Composite Returns FAQ

FAQ
1. What are the Terms/Definitions for the Composite Individual Income Tax Return?

Flow-through entity (FTE) - an entity that, for that tax year, is an S corporation, a general partnership, a limited partnership, a limited liability partnership, or a limited liability company that is not taxed as a C corporation for federal income tax purposes for that tax year. FTE does not include a publicly traded partnership or a disregarded entity for federal income tax purposes. MCL 206.12(1)

Intermediate FTE - an FTE in a tiered structure, that has an interest in another FTE.

Member of an FTE - an individual; estate; trust; or intermediate FTE.

Nonresident member - An individual who is not domiciled in this state; nonresident estate or trust; or intermediate FTE with a nonresident ultimate owner. MCL 206.12(5)

Participant - A nonresident member who has elected to participate in a composite return.

Ultimate owner - An individual, estate, or trust that has an interest in an FTE or intermediate FTE.

Tiered entities - An FTE is part of a tiered structure if it has one or more members that are also FTE’s. A tiered structure consists of a source FTE and one or more intermediate FTEs.  The intermediate FTE receives income from the source FTE and the income is passed through to the ultimate owner(s).

Corporation - any entity that is required to or has elected to file as a C corporation for federal income tax purposes for that tax year. MCL 206.6(3)

Distributive Share - A member’s share of business income reported to the member on a federal Schedule K-1.

Business Income - For an FTE, business income includes payments and items of income and expense that are attributable to business activity of the FTE and separately reported to the members, including portfolio income. MCL 206.4 

 
2. What is a composite return?

A Michigan Composite Individual Income Tax Return (Form 807)  is a collective individual income tax filing for two or more participating nonresident members filed by the flow-through entity (FTE). This form is used to report and pay individual income tax under Part 1 of Public Act 281 of 1967, as amended. An intermediate FTE may elect to participate on behalf of its nonresident members, if its ultimate owner(s) can be identified.  Participation in a composite return will eliminate the need for an individual ultimate owner to file a Michigan Individual Income Tax Return (Form MI-1040), when the ultimate owner has no other Michigan-sourced income. 

A C corporation or an entity that files federally as a C corporation is not eligible to participate in the composite return.

This return is not an entity-level filing for tax imposed on the FTE.

3. Is a composite return required?

No, a Michigan Composite Individual Income Tax Return (Form 807) is optional.  A flow-through entity may file a composite return on behalf of its nonresident members who elect to participate or each individual member must file a Michigan Individual Income Tax Return (Form MI-1040), Michigan Nonresident and Part-Year Resident Schedule (Schedule NR)Schedule 1 and all other applicable schedules for a complete Michigan filing.

4. Who may file a composite return?

A flow-through entity (FTE) that has generated Michigan taxable income (loss) may choose to file a Michigan Composite Individual Income Tax Return (Form 807) on behalf of its nonresident members who elect to participate. An intermediate FTE may also be eligible to file a composite return (See “May an intermediate flow-through entity file a composite return?”).

5. May an intermediate flow-through entity file a composite return?

Yes, an intermediate flow-through entity (FTE) that generated its own income or loss and has two or more participating nonresident members may file its own composite return, even if the intermediate FTE participated in another composite return.

If an intermediate FTE participated in another FTE’s composite return, it should not include any income or tax paid on its behalf with the other FTE’s composite return.

6. Who may participate in a composite return?

A participant in a Michigan Composite Individual Income Tax Return (Form 807) must be a nonresident member.  A nonresident member is an individual who is not domiciled in this state; a nonresident estate or trust; or intermediate flow-through entity (FTE) with a nonresident ultimate owner.

For each participating intermediate FTE include a Tiered Structure Schedule from the source FTE to the ultimate owner, with the following:

  • Details for each tier of the tiered structure:
    • FTE name, FEIN and ownership percentage for each tier
  • Details for each participating ultimate owner:
    • Name, address, account number, distributive share of Michigan income, tax and ownership percentage
7. Do all nonresident members have to participate in a composite return?

No, a nonresident member can choose not to participate in a Michigan Composite Individual Income Tax Return (Form 807) and can file their own Michigan Individual Income Tax Return  (Form MI-1040), Michigan Nonresident and Part-Year Resident Schedule (Schedule NR), Schedule 1 and all other applicable schedules for a complete Michigan filing.

8. Can a nonresident trust participate in a composite return?

Yes, a nonresident trust can be a participant in a Michigan Composite Individual Income Tax Return (Form 807), for the trust only.  Beneficiaries of a nonresident trust are not considered “members” of the trust for composite return purposes and may not be included in a composite filing.

Note: Any payments made on behalf of a trust may not be claimed by the beneficiaries of the trust. Beneficiaries of a trust should remit their own applicable quarterly estimated income tax payments on a Michigan Estimated Individual Income Tax Voucher (MI-1040ES).

