Michigan Flow Through Entity Update - 12-2023
Michigan Flow-Through Entity Tax Reporting Updates
from the Michigan Department of Treasury
December 1, 2023 - Over the course of these last 2 years, it’s been a challenge to stay up to speed with the elective tax on flow-through entities, which was enacted retroactively by 2021 PA 135 (see Michigan Enacts an Elective Flow-Through Entity Tax in the February 2022 issue).
One of the steepest learning curves with the Flow-Through Entity (FTE) tax has involved tiered entities and indirect credits. The terms “tiered” or “indirect” credits describe credits generated by FTE taxpayers (credit-generating entities) that have one or more direct owners that are other flow-through entities. Those other flow-through entities cannot claim the credits and must pass them through to their owners via reporting required under the statute.Each respective share of a credit is ultimately claimed by taxpayers subject to Michigan individual income tax—i.e., a credit-generating entity’s indirect owners. To aide taxpayers with reporting and streamline return processing, Treasury has recently developed additional guidance and changed a form requirement. Reporting to Members Templates Available As discussed in previous guidance, certain specific information about the credit, tax base adjustments, and credit-generating entity must be reported to members by flow-through entities, regardless of whether a flow-through entity elects into the tax. See MCL 206.839.
Because the statute does not mandate any particular form or manner, flow-through entities can report the required information in Schedule K-1 notes or any other format it chooses. It’s become clear that taxpayers, their preparers, and Treasury staff may benefit from uniform templates that demonstrate the level of detail required. Therefore, Treasury developed two templates, “Michigan Flow-through Entity Tax Information for Direct Members” (direct template) and “Indirect Share of Michigan Flow-through Entity Tax Information for Direct Members” (indirect template), and published them earlier this year at www.michigan.gov/taxes/ business-taxes/flowthrough-entity-tax/report-and-pay-fte.
Taxpayers are encouraged, but not required, to use the templates, which can be attached as a PDF to an e-filed MI-1040 or MI-1041 return. The Report and Pay web page includes some basic instruction, links to the templates, and a comprehensive example of indirect credit reporting. Please note that the direct template is also applicable to simpler structures that are not tiered. Also, when using the indirect template, the credit generating entity should always be reported as the Indirect Entity, even when there are multiple tiers between the credit generating entity and the individual, trust, or estate that will ultimately claim the credit.
Reporting Indirect Members on Form 5774 Now Permitted
The FTE annual return filing includes Schedule for Reporting Member Information for a Flow-Through Entity (Form 5774). Part 2 of that form reports individuals, fiduciaries, and other flow-through entities and their respective shares of the tax (credit). Previously, instructions for that section stated that only direct members could be listed. Recently, updates have been made to remove that restriction. Beginning with 2022 FTE returns that have not yet been filed and all returns going forward, FTE taxpayers are permitted to report indirect members and their respective shares of income and credits in lieu of listing the direct member that is another flow-through entity. This may reduce processing times for indirect members and requests for additional information.
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