If you own an S corporation or partnership in Michigan, you may have heard about the state's Flow-Through Entity (FTE) tax, a mechanism that can reduce your federal tax bill by working around the cap on state and local tax deductions. Recent changes to both Michigan law and federal tax legislation have made this decision more nuanced than it once was. This guide walks you through what the FTE tax is, what's changed, and what you need to know heading into 2026.
The federal tax code limits how much individuals can deduct for state and local taxes (SALT) on their federal return. For most taxpayers, that cap has historically been $10,000, a significant limitation for business owners in states with meaningful income tax obligations.
Michigan's FTE tax offers a potential workaround. Rather than paying Michigan income tax individually, eligible pass-through businesses — S corporations and most partnerships — can elect to pay that tax at the entity level instead. Because the payment is made by the business, it's treated as a fully deductible business expense federally, bypassing the individual SALT cap.
In exchange, each owner receives a refundable Michigan income tax credit for their share of the FTE tax paid by the entity. The tax rate is Michigan's standard individual income tax rate of 4.25%.
Who is eligible: S corporations, partnerships, and LLCs filing as partnerships.
Who is not eligible: Sole proprietors, C corporations, single-member LLCs, and publicly traded partnerships.
One critical detail: once you make the election, it's binding for three consecutive years. That commitment deserves careful thought before pulling the trigger. For more on how state-level tax strategies fit into a broader plan, visit our Tax Planning services page.
Key Takeaway: The FTE tax can allow Michigan pass-through entity owners to deduct state income taxes that would otherwise be capped at the individual level. But the three-year, irrevocable commitment means the decision shouldn't be made lightly.
Under the original rules (2021 through 2023), Michigan businesses had to elect into the FTE tax by March 15 of the year they wanted the election to apply. That meant committing to a three-year, irrevocable election before there was enough information to know whether it was a good idea.
Governor Whitmer signed House Bill 5022 into law in January 2025, and it changes the rules significantly for tax years beginning on or after January 1, 2024.
The new deadline: The election window now runs until the last day of the ninth month after the end of the tax year. For calendar-year filers, that's September 30, giving business owners time to review their full-year numbers before committing.
For example, a Michigan S corporation that missed the old March 15, 2024 deadline for tax year 2024 was able to make the election retroactively, with a new deadline of September 30, 2025. That's a meaningful second chance for businesses that were previously locked out.
HB 5022 also updated the rules around estimated tax payments and penalties. Under the new rules, penalties and interest are generally not assessed for estimated payments that were due before the election was made, since a business isn't technically subject to the FTE regime until it has validly elected. For full details on how Michigan administers the election, including payment procedures and the safe harbor rules, refer to the Michigan Department of Treasury's FTE FAQ.
Key Takeaway: HB 5022 is a significant improvement. The extended deadline gives Michigan business owners the benefit of hindsight, but the three-year commitment still requires careful upfront planning.
Missing these dates can invalidate an election or trigger penalties, so deadline management matters. One important caveat: if you elect after the March 31 annual return due date, the full FTE tax liability for that first year is due on the day you elect. That can mean a significant lump-sum payment, so cash flow planning is essential.
All elections and payments must be made through Michigan Treasury Online (MTO). No other method constitutes a valid election.
Key Takeaway: Calendar-year filers have until September 30, 2026 to elect for tax year 2025, but late elections trigger an immediate full-year payment obligation.
Any decision about the Michigan FTE election in 2026 has to account for what happened at the federal level in 2025.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, temporarily raised the individual SALT deduction cap from $10,000 to $40,000 for tax years 2025 through 2029. For some Michigan business owners, the increased SALT cap reduces or eliminates the tax benefit of the FTE election, at least through 2029. However, this higher cap phases out for taxpayers with modified adjusted gross income above $500,000, returning to $10,000 for those earning over $600,000. After 2029, the cap is scheduled to revert to $10,000 for everyone, under current law.
The benefit of electing is tied to the gap between your state tax liability and what you can deduct individually. For business owners whose income falls below the phase-out threshold and who can now deduct up to $40,000 in SALT on their personal return, the FTE election may offer less benefit, or potentially none, for 2025 through 2029.
In response, Michigan Treasury offered limited relief: business owners who had already made an FTE election payment before the federal law changed may be able to request a refund, provided they haven't yet filed their annual FTE return and submit the request before the September 30 deadline. For the official terms of that relief, see the Michigan Department of Treasury's notice on FTE election relief.
Key Takeaway: The SALT cap increase reduces the benefit of the FTE election for many Michigan business owners, particularly those with income below $500,000. Whether the election still makes sense depends on your specific income level and tax situation.
The FTE election tends to make the most sense for business owners whose personal SALT deduction would be capped even at the new $40,000 limit, generally those with higher income and significant Michigan tax liability. For owners earning above $600,000, the SALT cap effectively reverts to $10,000 regardless, which means the FTE election may continue to provide substantial value.
For owners at lower income levels, the analysis is less clear-cut. And since the higher SALT cap is scheduled to expire after 2029, a three-year election made in 2026 will cover years both inside and outside the current favorable window, a factor worth modeling before committing.
For high-earning business owners weighing this alongside other tax strategies, our guide on How High Earners Can Reduce Taxable Income covers the broader picture. The right answer on the FTE election varies significantly depending on your income, ownership structure, and the composition of your entity's membership, which is exactly the kind of analysis that benefits from professional guidance.
The Michigan FTE election is a useful tool, but it's not right for everyone, and the decision has gotten more complex in the past year. At Revonary, we work with Michigan S corporation and partnership owners to evaluate whether the FTE election makes sense as part of a broader, year-round tax strategy. We'll model your specific situation, explain the trade-offs in plain terms, and help you act before the deadlines pass.
If you haven't yet reviewed whether the Michigan FTE election is right for your 2025 return, now is the time to start the conversation. Contact us today.
This article is intended for general informational purposes and does not constitute legal or tax advice. Tax rules are subject to change. Please consult a qualified tax advisor regarding your specific situation.