Most importantly, the apportionment rules for flow-through entities are the same rules that apply to business income reported by individual members under Part 1 of the Michigan Income Tax Act. Sales other than sales of tangible personal property are sourced based on the location of the relevant income-producing activity. In determining the sales factor, sales of tangible personal property are typically sourced to the state where the transfer of ownership occurs (i.e., where the purchaser takes possession of property or where the property is delivered to the purchaser). The business income tax base of the flow-through entity is apportioned to Michigan using a sales factor that is based on the ratio of sales sourced to Michigan to total sales everywhere. Income from and expenses of producing oil and gas.Tax refunds received under the city income tax and flow-through entity tax.Guaranteed payments for services rendered by a member who is an individual.Taxes on or measured by net income, including the Michigan FTE tax.Income and losses derived from the sale or exchange of certain obligations of the US government.Interest income and dividends derived from obligations or securities of states other than Michigan.The specific statutory adjustments include: If the business income tax base is less than zero, then no tax is due in that year. The Michigan FTE tax is only levied on the positive business income tax base of an electing entity. The business income tax base refers to the flow-through entity’s federal taxable income and any payments and items of income and expense that are attributable to the business activity of the flow-through entity and separately reported to its members less specific statutory adjustments and/or special additional adjustments for a tiered structure. Generally, the tax is designed to benefit members of the flow-through entity that are individuals, trusts, or estates. is designed to fulfill the scope and intended purpose of ensuring that tax on income is paid only once-collecting the same amount of income tax from the business entity as would otherwise be collected from the entity’s members.The electing flow-through entity, based on the calculation and payment of the Michigan FTE tax, must communicate certain credits and adjustments to members, providing for proper reporting on Michigan individual income tax returns. requires the reporting of complementary entity-level and member-level adjustments.Although the flow-through entity effectively pays the income tax, members must comply with reporting or return filing requirements under Part 1 or Part 2 of the Income Tax Act. If this election is made and the tax is paid by the entity, members of the entity are eligible to receive a refundable income tax credit. allows a flow-through entity to elect to pay tax on certain income at the individual income tax rate.This amount generally correlates to the business income attributed to members who will be taxed in Michigan. is elected and levied on the Michigan portion of the positive business income tax base of a flow-through entity. Effective January 1, 2021, the Michigan flow-through entity (FTE) tax is levied on certain electing entities with business activity in Michigan. Michigan Flow-Through Entity (FTE) Tax OverviewĢ021 PA 135 introduces Chapter 20 within Part 4 of the Michigan Income Tax Act.
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