2024 PA 216 Amends Flow-Through Entity Tax

Issued: February 3, 2025

2024 PA 216 amends Parts 1, 2, and 4 of the Michigan Income Tax Act (MITA) as they relate to the Flow-Through Entity (FTE) tax. Generally, these amendments are effective for tax years beginning on and after January 1, 2024. However, these amendments do not take effect until April 2, 2025. This notice explains the amendments, specifically the following topics:

• The deadline to elect into the tax,
• Penalty and interest on estimated payments,
• The deadline to fund FTE tax credits, and
• Implementation issues for tax year 2024 due to the effective date of the legislation.

Election Deadline

To file and pay the FTE tax, a flow-through entity must make a three-year election. MCL 206.813. PA 216 modifies the statutory election deadline to provide more time for flow-through entities to elect. For tax years beginning on and after January 1, 2024, the deadline has been moved to the last day of the 9th month after the end of the tax year (e.g., September 30 for calendar year filers).

A flow-through entity that validly elects after the return due date (March 31 after the tax year end, for calendar year filers) becomes subject to the filing and payment requirements of the tax as of the date of the election. Therefore, if an election is made after the annual return’s due date, the taxpayer must pay its full liability on the day of the election to avoid late penalty and interest. For return filing purposes, a flow-through entity that elects after the return due date is presumed to have made a valid request to extend the return due date to the last day of the 9th month after its tax year (e.g., September 30, for calendar year filers). The above provisions apply to all three-year elections, including first-time elections and re-elections.

Because the bill was enacted after the election deadline for most tax years beginning in 2024 had already passed (e.g., March 15, 2024, for calendar year filers), PA 216 has the effect of “reopening” the window to make a valid election. That is, flow-through entities whose deadline had already lapsed for the tax year beginning in 2024 may now elect for that tax year. Because this new election period is available only once PA 216 goes into effect, taxpayers should wait until April 2, 2025, to submit a new election payment. Any 2024 payment held by Treasury on April 2, 2025, will be automatically treated as a valid election on that date. Flow-through entities that have not yet made a timely election into the tax year beginning in 2024 should wait until April 2, 2025, to file the 2024 FTE tax annual returns. 2024 payments previously considered timely for election purposes remain valid elections.

For guidance on how to make an election, see Notice: Instructions for Electing Into and Paying the Flow-Through Entity Tax.

Estimated Payments

New rules also apply to penalty and interest for tax years beginning on or after January 1, 2024. Typically, an FTE taxpayer is required to make estimated payments during the tax year if their liability is reasonably expected to exceed $800 for the tax year, and penalty and interest apply to unpaid or underpaid estimates. Under PA 216, penalty and interest will generally not be assessed for any quarterly estimated payment due prior to the taxpayer making a valid election. For any quarterly estimate due on or after the taxpayer’s election, the taxpayer must timely pay those estimates to avoid penalty and interest.

Credit Funding Deadline

If the FTE tax is not paid by a so-called “credit funding deadline”, that portion of the credits cannot be claimed by members until the tax year in which the FTE tax is paid. MCL 206.254(1); 206.839(1)(d). For FTE tax years beginning on or after January 1, 2024, PA 216 modifies the credit funding deadline so that the timing of the credits will now be based on the tax levied and paid, “on or before the date for the filing of the [FTE tax] annual return, including any extension.” Generally, this means that members of an FTE taxpayer will claim 100% of their credits on their annual return for the same tax year for which the flow-through entity paid the tax, if the entity pays its annual liability by its return due date (or extended due date, if applicable). To the extent the tax is not paid by an FTE taxpayer’s return due date, claims of the resulting FTE tax credits must be delayed until the tax year in which that tax is paid. FTE taxpayers may still be subject to penalty and interest for tax paid after the initial due date.

A flow-through entity that elects into the FTE tax after the return due date is presumed to have made a valid request to extend the date for filing the return due for that tax year. MCL 206.833. Therefore, the credit funding deadline for that tax year will be determined as of the extended due date of the return. However, these taxpayers will be subject to penalty and interest for any tax paid after the date of the election.

Example 1: Company Y is a calendar filer whose FTE tax election is effective for tax years 2023 through 2025. Company Y paid most of its liability by making $90,000 of timely estimated payments, and files its 2024 annual return on March 31, 2025, reporting tax due in the amount $10,000. Even though Company Y filed its return on time, it requested an extension because it had not yet fully funded its credits. Company Y pays the remainder of the tax, $10,000, on April 30, 2025. Company Y’s two 50% members, both individuals, claim their full $50,000 credits on their 2024 returns. However, Company Y will be assessed for late penalty and interest on the $10,000 deficiency from the time it was due, March 31, 2025, to the time it was paid.

Example 2: Company Z is a calendar year filer whose previous three-year election expired. Company Z makes a new election beginning in 2024 by making a $45,000 payment on June 1, 2025. Company Z is presumed to have requested an extension, and files its annual return and pays the remaining $5,000 of its 2024 liability on July 15, 2025. Because Company Z had a valid extension, all $50,000 of credits are claimed by Company Z’s four direct members, all individuals, on their 2024 returns. However, Company Z will be subject to penalty and interest on the $5,000 from June 1 to July 15.

Contact Treasury

For any questions regarding this Notice, contact the Business Taxes Division at 517-636-6925. Additional information regarding the Flow-through Entity Tax can be found at michigan.gov/taxes/business-taxes/flowthrough-entity-tax.