New Michigan tax change could be boon for business owners

While a new $1.5 billion economic development fund for large-scale manufacturing projects has received most of the news this week, a tax policy change also signed into law this week amounts to something of a Christmas gift for many of the state’s small businesses.

Gov. Gretchen Whitmer signed legislation that will allow Michigan’s pass-through entities — primarily LLCs and S corporations in which income passes through to the individual owners — to pay a new 4.25 percent state income tax at the business level rather than the individual level. Doing so allows eligible business owners to avoid the $10,000 federal cap on deducting state and local taxes, or SALT.

The legislation, sponsored by Rochester Hills Republican state Rep. Mark Tisdel and passed with bipartisan support, is estimated to save the roughly 240,000 pass-through entity owners subject to tax in Michigan about $200 million in federal taxes annually, according to a client alert sent out by Detroit-based law firm Miller Canfield.

“It will make a big difference for a lot of S corps and LLCs,” Brian Calley, president of the Lansing-based Small Business Administration of Michigan, said of the legislation. “And the nice thing is that it doesn’t really cost the state anything other than the administration.”

“All the way around, this is a big win,” Calley added, noting that the tax policy change will be of particular benefit for more “mature” companies, while startups might see less benefit because of some added costs for accounting and tax preparation.

Those businesses can simply choose to pay at the individual level and take the federal deduction, he said.

About 20 other states offer a similar workaround for their pass-through entities, according to a CNBC report earlier this month, including Illinois, Wisconsin and Minnesota.

Of particular importance, the legislation will be retroactive and available for businesses for the 2021 tax year.

Gregory Nowak, senior counsel at Miller Canfield, said that due to the retroactive nature of the legislation, businesses and advisers are “scrambling” somewhat to best identify when owners should make quarterly payments, as much of the official guidance from the Michigan Department of Treasury is still forthcoming.

The Treasury Department on Wednesday afternoon did offer that guidance for those owners who want to make the election for this year and make a payment before the end of the year, an option on the Treasury portal that will be available in the coming days.

“So it does create some interesting tax compliance challenges,” Nowak said. “But the benefit of the federal tax deductibility of these taxes, generally, is often going to be worth some compliance efforts. Everyone’s going to be kind of scrambling.”

Whitmer’s office did not respond to a request for comment on the legislation on Wednesday. The Democratic governor, who’s up for re-election next year, vetoed similar legislation over the summer.

It’s unclear why the governor opted to sign this legislation.

Tisdel, the bill’s sponsor, applauded the governor’s change of heart and noted the numerous businesses that will benefit from the change.

“Corner stores and Main Street shops are the foundation of our local economies and a feature of our communities,” Tisdel said in a statement. “They sell products, like meals and books, and provide services, like haircuts and help filing our taxes. We know and trust our local businesses to serve us, and they deserve a fair tax system. I was proud to spearhead this new law, which will empower small businesses to boost their tax savings. More money kept locally by businesses will provide more economic opportunities in Michigan communities.”