E. What are the relevant reporting requirements for flow-through entities?

In addition to any federal income tax reporting requirements, flow-through entities are required to report to their members certain information about the flow-through entity tax to ensure that member-level return adjustments can be reported accurately (see Section II.A – C of this notice).³⁴ Therefore, on or before the due date of the flow-through entity’s annual return each year, 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;³⁵
2. The member’s allocable share of the reporting entity’s taxes on or measured by net income, including the Michigan flow-through entity tax, that was required to be added back in computing the flow-through entity’s business income tax base;³⁶
3. The member’s share of the reporting flow-through entity’s refund of Michigan flow-through entity tax received during the tax year, if applicable;³⁷
4. The member’s share of the following tax amounts, reported separately:³⁸
1. The tax imposed under the Michigan flow-through entity 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 flow-through entity tax imposed for any prior tax year that was paid in the current tax year excluding any amount reported under 4.a for the previous tax year; and
3. The Michigan flow-through entity tax allocated to the reporting flow-through entity under 4.a or 4.b 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.

Example: Flow-through entity FTE is owned by two individuals, X and Y, each with 50% profit/loss share. All are calendar year taxpayers. FTE estimates it will owe $2,000 in Michigan flow-through entity tax and pays that amount during Year 1 (Y1). On its federal return for Y1, FTE deducts $2,000 of state tax paid from its total income of $50,000, arriving at federal ordinary business income in the amount of $48,000. FTE separately reports distributive share of $24,000 each to X and Y.

FTE calculates its taxes as follows for Year 1:

FTE Flow-through Tax Return
Federal Taxable Income: 48,000
Addition: flow-through entity taxes deducted: 2,000
Business Income Tax Base before apportionment: 50,000
MI Apportionment Factor: 80%
Business Income Tax Base: 40,000
Flow -through entity tax due at 4.25%: 1,700
Estimated Tax Payments: (2,000)
Refund: 300

In addition to the information required to be reported on Federal Schedule K-1, FTE must report the following to each of its members, X and Y:

1. The apportionment information used to determine the flow-through entity tax, 800,000 Michigan sales over 1,000,000 total sales = 80%.
2. The share of income taxes deducted on FTE’s Y1 federal return, $1,000 per member.
3. The share of refunds of Michigan flow-through entity tax received in Y1, $0 per member.³⁹
4. For purposes of the members’ refundable credits, the share of Y1 tax imposed on FTE and paid by the due date of the Y1 annual return, $850 per member.

Moreover, to allow members to accurately report information in a tiered structure, a flow-through entity must report its members’ allocable share of any of the above items that are allocated to that flow-through entity by any other flow-through entity. For example, if FTE A receives an allocable share of a credit for tax paid by FTE B, FTE A must report to each of its members their share of the credit paid by FTE B.⁴⁰ More 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.

In this regard, there are no statutory requirements related to the form by which this information must be communicated to members of the flow-through entity. Flow-through entities may accordingly 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.

³⁴MCL 206.839(1).
³⁵Generally, the allocation or apportionment information reported about the flow-through entity business income tax base will be the same as the allocation or apportionment information reported about member income subject to tax under Part 1. For information regarding allocation and apportionment under Part 2 of the Income Tax Act, see Chapter 14 of Part 2 of the Act, MCL 206.661 et seq.
³⁶See Section III.B. for discussion on how this information will be used by certain members to report the addition of Michigan flow-through entity taxes paid and deducted by the reporting entity.
³⁷See Section III.C for discussion on how this information will be used by certain members to report the deduction for their share of refunds of Michigan flow-through entity taxes.
³⁸See Section III.A for discussion on how this information will be used by certain members as a credit on their return, as well important limitations about the taxes that must be reported to those members.
³⁹The $150 refund FTE received in Y2 will be reported as Y2 information.
⁴⁰Electing flow-through entities in a tiered structure must deduct income received from another electing flow-through entity and are not eligible to claim a credit for Michigan flow-through entity taxes paid by any other electing entity. See Section II.C.a of this notice for more information about computing the business income tax base in a tiered structure.