A. Who is eligible to pay the flow-through entity tax?

The flow-through entity tax is levied and imposed on certain electing flow-through entities with business activity in Michigan. For this purpose, a “flow-through entity” is defined as “an S corporation or a partnership under the internal revenue code for federal income tax purposes.”³  As used in that context, the term “S corporation” refers to any person that has made the election to be an “S Corporation” as provided under the Internal Revenue Code (IRC)⁴ whereas a “partnership” refers to any entity that is required to or has elected to file as a partnership for federal income tax purposes.⁵ Based on these definitions, the following types of common flow-through entities may elect to pay the flow-through entity tax in Michigan:

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

However, certain types of flow-through entities are specifically precluded from paying the Michigan flow-through entity tax, including the following:

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; and
4. LLCs that file federal income tax returns as corporations.

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

³MCL 206.805(3).
⁴MCL 206.807(4).
⁵MCL 206.807(1).