Flow-Through Entity Tax Frequently Asked Questions (FAQ)

For any three-year election made after the annual return due date of the first tax year, the taxpayer’s annual liability for its first tax year is due the day it elects into the tax.

Generally, no. Because a flow-through entity is not a “taxpayer” until it validly elects, it is not required to make estimated payments that would have been due before the election is made. Effective April 2, 2025, MCL 206.831(2)(b) requires that interest and penalty not be assessed for any quarterly estimated payment due prior to the taxpayer making the election to pay the FTE tax. An exception may apply where Treasury determines that the deficiency is due to an intentional disregard of the law. Based on the timing of the flow-through entity’s election, this excusal may apply to quarterly estimates from the second tax year of an election in addition to the first tax year.

Example: Company A is a calendar year filer whose previous three-year election expired. Company A makes a new election beginning in 2024 by making a payment on September 30, 2025. Company A is not charged penalty or interest for underpayment of any of the four quarters for tax year 2024, nor for the first three quarterly estimates for tax year 2025 (due April 15, June 15, and September 15, 2025). However, because Company A elected after the due date of its 2024 annual return, it must pay its full 2024 annual liability the day it elects or be subject to late penalty and interest.

PA 24 of 2025 requires Michigan taxpayers to decouple from several IRC provisions enacted by the federal OB3. These amendments require certain taxpayers to adjust their income reported, generally starting with tax year 2025. See Form 5772 line 11 instructions for decoupling calculation.

For more information on specific adjustments see Treasury’s notice, Decoupling Michigan Income Taxes from Certain Internal Revenue Code Provisions.

Yes. If a taxpayer is required to make quarterly estimated payments under MCL 206.831, the taxpayer will be subject to penalty and interest if, by the quarterly due date following its election, it has not paid its estimated liability for that quarter plus the previous quarters of that tax year.

Example: Company B is a calendar year filer. On August 31, 2025, Company B makes a three-year election beginning with tax year 2024. In addition to paying its full 2024 liability on the day it elects to avoid late penalty and interest, Company B must also consider its quarterly estimated payments for 2025, the second year of its election period. Company B determines that its estimated 2025 annual liability will be $200,000. Company B generally must pay at least $135,000 ($200,000 x 90% x 3/4) by September 15, 2025, the next 2025 quarterly due date, to avoid penalty and interest for underpayment of estimates (UPE). If Company B pays less than $135,000 by that date, a 10% penalty plus statutory interest will be assessed on the deficiency. A 25% penalty will apply if no estimated payments are made for the tax year.

The flow-through entity tax is retroactive to tax years beginning on and after January 1, 2021. The continued levy of the tax is contingent upon the existence of the federal state and local tax (SALT) deduction limitation codified within IRC 164(b)(6)(B).

A flow-through entity is defined as an S corporation or a partnership under the internal revenue code for federal income tax purposes.

The Michigan FTE tax is levied and imposed on certain electing flow-through entities with business activity in Michigan.

The following types of common flow-through entities may elect to pay the Michigan FTE tax:

1. Limited liability companies (LLCs) that file federal income tax returns as partnerships.
2. Partnerships (including limited partnerships, limited liability partnerships, and general partnerships).
3. S Corporations.

Businesses that are not flow-through entities — such as sole proprietorships or C corporations — are not eligible to pay the Michigan FTE tax.

Certain types of flow-through entities are specifically excluded from paying the Michigan FTE tax:

1. Publicly traded partnerships as defined under IRC 7704.
2. Flow-through entities subject to the financial institutions tax under Chapter 13 of Part 2 of the Income Tax Act.
3. Entities that are disregarded for federal income tax purposes, such as single member LLCs.
4. LLCs that file federal income tax returns as corporations.

The election must be made by submitting an electronic payment to the Treasury through Michigan Treasury Online (MTO). Any other manner of making the election (e.g., submitting a written election statement or making a payment outside of MTO) is not a valid election.

The election is effective for three years: the tax year in which the payment is made and the next two successive years. The election payment must be directed to the initial year of the election. Once the election is made it is irrevocable.  If a taxpayer wants to continue to report and pay the tax after its three-year election ends, that taxpayer must make a new election for the next tax year.

