The Michigan PTE tax — formally the flow-through entity tax — lets partnerships, S corporations, and LLCs taxed as either one pay Michigan income tax at the business level instead of passing the full state tax bill to individual owners. The rate is 4.25%, matching Michigan’s individual income tax rate, and the entity-level payment is fully deductible on the business’s federal return, which sidesteps the federal cap on individual state and local tax deductions.1Michigan Legislature. Michigan Code 206.51 – Tax Rate on Taxable Income of Person Other Than Corporation Public Act 135 of 2021 created the election, and it remains voluntary and made annually, so owners can rerun the numbers each year.2Michigan Legislature. House Bill 5376 of 2021
Why the Election Exists
The 2017 Tax Cuts and Jobs Act capped the state and local taxes an individual can deduct on a personal federal return. For 2026, that cap sits at $40,400 for most filing statuses and $20,200 for married filing separately, after Congress raised it through the One Big Beautiful Bill Act signed on July 4, 2025.3Internal Revenue Service. One Big Beautiful Bill Provisions A Michigan business owner with $80,000 in state income tax could only deduct $40,400 of it on their personal federal return. The rest gave no federal benefit.
IRS Notice 2020-75 changed that. The IRS said it would treat state income tax paid by a partnership or S corporation as an entity-level deduction rather than an individual one. Entity-level tax is an ordinary business expense, so it falls outside the individual SALT cap.4Internal Revenue Service. Notice 2020-75 The same $80,000 paid through the Michigan election is fully deductible on the entity’s federal return no matter what the individual cap is. Members then get a refundable credit on their Michigan personal returns so the same income isn’t taxed twice at the state level.
The One Big Beautiful Bill Act preserved the workaround for all pass-through entities, including service businesses like law firms, medical practices, and accounting firms. Even with the higher $40,400 individual cap, the election still delivers real savings for any owner whose share of Michigan tax exceeds that number.
Who Can Elect
Any entity treated as an S corporation or partnership under the Internal Revenue Code can make the election if it has business activity in Michigan. That covers general partnerships, limited partnerships, LLCs taxed as partnerships, and LLCs taxed as S corporations. Publicly traded partnerships, entities disregarded for federal tax purposes, and entities treated as C corporations cannot elect.5Michigan Legislature. Michigan Code 206.805 – Definitions F to M A single-member LLC that hasn’t elected corporate treatment is disregarded federally and can’t make the election either.
The tax only applies to income attributable to “eligible” members: individuals, trusts, estates, and other flow-through entities. Corporations are ineligible members. An entity with corporate owners can still elect, but income flowing to those corporate members is excluded from the tax base.6Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions So a partnership with three individual partners and one corporate partner would have the FTE tax cover only the three individuals’ shares.
Rate and Tax Base
The rate is 4.25%, identical to Michigan’s individual income tax rate for 2026.7Michigan Department of Treasury. 4.25% Income Tax Rate for Individuals and Fiduciaries in 2026 Tax Year The tax base starts with the entity’s business income, apportioned to Michigan based on in-state activity, and includes both resident and nonresident members’ shares.
The entity then makes additions for items deducted federally but not allowed under Michigan law, and subtractions for income exempt at the state level. The result is multiplied by 4.25%. The design goal is to produce roughly the same tax the members would have collectively owed on their individual Michigan returns without the election.
How to Make the Election
The election is made annually by filing an FTE return in the form and manner prescribed by the Michigan Department of Treasury.8Michigan Legislature. Michigan Compiled Laws 206.813 – Election to Pay Flow-Through Entity Tax The entity needs its Federal Employer Identification Number, its contact information, and the ownership percentage and identifying information for every eligible member. Getting member data organized before starting prevents errors that can delay processing.
Filing runs through the Michigan Treasury Online portal. Treasury reviews the return, verifies the income figures, and reconciles estimated payments against the total liability.
