SALT Cap Workaround Bill for Flow-Through Entities

On December 20, Governor Whitmer signed Michigan House Bill 5376 into law. The “SALT Cap Workaround” will allow Michigan income tax to be calculated and paid at the entity level for flow-through entities (i.e., partnerships and S corporations), if an election is made. The flow-through entity tax rate will be the same as the Michigan individual income tax rate, 4.25%. Business owners of a flow-through entity who make this election will be able to claim a tax credit equal to their allocated share of the tax paid by the flow-through entity.

The Tax Cuts & Jobs Act of 2017 capped the deduction for state and local taxes at $10,000. This bill is a response to help Michigan business owners impacted by that limitation. Business owners would benefit on the federal level by being able to deduct state tax paid in full on the entity’s federal return, thereby realizing that full deduction instead of being subject to the 10% cap if they paid at the individual level.

For tax years beginning January 1, 2021, flow-through entities will have until April 15, 2022, to make the election. Once selected, the election will be irrevocable for the next two tax years. 

The Michigan Department of Treasury will administer the flow-through entity tax. Forms to make the election and remit the tax are not yet available. 

Businesses should evaluate their tax situations when electing a flow-through entity tax for any SALT (State And Local Tax) cap workaround. Michigan is now one of several states that have enacted legislation in response to the SALT cap. If you have questions about the Michigan House Bill 5376 or flow-through entity tax elections for other states, please contact your Yeo & Yeo tax professional.