For Tax Year 2023 and Prior

For any tax years 2021 to 2023, a flow-through entity that wants to file and pay the FTE tax must elect by the 15th day of the 3rd month of its tax year. MCL 206.813. “Tax year” generally means “the same period as is covered by its federal income tax return.” MCL 206.809(2). Therefore, an entity should use the beginning date of its federal taxable year to determine its Michigan FTE tax year, and must elect by the 15th day of the 3rd month after that tax year begins.

A flow-through entity in its first year of existence must use the beginning date of its federal tax year to determine its Michigan tax year and FTE election deadline, regardless of when the entity might begin actively conducting its trade or business.

For example, Company A is a start-up business that for its first tax year will file a federal income tax return for the taxable year January 1, 2023, through December 31, 2023. In June 2023, Company A files its articles of organization, obtains licenses to operate, and registers for the Michigan FTE tax. Company A then begins actively conducting its trade or business (in Michigan) on September 1, 2023. Company A has until March 15, 2023, to elect into the FTE tax for its 2023 tax year. As with all other elections into the FTE tax, this election continues for the tax year of election plus the next two subsequent years.

For Tax Years Beginning on or After January 1, 2024

PA 216 modifies the statutory election deadline to provide more time for flow-through entities to elect. For tax years beginning on and after January 1, 2024, the deadline has been moved to the last day of the 9th month after the end of the tax year (e.g., September 30 for calendar year filers).

For example, Company A is a start-up business that for its first tax year will file a federal income tax return for the taxable year January 1, 2025, through December 31, 2025. In June 2025, Company A files its articles of organization, obtains licenses to operate, and registers for the Michigan FTE tax. Company A then begins actively conducting its trade or business (in Michigan) on September 1, 2025. Company A has until September 30, 2026, to elect into the FTE tax for its 2025 tax year. As with all other elections into the FTE tax, this election continues for the tax year of election plus the next two subsequent years.

For Tax Year 2023 and Prior

For tax years 2021 to 2023, a flow-through entity that wants to file and pay the FTE tax must elect by the 15th day of the 3rd month of its tax year. MCL 206.813. “Tax year” generally means “the same period as is covered by its federal income tax return.” MCL 206.809(2). Therefore, an entity should use the beginning date of its federal taxable year to determine its Michigan FTE tax year, and must elect by the 15th day of the 3rd month after that tax year begins.

For a variety of reasons, a flow-through entity may have a short tax year and must use the beginning date of its federal tax year to determine its Michigan tax year and FTE election deadline.

For example, a C corporation makes an S election and therefore becomes a “flow-through entity” eligible to elect into the FTE tax. The corporation files its S election form with the IRS on April 12, 2023, chooses to make its S election effective October 1, 2023, and creates a short taxable year from October 1, 2023, through December 31, 2023. The corporation receives notice from the IRS on June 1, 2023, informing them that their S election was accepted. This S corporation has until December 15, 2023, to elect into the Michigan FTE tax for its short 2023 tax year. As with all other elections into the FTE tax, this election continues for the tax year of election plus the next two subsequent years.

For Tax Years Beginning on or After January 1, 2024

PA 216 modifies the statutory election deadline to provide more time for flow-through entities to elect. For tax years beginning on and after January 1, 2024, the deadline has been moved to the last day of the 9th month after the end of the tax year (e.g., September 30 for calendar year filers).

For example, a C corporation makes an S election and therefore becomes a “flow-through entity” eligible to elect into the FTE tax. The corporation files its S election form with the IRS on April 12, 2024, chooses to make its S election effective October 1, 2024, and creates a short taxable year from October 1, 2024, through December 31, 2024. The corporation receives notice from the IRS on June 1, 2024, informing them that their S election was accepted. This S corporation has until December 15, 2024, to elect into the Michigan FTE tax for its short 2024 tax year. As with all other elections into the FTE tax, this election continues for the tax year of election plus the next two subsequent years.

For the same tax year under Section 51 of the Income Tax Act, the Michigan FTE tax is levied on qualifying/electing entities at the same rate as Michigan individual income tax (IIT) is levied on individuals. For example, the tax year 2021 tax rate for Michigan FTE tax and IIT is 4.25%.