Estimated Payments
An electing entity whose FTE tax is expected to exceed $800 for the year must make quarterly estimated payments. For calendar-year filers the due dates are:9Michigan Department of Treasury. Flow-Through Entity Tax
- First quarter: April 15
- Second quarter: June 15
- Third quarter: September 15
- Fourth quarter: January 15 of the following year
Fiscal-year filers follow the same spacing relative to their own year-end. When a due date falls on a weekend or state holiday, the payment is due the next business day.
Annual Return
The annual return and any remaining balance are due March 31 of the year following the tax period for calendar-year filers.9Michigan Department of Treasury. Flow-Through Entity Tax That’s earlier than the April 15 individual deadline, which catches some first-time filers off guard. Extensions are available, but they only extend the filing deadline. Unpaid tax is still due March 31, and interest and penalties run from that date on any balance owed after the original deadline.6Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
How Members Get the Credit
Once the entity pays the tax, each eligible member receives a credit to claim on their Michigan individual return (Form MI-1040) or fiduciary return (Form MI-1041). The credit is refundable, so if it exceeds what the member owes on their Michigan return, Treasury pays the difference.6Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
Each member’s credit is based on their share of the income that generated the FTE tax. For a two-partner LLC where each partner holds 50%, each partner’s credit equals half the FTE tax the entity paid. The credit prevents double taxation at the state level. Without it, the same income would be taxed once at the entity and again at the member, leaving the federal deduction as the net benefit.
The Federal Benefit and the QBI Trade-Off
Federally, the FTE payment shows up in each member’s share of the entity’s non-separately stated income or loss on their Schedule K-1. It reduces the entity’s income before the pass-through, so the member reports lower federal taxable income without claiming a separate personal deduction. The payment stays at the entity level and bypasses the individual SALT cap.4Internal Revenue Service. Notice 2020-75
There’s a trade-off. Because the FTE payment reduces the entity’s income, it also reduces each member’s qualified business income (QBI). QBI is the starting point for the Section 199A deduction, which allows eligible owners to deduct up to 20% of their pass-through business income. Lower QBI means a smaller 199A deduction. For most owners the SALT cap savings clearly outweigh the smaller 199A benefit, but the answer depends on income level, filing status, and the type of business. Running the numbers with a tax professional before electing is worth the fee.
Penalties for Missing Deadlines
Michigan imposes penalties at two stages.
On estimated payments, an entity that underpays any quarterly installment owes a 10% penalty on the deficiency plus statutory interest that accrues from the due date. An entity that makes no estimated payments at all during the tax year faces a 25% penalty. Entities expecting to owe less than $800 for the year aren’t required to make quarterly payments.6Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
On the annual return, any tax not paid by March 31 accrues interest and may draw a late-payment penalty, even if the entity requested a filing extension. The most common penalty scenario is an entity that files on extension, pays the balance months later, and finds interest has been running since April 1.
Federal penalties for late filing of the partnership or S corporation return (Form 1065 or Form 1120-S) apply separately. Those run per member, per month, and add up quickly for entities with several owners.
When the Election Is Worth It
The election delivers the most value when an eligible member’s share of Michigan tax would otherwise exceed the federal SALT cap. For 2026 that cap is $40,400 for most filers. An owner whose share of Michigan tax is $20,000 and who has no other significant state or local taxes may already be under the cap on their personal return, and the election adds paperwork without much federal savings.
The math flips for a high-income partner in a profitable Michigan partnership whose share of state tax runs $80,000 or more. The election recovers the full federal deduction on that amount, and the savings often reach thousands of dollars even after accounting for a smaller Section 199A deduction.
Entities with a mix of eligible and ineligible members should weigh the administrative burden. If most income flows to corporate members, the tax base shrinks and the benefit concentrates among a smaller group. Professional preparation adds cost too. In borderline cases, projecting actual dollar savings against filing costs shows whether the election pencils out.