9. What if I participated in a composite return and I have Michigan income from other sources?

Nonresidents that participated in a Michigan Composite Individual Income Tax Return (Form 807) and have other Michigan-sourced income which requires them to file a Michigan Individual Income Tax Return (Form MI-1040) return may not subtract the income reported on the composite return. Instead, taxpayers may claim a credit on their MI-1040 for their share of the tax paid on a composite return.  The credit should be entered on the MI-1040 and reported as tax withholding. Taxpayers may be required to provide supporting documentation of the amount claimed. Composite participants should be provided with this information by the entity filing the composite return.

10. What income is reported on the composite return?

A flow-through entity (FTE) reports the distributive share of income (loss) of participating nonresident members by using its federal return and adjusting to Michigan taxable income through additions, subtractions, allocation and/or apportionment.  The return allows for a separation of income (loss) attributable to Michigan resident members and/or nonparticipating nonresident members, if any exist, this ensures that only the income of the participating nonresident members is being taxed on the return.

The Michigan Composite Individual Income Tax Return (Form 807) is a calendar year return for nonresident individuals.  If the filing FTE has a fiscal tax year for federal purposes, it would use the appropriate Form 807 that corresponds to the year the ultimate owners will include the FTE’s income in their federal individual income tax filing.

11. Can a net operating loss (NOL) deduction be claimed on a composite return?

Yes, an NOL deduction may be claimed on a Michigan Composite Individual Income Tax Return (Form 807), but only to the extent that it is attributable to the same participants from the loss year and in the same proportions of ownership.

12. What is the due date for a composite return?

A Michigan Composite Individual Income Tax Return (Form 807) is generally due on April 15th after the close of the calendar year. The due date of composite return corresponds with the due date of the Michigan Individual Income Tax Return (Form MI-1040).

If a flow-through entity cannot file by the due date, a request for an extension of time to file can be made by filing an Application for Extension of Time to File Michigan Tax Returns (Form 4) on or before the original due date of the composite return.

 

13. Which tax year composite form should be used by a fiscal tax year flow-through entity?

The Michigan Composite Individual Income Tax Return (Form 807) is a calendar year individual income tax filing for two or more nonresident members. A fiscal year flow-through entity (FTE) will file a composite return for the calendar year in which the fiscal year ends.  This will be a different year form than the FTE’s federal return. 

Example:  A fiscal year FTE with a year-end of September 30, 2019 will file a 2019 composite return even though the FTE’s federal filing will be a 2018 return. 

14. What documentation may be required when filing a composite return?

A flow-through entity (FTE) may be required to include only the following items, as applicable, with its Michigan Composite Individual Income Tax Return (Form 807).

  • Copy of U.S. Form 1065 (5 pages) or U.S. Form 1120S (5 pages)

  • Michigan Schedule of Apportionment (Form MI-1040H)

  • Completed Schedule A, Schedule of Participants

    • Tiered Structure Schedule

  • Completed Schedule B, Schedule of Nonparticipants

  • Completed Schedule C, Schedule of Michigan Residents

  • Statement signed by an authorized officer or general partner certifying that each participant has been informed of the terms and conditions of this program of participation

  • A copy of Form 4.

 

15. What information must a flow-through entity report to participants in a composite return?

The following information must be reported to each participant listed on the Michigan Composite Individual Income Tax Return (Form 807):

  • FEIN of the FTE

  • Tax year of the FTE

  • The participant’s distributive share of income allocated or apportioned to Michigan from Schedule A, Schedule of Participants, Column 2

  • The participant’s share of tax liability on the composite return filed by the FTE form Schedule A, Schedule of Participants, Column 3

  • The FTE’s Michigan sales and the FTE’s total sales everywhere

  • The participant’s prorated exemption allowance as computed on line 47 of the composite return.

The FTE may use any method to report the necessary information to the participants so long as it conveys the information listed above.  Treasury recommends that the FTE provides the information to the participants as a supplemental attachment to their federal Schedule K-1, which provides the participant with the information necessary to file a Michigan Individual Income Tax Return (Form MI-1040) if the ultimate owner has other Michigan-sourced income.

16. What information must a flow-through entity report to nonparticipants of a composite return?

The following information must be conveyed to each nonparticipant listed on the Michigan Composite Individual Income Tax Return (Form 807):

  • The FEIN of the flow-through entity (FTE)

  • The tax year of the FTE

  • The amount of estimated tax paid by the FTE on behalf of that member

  • The member’s share of taxable income attributable to the FTE

  • The FTE’s Michigan sales and the FTE’s total sales everywhere

The FTE may use any method to report the necessary information to its members so long as it conveys the information listed above. Treasury recommends that the FTE provides the information to the members as a supplemental attachment to their federal Schedule K-1, which provides the member with the information necessary to file a Michigan Individual Income Tax Return (Form MI-1040).

17. Are estimated tax payments required for flow-through entities filing composite returns?

Flow-through entities (FTE)s who intend to file a Michigan Composite Individual Income Tax Return (Form 807) may be required to remit estimated income tax payments with a Michigan Estimated Income Tax Voucher for Fiduciary and Composite Filers (Form MI-1041ES).  For each quarter, the FTE should file one Form MI-1041ES with the quarterly estimated payment for all participants whose share of annual income tax liability is expected to exceed $500 after exemptions and credits. Form MI-1041ES must be completed with the name of the FTE and the FTE’s federal employer ID number (FEIN) that will claim the estimated payments on their composite return. Check the box for “Composite” to indicate the Filer Type. Do not submit estimated payments with Form MI-1041ES for members who are not participating in the composite return.

