The Michigan flow-through entity tax is an optional election that allows pass-through businesses like S-corps, partnerships, and LLCs to pay state income tax at the entity level rather than on the owners’ individual returns.

This exists because of the 2017 federal tax law that capped state and local tax deductions at $10,000 on individual returns. Before that cap, business owners could deduct all their state income taxes. After 2017, many Michigan business owners lost the ability to fully deduct what they pay to the state. The flow-through entity tax creates a legal workaround.

Here’s how it works. If your business elects into the FTE tax, the entity pays 4.25% on its taxable income directly to Michigan. Each owner then gets a credit on their personal Michigan return for their share of the tax paid. The benefit is that the entity-level payment counts as a business expense on the federal return, which bypasses the SALT cap entirely.

Not every business owner benefits from this election. It makes the most sense if you own a profitable pass-through entity, you itemize deductions on your federal return, and you’re already at or above the $10,000 SALT cap. If your business doesn’t generate significant taxable income or you take the standard deduction, the FTE election probably won’t provide meaningful savings.

The election must be made annually and requires estimated payments throughout the year. Your full-service bookkeeping needs to be current and accurate enough to estimate quarterly income, since the election has specific deadlines you can’t miss.

This isn’t something to figure out on your own. Work with a CPA who understands Michigan tax law and can model whether the election makes sense for your situation. Many small business owners in the Metro Detroit area don’t realize this option exists or assume it’s too complicated. A Detroit medical billing service or any pass-through business with solid profits should at least run the numbers with a tax professional to see if the savings are worth it.