Understanding Michigan Flow Through Entity Tax

Introduction

If you’re a business owner in Michigan, it’s important to understand the state’s tax laws. One of the most important tax laws in Michigan is the flow-through entity tax. This tax applies to certain types of businesses that pass their income through to their owners. Whether you’re a new business owner or you’ve been in business for years, it’s important to understand how this tax works and what it means for your business.

What is a Flow-Through Entity?

A flow-through entity is a type of business that passes its income through to its owners. This means that the business itself doesn’t pay taxes on its income. Instead, the owners of the business pay taxes on the income that they receive from the business. Examples of flow-through entities include partnerships, LLCs, and S corporations.

What is the Michigan Flow Through Entity Tax?

The Michigan flow-through entity tax is a tax that applies to certain types of flow-through entities. This tax was created in 2018 as part of a package of tax reforms in Michigan. The tax applies to partnerships, LLCs, and S corporations that have income that is passed through to their owners.

How Does the Michigan Flow Through Entity Tax Work?

The Michigan flow-through entity tax is calculated based on the business’s total income that has been passed through to its owners. The tax rate is 6% of this income. However, there is a cap on the amount of tax that a business can pay. The cap is $1.2 million per year. This means that if a business’s income that is passed through to its owners is greater than $20 million per year, it will only pay the maximum of $1.2 million in flow-through entity tax.

Who Needs to Pay the Michigan Flow Through Entity Tax?

Not all flow-through entities need to pay the Michigan flow-through entity tax. The tax only applies to businesses that have income that is passed through to their owners and that also have nexus in Michigan. Nexus means that the business has a presence in Michigan, such as an office, employees, or property.

How to File the Michigan Flow Through Entity Tax?

To file the Michigan flow-through entity tax, a business needs to complete and file Form 807. This form is due on or before the 15th day of the fourth month following the end of the business’s tax year. For example, if a business’s tax year ends on December 31st, the form is due on April 15th.

What Are the Penalties for Not Paying the Michigan Flow Through Entity Tax?

If a business fails to pay the Michigan flow-through entity tax on time, it will be subject to penalties and interest. The penalty for late payment is 5% of the amount of tax that is due, plus an additional 1% for each additional month that the tax goes unpaid. Interest is also charged on the unpaid tax at a rate of 1% per month.

Conclusion

Understanding the Michigan flow-through entity tax is important for any business owner in the state. By knowing how this tax works and what it means for your business, you can ensure that you are in compliance with the law and avoid penalties and interest. If you have any questions about the Michigan flow-through entity tax, it’s always best to consult with a tax professional who can help you navigate the complexities of the tax code.