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Michigan Flow-Through Entity (FTE) Tax Overview
https://www.michigan.gov/taxes/business-taxes/flowthrough-entity-tax/frequently-asked-
questions (visited 7/29/23)
2021 PA 135 introduces Chapter 20 within Part 4 of the Michigan Income Tax Act. Effective
January 1, 2021, the Michigan flow-through entity (FTE) tax is levied on certain electing
entities with business activity in Michigan.
The Michigan FTE tax:
• is elected and levied on the Michigan portion of the positive business income tax
base of a flow-through entity. This amount generally correlates to the business
income attributed to members who will be taxed in Michigan.
• allows a flow-through entity to elect to pay tax on certain income at the individual
income tax rate. If this election is made and the tax is paid by the entity, members of
the entity are eligible to receive a refundable income tax credit. Although the flow-
through entity effectively pays the income tax, members must comply with
reporting or return filing requirements under Part 1 or Part 2 of the Income Tax Act.
• requires the reporting of complementary entity-level and member-level
adjustments. The electing flow-through entity, based on the calculation and
payment of the Michigan FTE tax, must communicate certain credits and
adjustments to members, providing for proper reporting on Michigan individual
income tax returns.
• is designed to fulfill the scope and intended purpose of ensuring that tax on income
is paid only once-collecting the same amount of income tax from the business entity
as would otherwise be collected from the entity’s members. Generally, the tax is
designed to benefit members of the flow-through entity that are individuals, trusts,
or estates.
Flow-Through Entity Tax FAQ
• What tax year is the Michigan FTE tax effective?
The flow-through entity tax is retroactive to tax years beginning on and after
January 1, 2021. The continued levy of the tax is contingent upon the existence of
the federal state and local tax (SALT) deduction limitation codified within IRC
164(b)(6)(B).
• What is a flow-through entity and which business entities are eligible to
pay the Michigan FTE tax?
A flow-through entity is defined as an S corporation or a partnership under the
internal revenue code for federal income tax purposes.
The Michigan FTE tax is levied and imposed on certain electing flow-through
entities with business activity in Michigan.
The following types of common flow-through entities may elect to pay the Michigan
FTE tax:
1. Limited liability companies (LLCs) that file federal income tax returns as
partnerships.
2. Partnerships (including limited partnerships, limited liability partnerships,
and general partnerships).
3. S Corporations.
• Which business entities are not eligible to pay the Michigan FTE tax?
Businesses that are not flow-through entities — such as sole proprietorships or C
corporations — are not eligible to pay the Michigan FTE tax.
Certain types of flow-through entities are specifically excluded from paying the
Michigan FTE tax:
1. Publicly traded partnerships as defined under IRC 7704.
2. Flow-through entities subject to the financial institutions tax under Chapter
13 of Part 2 of the Income Tax Act.
3. Entities that are disregarded for federal income tax purposes, such as single
member LLCs.
4. LLCs that file federal income tax returns as corporations.
• How do flow-through entities make an election into the Michigan FTE tax?
The election must be made by submitting an electronic payment to the Treasury
through Michigan Treasury Online (MTO). Any other manner of making the election
(e.g., submitting a written election statement or making a payment outside of MTO)
is not a valid election.
The election is effective for three years: the tax year in which the payment is made
and the next two successive years. The election payment must be directed to the
initial year of the election. Once the election is made it is irrevocable.
A timely election payment must be received by the fifteenth day of the third month
of the flow-through entity’s tax year. Although special rules apply for the initial
implementation year, calendar year filers will ordinarily be required to make an
election by March 15 of the tax year.
• How is the Michigan FTE tax calculated?
For the same tax year under Section 51 of the Income Tax Act, the Michigan FTE tax
is levied on qualifying/electing entities at the same rate as Michigan individual
income tax (IIT) is levied on individuals. For example, the tax year 2021 tax rate for
Michigan FTE tax and IIT is 4.25%.
The Michigan FTE tax is levied only on the Michigan portion of the positive
“business income tax base” attributable to direct members of an electing flow-
through entity that are individuals, fiduciaries (i.e., estates or trusts), or other flow-
through entities. Any portion of the business income tax base attributable to direct
members that are insurance companies, financial institutions, or C corporations is
not subject to the Michigan FTE tax.
