Michigan allows flow-through entities (“FTEs”)1 to make an election to pay the flow-through entity tax. Such an election is generally binding for the current tax year and the subsequent two tax years. Public Act 216 of 2024 of the Michigan Legislature (the “Act”) modified the timing of the election. Historically, the election was required to be made by the fifteenth day of the third month of the tax year. The new legislation extends the deadline to make the election to the last day of the ninth month after the end of the tax year. The change applies to tax years beginning on or after January 1st, 2024. Inasmuch as the deadline for tax year 2024 had already passed (March 15th under the old law for calendar year taxpayers), the modified law reopens the window to make a 2024 election (September 30, 2025, for 2024 for calendar year taxpayers).
A notice issued by the Michigan Department of Treasury notes that the effective date of the legislation is April 2, 2025; it advises taxpayers who now want to make an election should do it on or after April 2nd, 2025, and make the payments required to make the election for 2024. Those who properly elected and submitted payments under the old law will not be affected by this rule change.
Forvis Mazars Insight: This law change allows flow-through entities more time to make the flow-through entity tax election, rather than taking a leap of faith less than a quarter of the way through the tax year to which the election applies.
Penalties and Interest
The Act also applies new rules around penalties and interest related to estimated payments relative to the timing of the election. Historically, an entity making a flow-through entity election was required to make estimated payments during the tax year if its liability was reasonably expected to exceed $800 for the tax year; therefore, any unpaid or underpaid estimates were subject to penalties and interest. The Act changes the rules a little; penalties and interest will not apply to any quarterly estimated payments due before the taxpayer makes its election. Penalties and interest will apply to late estimates due on or after the election is made.
Credit Funding Deadline
The Act also modifies the so-called “credit funding deadline.” Under the original legislation, FTE owners only received credit on their returns for any payments made by the fifteenth day of the third month after the end of the FTE’s tax year. Under the act, for tax years beginning on or after January 1, 2024, FTE owners will receive credit on their returns if the payment is made before the date for the filing of the FTE’s annual return, including extensions.
Forvis Mazars Insight: The changes to the penalty and interest provisions and the credit funding deadline are equitable adjustments considering the other changes implemented by the Act.
How Forvis Mazars Can Help
PTE elections, in Michigan and elsewhere, can be complicated and highly technical. Forvis Mazars can help you navigate the impacts of such elections in order to determine a course of action.
- 1Michigan uses the term flow-through entities, whereas most states use the term pass-through.