Last minute rule changes could affect tax payments made by partnerships and S-Corps

Michigan Governor Gretchen Whitmer recently signed into law the ability for pass-through entities (partnerships and S-Corps) to elect and pay an entity-level tax.  This would allow for the pass through business owners to take a state income tax deduction at the federal level, and thus by-pass the limitation on Schedule A.  The pass-through owners would then get a refundable credit on their MI-1040 to offset against their MI taxes.

A few things to note about the change:

  • If the business is a cash-basis taxpayer and wants to take advantage of this for 2021, then a payment MUST be made by 12/31 and through an MTO account.
    • Caveat: MTO is not yet set up for this.  A FastPay option at the MTO site will be available as of 12/29/21, giving taxpayers two days to make the payment.
    • The tax is 4.25% of the business income after certain adjustments (such as add back all state income taxes deducted at the federal level, etc.)
    • By making such a payment though, the business would also be treated as making the election for the PTE tax.
  • The election is irrevocable for the year made, plus two subsequent years.
  • For 2021, a PTE tax return and payment is due by 4/15/22, and then thereafter it is due March 15th
    • For 2022 and after, quarterly estimates will be required.
  • For the MI-1040 underpayment penalty, it’s not clear if the payment will be considered as an estimate or as withholding.

Guidance is expected in January 2022.  For now, speak to your ShindelRock tax professional to evaluate if this new payment option is right for your business.