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D. How will the flow-through entity tax impact the estimated tax payments of members of an electing flow-through entity?
The Implementation of the Michigan Flow-Through Entity Tax
D. How will the flow-through entity tax impact the estimated tax payments of members of an electing flow-through entity?
Individual and fiduciary members are generally required to make estimated payments if their expected annual tax is greater than $500.60 In determining the estimated tax obligation, the annual tax liability is determined after applying all credits and payments applicable to the taxpayer’s liability. The refundable credit based on the flow-through entity tax that was paid by an electing flow-through entity will reduce an eligible member’s expected annual tax liability. Accordingly, a direct or indirect member of an electing flow-through entity is not required to make estimated tax payments for flow-through income that will be subject to the flow-through entity tax and for which the member will receive a refundable credit.
Special instruction for 2021. The refundable credit received for taxes paid by an electing flow-through entity will reduce a member’s 2021 annual tax liability. Members of an electing flow-through entity may adjust their upcoming estimated payment — due January 18, 2022, for calendar year filers — as appropriate to reflect the refundable credit that member will receive for tax paid by an electing flow-through entity for 2021. Because the credit effectively reduces the member’s annual tax liability, members may adjust their upcoming estimated payment even if the flow-through entity has not yet elected or paid the flow-through entity tax as of the due date of that estimated payment.61 Members of an electing flow-through entity that have made estimated tax payments throughout 2021 may now have significant overpayments for tax year 2021. Those taxpayers should report those payments on the annual return filed for tax year 2021 and will receive a refund of those overpayments upon the processing of that return.
60MCL 206.301(1).
61See Form MI-2210, Line 5. For example, assume that Member 1 has been remitting estimated tax payments during the year and will receive a credit from an electing flow-through entity for tax year 2021. Member 1 determines that an estimated payment would not be due on January 18, 2022 based on that credit. The entity plans to elect into and pay the Michigan flow-through entity tax as permitted sometime after January 18, 2022. Member 1 can still adjust the estimated payment as long as the flow-through entity will later elect into and pay the flow-through entity tax for tax year 2021. However, if the flow-through entity does not ultimately make the election such that Member 1 does not actually receive any credit for that year, then Member 1 could be subject to penalty and interest for underpayment of the estimated tax payment due on January 18, 2022.