The Michigan FTE tax is levied only on the Michigan portion of the positive “business income tax base” attributable to direct members of an electing flow-through entity that are individuals, fiduciaries (i.e., estates or trusts), or other flow-through entities. Any portion of the business income tax base attributable to direct members that are insurance companies, financial institutions, or C corporations is not subject to the Michigan FTE tax.

Electing flow-through entities must calculate the Michigan portion of the business income tax base before adjusting for the portion that is taxable or nontaxable based on attribution to their members.

The business income tax base refers to the flow-through entity’s federal taxable income and any payments and items of income and expense that are attributable to the business activity of the flow-through entity and separately reported to its members less specific statutory adjustments and/or special additional adjustments for a tiered structure. The Michigan FTE tax is only levied on the positive business income tax base of an electing entity. If the business income tax base is less than zero, then no tax is due in that year.

Federal taxable income must be adjusted for decoupling to arrive at business income. See Michigan's decoupling from certain One Big Beautiful Bill (OB3) federal changes under Public Act 24 of 2025.

For all tax years, business income is then subject to the following specific statutory adjustments:

1. Interest income and dividends derived from obligations or securities of states other than Michigan.
2. Income and losses derived from the sale or exchange of certain obligations of the US government.
3. Charitable contributions.
4. Taxes on or measured by net income, including the Michigan FTE tax.
5. Guaranteed payments for services rendered by a member who is an individual.
6. Tax refunds received under the city income tax and flow-through entity tax.
7. Income from and expenses of producing oil and gas.

The business income tax base of the flow-through entity is apportioned to Michigan using a sales factor that is based on the ratio of sales sourced to Michigan to total sales everywhere.

In determining the sales factor, sales of tangible personal property are typically sourced to the state where the transfer of ownership occurs (i.e., where the purchaser takes possession of property or where the property is delivered to the purchaser). Sales other than sales of tangible personal property are sourced based on the location of the relevant income-producing activity.

Most importantly, the apportionment rules for flow-through entities are the same rules that apply to business income reported by individual members under Part 1 of the Michigan Income Tax Act. The information used to apportion the business income tax base under the Michigan FTE tax should therefore be the same information reported by many flow-through entities to its individual members to determine business income taxable in Michigan.

In some cases, yes. The Michigan FTE tax is levied on the portion of the “business income tax base” attributable to any direct member that is an individual, fiduciary (i.e., trust or estate), or another flow-through entity. There is no special adjustment if such a direct member is exempt from tax by operation of federal or state law.

For example, an electing flow-through entity may have a member that is an Employee Stock Option Plan (ESOP), which is a trust that is generally exempt from tax under the Internal Revenue Code. The flow-through entity is required to pay the Michigan FTE tax on the share of the business income tax base attributable to the ESOP. In turn, the ESOP will receive a refundable Michigan FTE tax credit for its allocated share of the Michigan FTE taxes levied and paid - and will be able to file an income tax return in order to claim it.

Each tax year, on or before the Michigan FTE annual tax return due date, the flow-through entity must separately report the following information to each member:

1. Information regarding the allocation and apportionment of the business income tax base and the allocation and apportionment of income subject to tax under Part 1 (i.e., the individual income tax) or Part 2 (i.e., the corporate income tax), as applicable, of the Income Tax Act.
2. The member's allocable share of the reporting entity's taxes on or measured by net income, including the Michigan FTE tax, that was required to be added back in computing the flow-through entity's business income tax base.
3. The member's share of the reporting flow-through entity's refund of Michigan FTE tax received during the tax year, if applicable.
4.  The member's share of the following tax amounts, reported separately:
   1. The tax imposed under the Michigan FTE tax for the tax year and paid by the fifteenth day of the third month after the end of the tax year.
   2. The Michigan FTE tax imposed for any prior tax year that was paid in the current tax year excluding any amount reported under 4i for the previous tax year.
   3. The Michigan FTE tax allocated to the reporting flow-through entity under either 4i or 4ii by other flow-through entities with tax years ending on or within the reporting flow-through entity's tax year.

