On Dec 20 Governor Whitmer joined several other states that enacted a work-around to the federal SALT Cap for owners of pass-through entities (Partnerships and S Corporations). If you are not familiar with the limitations that the SALT cap has placed on taxpayers, here’s a quick summary.
- Prior to 2018, taxpayers who itemized their deductions were able to deduct state and local taxes
- As of 2018, The Tax Cuts and Job Act capped the state and local tax deduction at $10,000
- As a result, itemizing taxpayers with large state and local taxes are paying more in federal taxes because their deductions are now limited
- In particular, owners of pass-thru companies pay considerable state income taxes on their business income. Under current tax laws, they may be unable to deduct all the state income taxes they paid, resulting in higher federal taxes.
Michigan’s new law allows business owners to elect to pay state income tax on their business income as an entity. The Michigan taxpayers can receive an income tax credit for their portion of the tax on their individual state tax return. In addition, the IRS allows the pass-thru entity to deduct the state taxes paid on the federal partnership or S Corporation tax return, without the limitations of the SALT Cap. The election for 2021 must be made by April 15, 2022 and cannot be revoked for 3 years. The entity will pay a tax rate of 4.5% on their Michigan income.
The benefits of this new law will vary for each taxpayer so an analysis may be needed to determine when and if the election should be made. Reach out to your HAS advisor if you need assistance completing this analysis.
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