Michigan Flow Through Entity Tax in the Year You Sell

What the Tax Is

Michigan's flow through entity tax, often called the FTE tax, lets an S corporation or a partnership pay Michigan income tax at the company level instead of only through its owners.

It is elective. The company chooses it. Many owners did so on their CPA's advice, mainly because of how federal rules treat state taxes paid by a business.

The tax is charged on the company's Michigan business income, at the same rate as Michigan's individual income tax. Treasury set that rate at 4.25 percent for 2024 tax years.

How the Election Works

Once a company elects, the choice binds it for that year and the next two. It cannot simply drop out the following year.

The election is due by the 15th day of the third month of the tax year. For a calendar year company, that is mid March.

Each owner then claims a credit on their own Michigan return for their share of the tax the company paid. The goal is that owners are not taxed twice on the same income.

Why the Sale Year Is Different

In a normal year, the tax follows your operating profit. In the year you sell, the picture changes.

In an asset sale, your company sells its equipment, goodwill and other assets. The gain from that sale often flows through the company's business income. That can make the company's Michigan income for the year much larger than usual.

If the company has elected the FTE tax, that larger income may mean a larger entity level payment, and larger estimated payments, in the sale year. Exactly how the gain is treated is a question for your CPA.

Stock sales

In a stock or membership sale, the owners sell their shares and the company keeps going. The gain usually lands with the owners rather than the company.

The FTE tax may matter less, but the three year election may still bind the company under its new owners.

Things to Raise Early

• Is the company currently in an election period, and when does it end?
• How will the purchase price be split among assets, and how does that change Michigan income?
• Who pays the sale year estimates, and from which funds?
• How does the credit reach each owner if ownership changes mid year?

The purchase agreement can address some of this, especially in a stock sale where the buyer inherits the company's tax position.

A Simple Example

Picture an S corporation that has elected the FTE tax and usually earns a steady profit. In the year it sells its assets, the gain on goodwill and equipment is added to that profit.

Its Michigan business income for the year may be several times normal. If nobody planned for that, the estimated payments made early in the year will fall well short. Your CPA can run the numbers before closing so the cash is set aside.

What It Does Not Change

The FTE tax doesn't change the price a buyer pays. It changes how and when Michigan tax on your gain is paid, and possibly what you keep after federal tax.

Michigan's individual income tax is a flat rate. Detroit and some other Michigan cities levy their own city income tax as well, so where you live and where the company operates can matter.

Why Owners Should Ask Before Signing

Taxes on a sale usually cost an owner far more than any broker's fee. A little planning before the letter of intent, especially on how the price is split, can change what you keep.

Bring your CPA in before you accept an offer, not after. Your broker can share drafts of offers so the CPA can model them.

Related Michigan Steps

Whatever your company's tax setup, you will still request tax clearance on Form 5156 and close your Treasury accounts on Form 163.

Integrators and engineering firms, which are often S corporations, may also want to read selling an automation integrator.

Nothing here is tax advice. It applies to Michigan only, and your CPA decides what fits your company.

Want to know what your company could sell for first? Send the short form or call (313) 555-0152.