In determining a member's share of the tax items in #4 above, a flow-through entity must base those amounts on the member's share of the income or gain generating the flow-through entity tax that are included in the member's business income. For example, if a member recognizes income, expenses, gains, or losses in proportions other than pro rata based on ownership percentage, the tax allocated to that member must be equal to that percentage.

There are no statutory requirements related to how information must be communicated to members of the flow-through entity. Flow-through entities may provide the required information to its members in any reasonable manner, including as separate statements or as notes attached to the Federal Schedule K-1.

These terms can be used to describe a credit generated by an FTE taxpayer for another flow-through entity, which is listed as a direct member on Form 5774, Part 2.  That credit is passed through to the member flow-through entity’s owners and each respective share is ultimately claimed by taxpayers subject to Michigan individual income tax or corporate income tax (Part 1 or Part 2 of the Michigan Income Tax Act). Those taxpayers own the credit-generating flow-through entity indirectly, which is why their credits may be referred to as indirect credits. In addition, this ownership structure is often referred to as a tiered structure and therefore, creates what may be referred to as tiered credits.

Documentation provided to a member to report that member’s share of FTE tax credit and tax base adjustments must include the name and FEIN of the credit-generating flow-through entity, and have credits and adjustments separately stated by flow-through entity. For more information about the required reporting to members, see Section I.E. of Treasury’s Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax. Importantly, these specific reporting requirements apply to both electing and non-electing flow-through entities within a tiered structure in order to allow the ultimate member to claim the credit and make any return adjustments as necessary.

For Tax Year 2023 and Prior

Annual Returns

The annual return is due on the last day of the third month after the end of the tax year (e.g., March 31 for calendar year filers).

A flow-through entity must pay, by the initial due date of the annual return, its estimated unpaid tax liability for the tax year covered by an extension. Interest and, if applicable, penalty, will accrue from the initial due date of the return until the tax is paid.

An annual return must be filed by all electing flow-through entities. There are no de minimis liability thresholds for return filing purposes (i.e., an annual liability of $100 or less), and an annual return is required even if liability was paid in full through estimated payments.

Any payments toward a tax year’s Michigan FTE tax liability made after the 15th day of the third month after the tax year, will not qualify for a member credit for that same tax year. Instead, those payments will be reported as credits eligible to be claimed for members’ immediately succeeding tax year.

Estimated Tax Payments

Flow-through entities that elect to pay the Michigan FTE tax are required to make estimated payments each year that their annual tax liability is reasonably expected to exceed $800.

For calendar year filers, the estimates must generally be made in equal installments on or before April 15, June 15, September 15, and January 15. For fiscal year filers, the estimates must be made in equal installments on dates that correspond to the due dates for calendar year filers.

For Tax Years Beginning on or After January 1, 2024

Annual Returns

The annual return is due on the last day of the third month after the end of the tax year (e.g., March 31 for calendar year filers).

A flow-through entity must pay, by the initial due date of the annual return, its estimated unpaid tax liability for the tax year covered by an extension. Interest and, if applicable, penalty, will accrue from the initial due date of the return until the tax is paid.

An annual return must be filed by all electing flow-through entities. There are no de minimis liability thresholds for return filing purposes (i.e., an annual liability of $100 or less), and an annual return is required even if liability was paid in full through estimated payments.

Any payments toward a tax year’s Michigan FTE tax liability made after the due date of the return, including extension, if granted, will not qualify for a member credit for that same tax year. Instead, those payments will be reported as credits eligible to be claimed for members’ immediately succeeding tax year.

Estimated Tax Payments

Flow-through entities that elect to pay the Michigan FTE tax are required to make estimated payments each year that their annual tax liability is reasonably expected to exceed $800.

For calendar year filers, the estimates must generally be made in equal installments on or before April 15, June 15, September 15, and January 15. For fiscal year filers, the estimates must be made in equal installments on dates that correspond to the due dates for calendar year filers.

New rules also apply to penalty and interest for tax years beginning on or after January 1, 2024. Typically, an FTE taxpayer is required to make estimated payments during the tax year if their liability is reasonably expected to exceed $800 for the tax year, and penalty and interest apply to unpaid or underpaid estimates. Under PA 216, penalty and interest will generally not be assessed for any quarterly estimated payment due prior to the taxpayer making a valid election. For any quarterly estimate due on or after the taxpayer’s election, the taxpayer must timely pay those estimates to avoid penalty and interest.

