MI Income Tax for Pass-Through Entities

| 8/25/2016

Like many states, Michigan historically has required pass-through entities doing business in the state to withhold income tax on behalf of nonresident owners. Michigan Public Act 158 eliminates the withholding requirement for tax years beginning on or after July 1, 2016.

For tax years that begin before July 1, 2016, a pass-through entity must continue to withhold on its owners’ distributive share of income for the entire tax year if it has nonresident owners who are individuals or it has not received exemption certificates from its members that are C corporations or other pass-through entities. Pass-through entities with a calendar or fiscal year beginning on or before June 30, 2016, still will be subject to the withholding regime and will need to file Form 4917, “Flow-Through Withholding Quarterly Return,” and Form 4918, “Annual Flow-Through Withholding Reconciliation Return,” for the year. Fiscal-year pass-through entities with tax years beginning on or after July 1, 2016, no longer will need to withhold on their nonresident owners.

Because there no longer will be withholding on nonresident owners, nonresident owners will need to make estimated payments to cover their Michigan tax liability. Individuals can elect to participate in a composite return in lieu of filing on their own. If the individuals elect to participate in a composite return, the pass-through entity will need to make estimated payments for the composite liability. Until a form is developed for the estimated payments, the Michigan Department of Treasury has issued a notice indicating that quarterly estimated payments for the composite return should be made using Form MI-1041ES, “Michigan Estimated Income Tax for Fiduciaries.”

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John P. Eardley
Managing Director
Shawn Kane
Shawn Kane
Partner, State and Local Tax Services Leader