What is the Michigan flow-through entity tax?
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.
Metro Detroit's Small Business Bookkeeper
The Next Step:
A Short Conversation
Tell us about your business and your current bookkeeping situation. We'll listen, answer your questions, and give you a clear quote.
More Questions
How do I track inventory in my bookkeeping system?
Inventory tracking starts with enabling inventory features in your accounting software and setting up items correctly. The key is linking purchases to specific products so you can track cost of goods sold and know your actual margins.
Read answerHow do I improve my business cash flow?
Cash flow improves when you speed up collections, manage payment timing, and maintain visibility into your numbers. Most cash crunches aren't profit problems. They're timing problems between money coming in and money going out.
Read answerWhy are my insurance claims getting denied?
Insurance claims get denied for reasons including missing prior authorization, eligibility verification failures, coding errors, and incomplete patient information. Most denials are preventable with proper front-end processes.
Read answerHow do I set up a chart of accounts in QuickBooks?
The chart of accounts is the foundation of your financial reports. Start with the five main categories (assets, liabilities, equity, income, expenses), then customize based on what information you need to track for your specific business.
Read answerHow is bookkeeping different for construction companies?
The biggest difference is job costing. Construction bookkeeping tracks every expense and revenue by project, not just by category. You also deal with progress billing, retainage, subcontractor management, and equipment allocation that most businesses don't have.
Read answerHow do I categorize business expenses properly?
Sort every expense into categories that match your chart of accounts. Use categories specific enough to be useful but not so detailed that you're creating a new one for every vendor. Consistency matters more than perfection.
Read answer
