What You Need to Know! Michigan SALT Cap Workaround Details
This article appeared in the March/April 2022 issue of MiMfg Magazine. Read the full issue and find past issues online.
Michigan manufacturers should be aware of state and local tax changes, among them the State and Local Tax (SALT) Cap Workaround signed into law by Governor Gretchen Whitmer in December 2021. Public Act 135 of 2021 avoids the $10,000 limit on individual deductions for state and local taxes at the federal level.
What you should know:
This is effective for tax years beginning on and after 1/1/21
The rules allow for certain flow-through entities to make an election to pay a pass-through entity tax (PTE)
It applies to flow-through entities defined as S-corporations and entities treated as partnerships under the internal revenue code, but not publicly traded partnerships or disregarded entities
Flow-through entities may elect to file a return and pay the Michigan tax. In doing so it becomes an entity-level business expense that is deductible from business income. This reduces the federal taxable income that flows to the owner’s return, avoiding the state and local tax cap on itemized deductions. The owner of the flow-through entity can then claim a credit for their share of the Michigan taxes paid on their personal Michigan return. Any excess tax is refundable to the taxpayer; however, no interest is available on refunds related to the credit for tax years ending in 2021.
The Michigan Department of Treasury stated that flow-through entities wishing to make the election must do so online by making a payment, through Michigan Treasury Online (MTO). The election is irrevocable for the next two subsequent tax years. In calculating the tax at the entity level, the tax is only computed on the business income tax base allocated to individuals, flow-through entities, estates or trusts and excludes the business income tax base allocable to corporations, insurance companies, or financial institutions.
The election for a tax year is due on or before the 15th day of the third month of that tax year. However, for any tax year beginning in 2021, the election must be made 4/15/22. Calendar year taxpayers not planning to make the election for the 2021 tax year, but intending to in 2022, must make the election by 3/15/22.
Note that estimates are due April 15, June 15, September 15 and January 15. The IRS issued Notice 2020-75 stating regulations will soon clarify that state and local taxes imposed on a qualifying pass-through entity would be deductible in computing federal taxable income in the year of payment. This language implies that electing entities should make the estimates before the end of the tax year.
An estimated 20 states have adopted SALT Cap workaround legislation. Each has its own rules related to elections, due dates, and eligibility. For businesses filing in multiple states, it is important to analyze whether it would be beneficial to make the election for the state and ensure that deadlines aren’t inadvertently missed.
Guidance related to the PTE which can be found at michigan.gov/taxes or get information about the new Michigan SALT Cap workaround from your business tax advisor.
Clayton & McKervey, P.C. is an MMA Premium Associate Member and has been an MMA member company since February 2018. Visit online: claytonmckervey.com.
About the Author
Sue Tuson is a Shareholder with Clayton & McKervey. She may be reached at 248-208-8860.