House Bill 5131 (HB 5131), if enacted, will remove the statutory requirement that flow-through entities withhold tax on the distributive share of taxable income of individual nonresident members or the distributive share of business income of members that are corporations or other flow-through entities. Instead, members of flow-through entities will be expected to calculate and remit their own quarterly estimated tax payments. The changes will be effective for tax years beginning on or after July 1, 2016. The governor, who received HB 5131 on May 31, 2016, is expected to sign the bill.

Implications

If HB 5131 is enacted, for tax years beginning on or after July 1, 2016, the requirement for flow-through entities to calculate and remit withholding tax on behalf of members will be eliminated. This is welcome relief for flow-through entities that have struggled to accurately calculate and remit tax payments in accordance with Michigan law. Further, HB 5131 eliminates the administrative burden of collecting exemption certificates and tracking various payments made by flow-through entities on behalf of individuals, corporations or other flow-through entities in a tiered structure. Finally, HB 5131 will shift the responsibility for calculating and remitting tax payments back to the members of a flow-through entity. Each member should review its quarterly estimated tax calculations to ensure it is accurately accounting for income received from the flow-through entity.

Currently, the Michigan Department of Treasury (Department) does not require a state-specific flow-through informational reporting form that is equivalent to the federal Forms 1065 or 1120-S for partnerships or S-corporations, respectively. We will provide updates if the Department revises this requirement for state informational reporting for flow-through entities.

For tax years beginning before July 1, 2016, flow-through entities will continue to be required to withhold and remit tax withholding payments for individual nonresident members and for corporate or other flow-through entity members under the existing law.

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