Happy New Year! Gov. Whitmer has given Michigan residents a present in the form of an election to have pass-through entities pay, and deduct, state taxes paid on behalf of its pass-through owners, retroactively effective January 1, 2021.

This election removes these taxes from the individual owner’s $10,000 cap for state and local itemized taxes (for those who itemize) and allow for a deduction on the pass-through entity return of those taxes on your federal return.

There is no effect on your state taxes, as this will be an addback. The total savings is at most 1.58% of the pass-through entity’s taxable income for those in the highest federal bracket.

Below is a simple example of how this will work.

If you want to elect to have your pass-through business pay this tax, it will be made on the 2021 return when filed and paid at that time. If you are on a cash basis, the year the tax is paid is when you receive the deduction at the pass-through entity level. 

If you want to elect into this program and pay and deduct in 2021, you will need to pay through the Michigan Department of Treasury's web portal, Michigan Treasury Online. The online functionality is currently being established, and a Fast Pay option under Guest Services will be available on December 29, 2021.  

The deduction will be limited to the actual tax computed on the final, actual income, so amounts paid in excess will be refunded to the entity and not deductible.

More information can be found on the Treasury’s website.

Contact Bryan Bays at bbays@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.