If you are a business owner in Michigan, you must be familiar with the concept of flow-through entity taxation. It is a method of taxation that allows business income to pass through to the owners and be taxed at their individual income tax rates. In this article, we will discuss everything you need to know about Michigan flow through entity tax in 2023.
What is a Flow-Through Entity?
A flow-through entity is a business structure that does not pay its income tax at the entity level. Instead, the income passes through to the owners and is taxed at their individual income tax rates. Examples of flow-through entities include partnerships, limited liability companies (LLCs), and S corporations.
Michigan Flow-Through Entity Taxation
In Michigan, flow-through entities are subject to a flow-through entity tax (FET). The FET is a tax on the entity’s Michigan taxable income, which is then passed through to the owners and included in their individual income tax returns. The FET rate is 6% of the entity’s Michigan taxable income.
Who is Subject to the FET?
All flow-through entities that have nexus with Michigan are subject to the FET. Nexus refers to a connection between the entity and the state, such as having employees or property in Michigan, or conducting business in the state.
How is the FET Calculated?
The FET is calculated based on the entity’s Michigan taxable income. Michigan taxable income is calculated by taking the entity’s federal taxable income and making certain adjustments, such as adding back federal deductions that are not allowed for Michigan tax purposes.
When is the FET Due?
The FET is due on the 15th day of the fourth month following the end of the entity’s tax year. For example, if the entity’s tax year ends on December 31st, the FET is due on April 15th of the following year.
Michigan Corporate Income Tax vs. FET
It is important to note that flow-through entities in Michigan are not subject to the state’s corporate income tax. Instead, they are subject to the FET as discussed above. This is different from C corporations, which are subject to the corporate income tax.
Michigan Business Tax (MBT) and FET
The Michigan Business Tax (MBT) was the state’s previous tax on businesses. It has since been replaced by the Corporate Income Tax (CIT) and the FET. If a flow-through entity was subject to the MBT, it may still have MBT credits that can be used to offset the FET.
In summary, Michigan flow-through entities are subject to the flow-through entity tax (FET), which is a tax on the entity’s Michigan taxable income. The FET is due on the 15th day of the fourth month following the end of the entity’s tax year. It is important to understand the FET and how it differs from the state’s corporate income tax and the previous Michigan Business Tax. By staying informed about Michigan taxation, business owners can ensure they are compliant with state tax laws.