Michigan has new tax legislation on the books after Governor Whitmer signed H.B. 5376 allowing pass-through entities (LLCs, S-Corps, etc.) to pay and deduct state and local income taxes at the business-entity level instead of individual tax returns (both rates are currently 4.25%).
The new tax mirrors the State and Local Tax (SALT) cap workaround taxes enacted by several other states that are designed to avoid a $10,000 federal limit on individual itemized deductions for state and local taxes. Further, the bill should benefit local business owners and level the playing field with competing out-of-state businesses, most notably by saving roughly 240,000 pass-through entity owners subject to tax in Michigan an estimated $200 million in federal taxes annually. According to a legislative bill analysis, the new law will have no impact on state revenue, with the exception of incremental administration costs.
While an entity’s tax election will be irrevocable for a 3-year filing period, it’s available retroactively for years beginning in 2021. Annual returns are generally due by March 31 unless extended, but the election can be made for 2021 until April 15, 2022. The new law generally requires estimated payments and imposes penalties and interest for underpayment of those estimated taxes, but Treasury has indicated that no penalties will be imposed on pass-through entities that make the election for 2021 and pay the new 4.25% tax when filing their annual return by April 15, 2022.
We encourage you to speak with your tax professional and a Canopy Wealth Advisor to explore your options and make the most of this opportunity.