Electing flow-through entities must calculate the Michigan portion of the business
income tax base before adjusting for the portion that is taxable or nontaxable based
on attribution to their members.
• How is the business income tax base determined for the Michigan FTE tax?
The business income tax base refers to the flow-through entity’s federal taxable
income and any payments and items of income and expense that are attributable to
the business activity of the flow-through entity and separately reported to its
members less specific statutory adjustments and/or special additional adjustments
for a tiered structure.
The Michigan FTE tax is only levied on the positive business income tax base of an
electing entity. If the business income tax base is less than zero, then no tax is due in
that year.
The specific statutory adjustments include:
1. Interest income and dividends derived from obligations or securities of
states other than Michigan.
2. Income and losses derived from the sale or exchange of certain obligations of
the US government.
3. Charitable contributions.
4. Taxes on or measured by net income, including the Michigan FTE tax.
5. Guaranteed payments for services rendered by a member who is an
individual.
6. Tax refunds received under the city income tax and flow-through entity tax.
7. Income from and expenses of producing oil and gas.
• How is the business income tax base apportioned for the Michigan FTE tax?
The business income tax base of the flow-through entity is apportioned to Michigan
using a sales factor that is based on the ratio of sales sourced to Michigan to total
sales everywhere.
In determining the sales factor, sales of tangible personal property are typically
sourced to the state where the transfer of ownership occurs (i.e., where the
purchaser takes possession of property or where the property is delivered to the
purchaser). Sales other than sales of tangible personal property are sourced based
on the location of the relevant income-producing activity.
Most importantly, the apportionment rules for flow-through entities are the same
rules that apply to business income reported by individual members under Part 1 of
the Michigan Income Tax Act. The information used to apportion the business
income tax base under the Michigan FTE tax should therefore be the same
information reported by many flow-through entities to its individual members to
determine business income taxable in Michigan.
• Is a flow-through entity required to pay the Michigan FTE tax on income
attributable to direct members that are exempt from tax?
In some cases, yes. The Michigan FTE tax is levied on the portion of the “business
income tax base” attributable to any direct member that is an individual, fiduciary
(i.e., trust or estate), or another flow-through entity. There is no special adjustment
if such a direct member is exempt from tax by operation of federal or state law.
For example, an electing flow-through entity may have a member that is an
Employee Stock Option Plan (ESOP), which is a trust that is generally exempt from
tax under the Internal Revenue Code. The flow-through entity is required to pay the
Michigan FTE tax on the share of the business income tax base attributable to the
ESOP. In turn, the ESOP will receive a refundable Michigan FTE tax credit for its
allocated share of the Michigan FTE taxes levied and paid - and will be able to file an
income tax return in order to claim it.
• What are the relevant reporting requirements for flow-through entities
that have elected into the Michigan FTE tax?
Each tax year, on or before the Michigan FTE annual tax return due date, the flow-
through entity must separately report the following information to each member:
1. Information regarding the allocation and apportionment of the business
income tax base and the allocation and apportionment of income subject to
tax under Part 1 (i.e., the individual income tax) or Part 2 (i.e., the corporate
income tax), as applicable, of the Income Tax Act.
2. The member's allocable share of the reporting entity's taxes on or measured
by net income, including the Michigan FTE tax, that was required to be added
back in computing the flow-through entity's business income tax base.
3. The member's share of the reporting flow-through entity's refund of
Michigan FTE tax received during the tax year, if applicable.
4. The member's share of the following tax amounts, reported separately:
1. The tax imposed under the Michigan FTE tax for the tax year and paid
by the fifteenth day of the third month after the end of the tax year.
2. The Michigan FTE tax imposed for any prior tax year that was paid in
the current tax year excluding any amount reported under 4i for the
previous tax year.
3. The Michigan FTE tax allocated to the reporting flow-through entity
under either 4i or 4ii by other flow-through entities with tax years
ending on or within the reporting flow-through entity's tax year.
In determining a member's share of the tax items in #4 above, a flow-through entity
must base those amounts on the member's share of the income or gain generating
the flow-through entity tax that are included in the member's business income. For
example, if a member recognizes income, expenses, gains, or losses in proportions
other than pro rata based on ownership percentage, the tax allocated to that
member must be equal to that percentage.
• How does a flow-through entity provide information to members?
