A Michigan business makes the Michigan flow-through entity tax election by sending the Department of Treasury a payment at the 4.25% entity-level rate by the fifteenth day of the third month of its tax year, and that single payment locks the entity into the election for three consecutive tax years. The election shifts the state income tax from the owners’ personal returns to the entity itself, which converts it into a federal business deduction and steps around the individual SALT cap. It is not reversible mid-cycle, so the decision needs to be right before the first check goes out.
Which Entities Can Elect
The election is open to entities treated as flow-throughs for federal income tax purposes. In practice that means three groups:
- S corporations that have elected S status with the IRS.
- Partnerships, including general partnerships, limited partnerships, and limited liability partnerships.
- Multi-member LLCs that file federal returns as a partnership or as an S corporation.
Several entity types cannot elect. Sole proprietorships and C corporations are not flow-throughs and are out. Among flow-throughs, publicly traded partnerships as defined under IRC 7704, entities subject to Michigan’s financial institutions tax, disregarded entities such as single-member LLCs, and LLCs that file federal returns as corporations are all excluded.1Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
How to Make the Election
There is no separate election form. The election is made by submitting a timely payment to the Michigan Department of Treasury by the fifteenth day of the third month of the entity’s tax year. For calendar-year filers, that date is March 15.2Michigan Legislature. MCL 206-813 The payment itself is the election. Once accepted, it binds every member of the entity and applies to each member’s share of income, gain, loss, and deductions.
If the entity needs more time to file its annual return, the extension request must go through Michigan Treasury Online by the return due date, along with payment of estimated tax.1Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions An extension of time to file is not an extension of time to pay.
The Three-Year Lock-In
The election is irrevocable. It applies to the tax year in which the payment is made plus the next two consecutive tax years.1Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions An entity that wants to continue past that window must make a new election with a fresh timely payment. Nothing in the statute lets the entity back out midstream if ownership shifts, profits collapse, or federal rules change, so run the numbers over the full three-year horizon before electing rather than one year at a time.
What Gets Taxed and at What Rate
The rate is 4.25%, matching Michigan’s individual income tax rate.3State of Michigan. Flow-Through Entity Tax It applies to the Michigan portion of the entity’s business income tax base, which begins with federal taxable income and includes all business-activity income and expense items separately reported to members, less certain statutory adjustments.1Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
Only the share of that base attributable to direct members who are individuals, fiduciaries (estates or trusts), or other flow-through entities is subject to the FTE. Income attributable to corporate members is excluded, because those members pay Michigan’s corporate income tax on their share.
To determine the Michigan portion, the entity apportions its business income using a sales factor: Michigan-sourced sales divided by sales everywhere. These apportionment rules mirror those used by individuals reporting business income under Part 1 of the Michigan Income Tax Act.4State of Michigan. 5772, 2023 Michigan Flow-Through Entity Annual Return Instructions Entities operating entirely inside Michigan pay on 100% of the base. Multi-state entities need clean Michigan-sourced revenue records to defend the apportionment fraction.
Estimated Payments and the Annual Return
After electing, the entity owes quarterly estimated payments based on projected annual liability. For calendar-year filers, installments are due April 15, June 15, September 15, and January 15 of the following year.5State of Michigan: Treasury. Report and Pay FTE Fiscal-year filers use corresponding dates keyed to their year-end.
The annual return is Form 5772, the Michigan Flow-Through Entity Annual Return. For calendar-year filers it is due by March 31 following the close of the tax year, along with any remaining tax. Form 5772 reconciles estimated payments with actual liability and reports income, deductions, apportionment, and member-level detail.
One point of confusion worth flagging: Form 807 is the Michigan Composite Individual Income Tax Return, a separate filing used for nonresident members. An electing entity may still file Form 807 for participating nonresidents, but the FTE return itself is Form 5772, not 807.6State of Michigan. Composite – Frequently Asked Questions
Why Elect: the Federal Deduction
The reason to elect is federal. When a flow-through pays state income tax at the entity level, the IRS treats the payment as a deductible business expense. The entity deducts it in computing non-separately stated income, which reduces the federal taxable income flowing to owners on their Schedule K-1s. IRS Notice 2020-75 confirmed this treatment, describing these entity-level payments as “specified income tax payments” that are not counted against individual owners’ SALT limits. The notice applies to payments made on or after November 9, 2020, with reliance permitted for payments as far back as tax years ending after December 31, 2017.7IRS. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes
The Tax Cuts and Jobs Act of 2017 originally capped individual state and local tax deductions at $10,000. Legislation in 2025 raised that cap to $40,400 for most filing statuses in the 2026 tax year ($20,200 for married filing separately), with a phase-out beginning at $505,000 of income. The cap is scheduled to rise about 1% annually through 2029 before reverting to $10,000 in 2030. Because the entity-level FTE payment is a business deduction rather than a personal SALT deduction, it bypasses the cap. Owners who already exhaust the SALT cap with property and other state taxes still gain from the election, and high-income owners in the phase-out range gain the most.
How Members Get the Credit Back
When the entity pays, its members receive a refundable Michigan credit equal to their share of the FTE tax paid on their behalf. Members claim the credit on the Michigan individual income tax return (Form MI-1040), a fiduciary return (Form MI-1041), or a composite return (Form 807).8State of Michigan. General Flow-Through Entity Tax Credit Because the credit is refundable, any amount above the member’s Michigan liability comes back as a refund.
The full loop: the entity pays 4.25% to Michigan and takes a federal deduction, and each member takes a dollar-for-dollar Michigan credit against personal state tax. Combined federal and state tax drops.
Penalties for Missing the Mechanics
Michigan penalizes at two levels. For estimated payments, the penalty is 25% for failure to file estimates, or 10% of underpaid tax per quarter, with interest accruing at 1% above the prime rate.9State of Michigan. How Are Penalty/Interest Charges Calculated for Failure to File or Underpayment of Estimated Payments
For the annual return, a late file or late pay triggers 5% of the tax due for the first two months and an additional 5% for each additional month or fraction of a month, up to 25%. Interest on unpaid tax runs from the original due date.10Michigan Legislature. MCL 205-24 – Revenue Division of Department of Treasury The two sets of penalties stack, so an entity that underpays estimates and files the return late pays on both fronts.