Credit Funding Deadline

If the FTE tax is not paid by the credit funding deadline, that portion of the credits cannot be claimed by members until the tax year in which the FTE tax is paid. MCL 206.254(1); 206.839(1)(d). For FTE tax years beginning on or after January 1, 2024, PA 216 modifies the credit funding deadline so that the timing of the credits will now be based on the tax levied and paid, “on or before the date for the filing of the [FTE tax] annual return, including any extension.” Generally, this means that members of an FTE taxpayer will claim 100% of their credits on their annual return for the same tax year for which the flow-through entity paid the tax, if the entity pays its annual liability by its return due date (or extended due date, if applicable). To the extent the tax is not paid by an FTE taxpayer’s return due date, claims of the resulting FTE tax credits must be delayed until the tax year in which that tax is paid. FTE taxpayers may still be subject to penalty and interest for tax paid after the initial due date.

A flow-through entity that elects into the FTE tax after the return due date is presumed to have made a valid request to extend the date for filing the return due for that tax year. MCL 206.833. Therefore, the credit funding deadline for that tax year will be determined as of the extended due date of the return. However, these taxpayers will be subject to penalty and interest for any tax paid after the date of the election.

Example 1: Company Y is a calendar filer whose FTE tax election is effective for tax years 2023 through 2025. Company Y paid most of its liability by making $90,000 of timely estimated payments, and files its 2024 annual return on March 31, 2025, reporting tax due in the amount $10,000. Even though Company Y filed its return on time, it requested an extension because it had not yet fully funded its credits. Company Y pays the remainder of the tax, $10,000, on April 30, 2025. Company Y’s two 50% members, both individuals, claim their full $50,000 credits on their 2024 returns. However, Company Y will be assessed for late penalty and interest on the $10,000 deficiency from the time it was due, March 31, 2025, to the time it was paid.

Example 2: Company Z is a calendar year filer whose previous three-year election expired. Company Z makes a new election beginning in 2024 by making a $45,000 payment on June 1, 2025. Company Z is presumed to have requested an extension, because the election payment did not meet the original election date requirement and became a valid election payment with the enactment of PA 216 on April 2, 2025, and files its annual return and pays the remaining $5,000 of its 2024 liability on July 15, 2025. Because Company Z had a valid extension, all $50,000 of credits are claimed by Company Z’s four direct members, all individuals, on their 2024 returns. However, Company Z will be subject to penalty and interest on the $5,000 from June 1 to July 15.

All Michigan FTE returns, including Form 5772, must be submitted electronically through Michigan Treasury Online (MTO). Michigan FTE tax returns submitted outside MTO will not be accepted.

Yes. Taxpayers seeking extension must file the extension request on Michigan Treasury Online (MTO) by the due date of the FTE return, together with the payment of the estimated tax. To apply for an extension, log into MTO at mto.treasury.michigan.gov and select the applicable business on the FTE Dashboard. Follow the links to “File/Pay/Amend a Tax Return” under the FTE Actions menu, then select “Extension” for the applicable tax year. Once the request is completed, the option to make an Extension Payment is available. Any required payment must be made on MTO by the original due date of the return, or the extension request will be denied.

For new election periods beginning with tax years beginning on or after January 1, 2024, an election payment received after the original return due date will automatically be granted an extension.

For apportionment purposes, the interest is considered a “sale”. The source of the sale is where the decision-making activities of the flow-through entity occur. If a flow-through entity is managed from an office in Michigan, the interest would be treated as a Michigan sale. If management of a flow-through entity occurs out of state, then the interest would be sourced as an out-of-state sale.

All Michigan FTE tax payments must be submitted electronically through Michigan Treasury Online (MTO).

Payments submitted outside MTO will not be considered for valid election into the Michigan FTE tax.

Michigan FTE payments submitted outside MTO will not be accepted for estimated or annual tax obligations.

All Michigan FTE tax payments are submitted electronically through Michigan Treasury Online (MTO). ACH payments are limited to $99,999,999 per transaction. Debit card payments are limited to $999,999 per transaction.