There are no statutory requirements related to how information must be
communicated to members of the flow-through entity. Flow-through entities may
provide the required information to its members in any reasonable manner,
including as separate statements or as notes attached to the Federal Schedule K-1.
• What is a tiered or indirect credit?
These terms can be used to describe a credit generated by an FTE taxpayer for
another flow-though entity, which is listed as a direct member on Form 5774, Part
2. That credit is passed through to the member flow-through entity’s owners and
each respective share is ultimately claimed by taxpayers subject to Michigan
individual income tax or corporate income tax (Part 1 or Part 2 of the Michigan
Income Tax Act). Those taxpayers own the credit-generating flow-though entity
indirectly, which is why their credits may be referred to as indirect credits. In
addition, this ownership structure is often referred to as a tiered structure and
therefore, creates what may be referred to as tiered credits.
• What support must be provided to a member to support their claim of an
indirect or tiered credit?
Documentation provided to a member to report that member’s share of FTE tax
credit and tax base adjustments must include the name and FEIN of the credit-
generating flow-through entity, and have credits and adjustments separately stated
by flow-through entity. For more information about the required reporting to
members, see Section I.E. of Treasury’s Notice Regarding the Implementation of the
Michigan Flow-Through Entity Tax. Importantly, these specific reporting
requirements apply to both electing and non-electing flow-through entities within a
tiered structure in order to allow the ultimate member to claim the credit and make
any return adjustments as necessary.
• What are the filing and payment due dates for the Michigan FTE tax?
Annual Returns
The annual return is due on the last day of the third month after the end of the tax
year (e.g., March 31 for calendar year filers).
A flow-through entity must pay, by the initial due date of the annual return, its
estimated unpaid tax liability for the tax year covered by an extension. Interest and,
if applicable, penalty, will accrue from the initial due date of the return until the tax
is paid.
An annual return must be filed by all electing flow-through entities. There are no de
minimis liability thresholds for return filing purposes (i.e., an annual liability of
$100 or less), and an annual return is required even if liability was paid in full
through estimated payments.
Any payments toward a tax year’s Michigan FTE tax liability made after the 15th day
of the third month after the tax year, will not qualify for a member credit for that
same tax year. Instead, those payments will be reported as credits eligible to be
claimed for members’ immediately succeeding tax year.
Estimated Tax Payments
Flow-through entities that elect to pay the Michigan FTE tax are required to make
estimated payments each year that their annual tax liability is reasonably expected
to exceed $800.
For calendar year filers, the estimates must generally be made in equal installments
on or before April 15, June 15, September 15, and January 15. For fiscal year filers,
the estimates must be made in equal installments on dates that correspond to the
due dates for calendar year filers.
• What formats can an electing flow-through entity use to file its Michigan
Flow-Through Entity Tax Annual Return (Form 5772)?
All Michigan FTE returns, including Form 5772, must be submitted electronically
through Michigan Treasury Online (MTO). Michigan FTE tax returns submitted
outside MTO will not be accepted.
• Can an electing flow-through entity amend its Michigan FTE tax annual
return?
Amended annual return functionality for Michigan FTE tax is scheduled to be
available on Michigan Treasury Online (MTO) in mid-December 2022. No additional
returns for the tax year should be submitted until that time, even if you discover an
issue with the original filing. All Michigan amended annual FTE tax returns will be
submitted electronically through MTO.
• What is entered on the Michigan Sales (line 1a) and Total Sales (line 1b) of
the Michigan Flow-Through Entity Tax Annual Return (Form 5772) if the
flow-through entity had no sales, only income derived from interest
and/or dividends?
For apportionment purposes, the interest is considered a “sale”. The source of the
sale is where the decision-making activities of the flow-through entity occur. If a
flow-through entity is managed from an office in Michigan, the interest would be
treated as a Michigan sale. If management of a flow-through entity occurs out of
state, then the interest would be sourced as an out-of-state sale.
• What methods can be used to make election, estimated, or annual Michigan
FTE tax payments?
All Michigan FTE tax payments must be submitted electronically through Michigan
Treasury Online (MTO).
Payments submitted outside MTO will not be considered for valid election into the
Michigan FTE tax.
Michigan FTE payments submitted outside MTO will not be accepted for estimated
or annual tax obligations.
• Is there a payment limit for electronic Michigan FTE tax payments?