FTEs using a calendar tax year must file vouchers and remit quarterly estimated payments with Form MI-1041ES by April 15, June 15, September 15, and January 15.

FTEs with a fiscal tax year must remit quarterly estimated tax payments with Form MI-1041ES using the due date that corresponds with its fiscal tax year end.  The first estimated payment is due on the 15th day of the fourth month after the prior fiscal tax year ends.  Quarterly estimated payment due dates for a fiscal tax year filer apply regardless of the participants’ filing tax year.

The Michigan Income Tax Act requires every person to remit quarterly estimated tax payments if that person's income tax liability, after credits and withholding, is expected to exceed $500 for their tax year. MCL 206.301(1)

Failure to remit required estimated tax payments may result in the Michigan Department of Treasury charging penalty and interest.

The Michigan Income Tax Act (MCL 206.301(11)), provides that the amount of an installment of estimated tax shall be computed in the same manner as provided in the Internal Revenue Code.  If an individual owes more than $500, they may not have to make estimated tax payments if they expect their withholding to be at least:

  1. 90 percent of the tax shown on the return for the current taxable year, or

  2. 100 percent of the tax shown on the return for the preceding taxable year, or

  3. 110 percent of the tax shown on the return for the preceding taxable year, if the preceding year’s adjusted gross income is more than $150,000 ($75,000 for married filing separately).

Penalty is 25 percent of the tax due (with a minimum of $25) for failing to remit estimated tax payments or 10 percent (with a minimum of $10) for underpaying estimated tax or remitting estimated tax payments late.  Interest is one percent above the prime rate and is computed monthly.  The rate is adjusted on July 1st and January 1st.

18. Are estimated tax payments required for nonparticipating individuals?

Members who do not participate in a composite return are required to remit applicable quarterly estimated income tax payments in the same manner as all other individual income tax filers.  Quarterly estimate tax payments may be remitted online using the Michigan Department of Treasury’s e-Payments system or by mailing a payment with an Estimated Individual Income Tax Voucher (MI-1040ES).

A flow-through entity (FTE) may elect to remit quarterly estimated tax payments on behalf of its nonparticipating members. Estimated tax payments may be remitted online through the Michigan Department of Treasury’s e-Payments system or by mailing a payment with an Estimated Individual Income Tax Voucher (MI-1040ES) using the nonparticipating member’s name and social security number.  Estimated tax payments remitted by an FTE on behalf of a nonparticipating member would be claimed as estimated tax on that member’s Michigan Individual Income Tax Return (Form MI-1040).

The Michigan Income Tax Act requires every person to remit quarterly estimated tax payments if that person's income tax liability, after credits and withholding, is expected to exceed $500 for their tax year. MCL 206.301(1)

Failure to remit required estimated tax payments may result in the Michigan Department of Treasury charging penalty and interest.

The Michigan Income Tax Act (MCL 206.301(11)), provides that the amount of an installment of estimated tax shall be computed in the same manner as provided in the Internal Revenue Code. If an individual owes more than $500, they may not have to make estimated tax payments if they expect their withholding to be at least:

  1. 90 percent of the tax shown on the return for the current taxable year, or

  2. 100 percent of the tax shown on the return for the preceding taxable year, or

  3. 110 percent of the tax shown on the return for the preceding taxable year, if the preceding year’s adjusted gross income is more than $150,000 ($75,000 for married filing separately).

Penalty is 25 percent of the tax due (with a minimum of $25) for failing to remit estimated tax payments or 10 percent (with a minimum of $10) for underpaying estimated tax or remitting estimated tax payments late. Interest is one percent above the prime rate and is computed monthly. The rate is adjusted on July 1st and January 1st.

19. What withholding is reported on the composite return for tax years 2012-2016?

Flow-through withholding was repealed in 2016 and is no longer required for entities with tax years beginning after June 30, 2016.  Flow-through withholding will not be claimed on composite returns filed for tax years 2018 and beyond.

On returns for tax years before 2018, fiscal composite filers who were subject to flow-through withholding should report the withholding attributable to the participating members.  This will be each participating member’s share of withholding paid and reconciled on Michigan Annual Withholding Reconciliation Return (Form 4918), excluding any withholding refunded to the flow-through entity (FTE). Withholding refunded to the FTE on Form 4918 should never be included in the amount of withholding reported to members at year-end. 

The withholding allocated to those members that participate in the composite return is claimed on the composite return, just as an individual would claim his share as a credit on Michigan Individual Income Tax Return (Form MI-1040) if the member was not participating.  Each participant’s share of withholding listed in Part 4 of Form 4918 is reported on the Michigan Composite Individual Income Tax Return (Form 807), Schedule A (Schedule of Participants).