Michigan Income Tax Filing Requirements of Flow-Through Entities after Repeal of Flow-Through Withholding (3/15/18)
Flow-Through Withholding (FTW) – FTW was repealed on June 9, 2016, when PA 158 was signed into law. Under PA 158, flow-through entities are no longer required to withhold income tax on members’ distributive share of income or file Michigan Flow-Through Withholding Quarterly Returns (Form 4917) or an Annual Flow-Through Withholding Reconciliation Return (Form 4918) for tax years that begin on or after July 1, 2016. The individual or corporate members with a Michigan filing requirement are responsible for filing and remitting their own estimated taxes when they expect to owe Michigan tax. Nonresident individual members may not have to pay estimated tax if the flow-through entity files a composite return on their behalf.
Michigan Composite Individual Income Tax Return (Form 807) – Form 807 is used to report and pay individual income tax under Part 1 of Public Act 281 of 1967, as amended. It is a collective individual income tax filing of participating nonresident members, filed by a flow-through entity on behalf of those nonresident members. The composite return should only be filed on behalf of two or more nonresident members subject to Michigan Individual Income Tax. This return is not an entity-level filing for income tax imposed on the flow-through entity. A flow-through entity – which does not include an entity that files federally as a C-corporation – currently has no return filing requirements for Michigan income tax.
A flow-through entity is not required to file Form 807. Nonresident members of a flow-through entity may elect to have the flow-through entity file a composite return in lieu of the members filing Individual Income Tax Returns (Form MI-1040). All nonresident members of the flow-through entity do not have to participate. A flow-through entity that does business in Michigan may file this return if it is filing on behalf of two or more nonresident individuals, partners, shareholders or members. A flow-through entity in a tiered structure may also be eligible to file a composite return on behalf of the ultimate owners who are nonresident individuals. A flow-through entity may not file on behalf of a member that is a C-corporation or a member that files federally as a C-corporation. The ultimate individual owners must be identified.
The individual income tax filing obligation of a member is satisfied when the member participates in a composite filing only if the member has no other Michigan-sourced income. The filing entity and participating members must agree to comply with the participation and reporting to member requirements as described in the Form 807 instructions.
Estimated Tax - Michigan Composite Individual Income Tax Return (Form 807) – If the flow-through entity intends to file a Michigan Composite Individual Income Tax Return (Form 807), the flow-through entity may file and remit estimated taxes on behalf of participating members who are nonresident individuals. Estimated vouchers and payments are required if the annual income tax liability for each participant is expected to exceed $500 after exemptions and credits.
The estimated payments must be remitted with an Estimated Income Tax Voucher for Fiduciary and Composite Filers (Form MI-1041ES) with the name of the flow-through entity and the flow-through entity’s federal employer ID number (FEIN). Estimated payments should only be remitted for those nonresident individual members who will participate on the Composite Return (Form 807). Flow-through entities with a calendar tax year must file vouchers and pay quarterly estimated tax by April 15, July 15, October 15, and January 15. Flow-through entities that are not using a calendar year must file vouchers and pay quarterly estimated tax on the appropriate due dates that, in the flow-through entities’ fiscal year, correspond to the calendar year (the first payment is due on the 15th day of the fourth month after the fiscal year ends). Fiscal year filer due dates apply regardless of the tax years of the participants.
Each member who does not participate in a composite filing is responsible for filing and remitting their own required estimated taxes for the flow-through income. A flow-through entity may elect to make separate voluntary estimated income tax payments on behalf of each member who is an individual using an Estimated Individual Income Tax Voucher (MI-1040ES) and that member’s Social Security number.
Michigan Corporate Income Tax (CIT) – Under the CIT, a taxpayer is defined as a corporation, insurance company, financial institution, or unitary business group. Flow-through entities, including S-corporations, partnerships, and trusts, generally are not taxpayers under the CIT, unless the flow-through entity elects or is required to file as a C-corporation for federal tax purposes or otherwise constitutes an insurance company or financial institution.
Reporting Requirements to Members – Regardless of the withholding requirement repeal, a flow-through entity must continue to report certain information to its members, because both individuals and CIT taxpayers require this information to complete their income tax returns. A flow-through entity may use any method to report the information to its members, but the Department of Treasury recommends that the information be provided as a supplemental attachment to the member’s federal Schedule K-1.
The following information must be conveyed:
- The FEIN of the flow-through entity.
- The tax year of the flow-through entity.
- For members subject to individual income tax, the member’s distributive share of taxable income attributable to the flow-through entity. For members subject to CIT, the member’s distributive share of business income and the member’s share of statutory additions and subtractions before apportionment, attributable to the flow-through entity.
- The amount of the flow-through entity’s sales that are sourced to Michigan.
- The flow-through entity’s total sales.
- For members that are corporations or other flow-through entities, the amount of the flow-through entity’s gross receipts. Corporation members will report their proportionate share of allocated or apportioned gross receipts from flow-through entities on their CIT returns.
- For nonresident individual members that will participate in a Composite Individual Income Tax Return (Form 807), the member’s share of the tax liability paid by the flow-through entity on the composite return.
Individual Income Tax 517-636-4486
Corporate Income Tax 517-636-6925