Tax Law Blog

New Michigan Legislation Repeals the Flow-Through Entity Withholding Requirement

Flow-through entities (“S” corporations and most limited liability companies) are no longer required to withhold Michigan income tax on members’ distributive shares. (See Michigan Public Act 158 of 2016). This change is effective for tax years beginning on or after July 1, 2016.

The prior withholding requirements continue in effect for tax years that began before July 1, 2016. Under the prior requirements, flow-through entities had to withhold Michigan income tax from each individual nonresident owner’s reasonably anticipated distributive share of the entities’ taxable income. Accordingly, this change is friendly to Michigan businesses with out-of-state owners.

The Michigan Department of Treasury issued guidance and provided the examples below regarding how the repeal affects taxpayers with tax years that begin on or after July 1, 2016, including the filing of composite returns.

Example 1

Flow-through entities with a tax year beginning on June 1, 2016, and ending on May 31, 2017. In the case of a flow-through entity whose tax year begins on June 1, 2016, and ends on May 31, 2017, since the flow-through entity's tax year begins before July 1, 2016, the flow-through entity must file quarterly withholding on distributive share of income of nonresident members who are individuals and, if it has not received exemption certificates, from its members that are C corporations or other flow-through entities. Quarterly returns on form 4917 are due September 15, 2016, December 15, 2016, March 15, 2017 and June 15, 2017. An annual flow-through withholding reconciliation Form 4918 is due on July 31, 2017. The flow-through entity is not required to withhold on members' distributive share of income that is attributed to the tax year that begins on June 1, 2017.

Example 2

Flow-through entities with a tax year beginning on August 1, 2016 and ending on July 31, 2017. In the case of a flow-through entity whose tax year begins on August 1, 2016, and ends on July 31, 2017, the flow-through entity is not required to withhold on members' distributive share of income that is attributed to the tax year that begins on August 1, 2017.

According to additional guidance provided by the Michigan Department of Treasury, a flow-through entity may, but is not required to, file a composite income tax return for nonresident members who are individuals. For tax years that begin before July 1, 2016, the flow-through entity may claim a credit on the composite return for any flow-through withholding paid on behalf of its participating members. For tax years that begin on or after July 1, 2016, the flow-through entity may claim a credit on the composite return for any estimated tax payments made by the flow-through entity on behalf of its participating members.

Categories: Employment Tax & Withholding