If you own a Michigan S corporation, partnership or multi-member LLC, the flow-through entity tax can lower your federal tax bill. It’s Michigan’s version of the pass-through entity tax (PTET) that most states now offer. Your business pays the Michigan income tax, deducts it on its federal return, and you get a matching credit on your Michigan return.
The short answer: the PTE tax election usually pays off when your state and local taxes run past the federal SALT cap, and it often helps even when they don’t. But the election locks you in for three years, so run the numbers first.
As a CPA in Huntington Woods, I get this question from small business owners across Metro Detroit, from Royal Oak to Berkley. Here’s how the Michigan PTE election works for 2026, with sources.
What is the Michigan flow-through entity tax?
The Michigan flow-through entity (FTE) tax is an optional tax a business can elect to pay on its owners’ share of Michigan business income. Michigan created it in December 2021 under Public Act 135, and it has been available every year since.
- Rate: the same as Michigan’s individual income tax rate, which is 4.25% for 2026.
- Who can elect: S corporations and partnerships, including LLCs taxed as partnerships (Michigan Treasury FAQ).
- Who can’t: single-member LLCs taxed as disregarded entities, sole proprietors, C corporations and publicly traded partnerships.
- What’s taxed: the Michigan portion of business income that belongs to owners who are individuals, trusts, estates or other flow-through entities.
If you’re a sole proprietor or single-member LLC, you can’t make the PTE election unless your business is taxed as an S corp. That’s one more factor to weigh in whether to elect S corp status.
How the Michigan flow-through entity tax saves federal tax
The PTE election works because it moves your state income tax off your personal return, where the SALT cap limits it, and onto the business return, where it doesn’t.
When you pay Michigan income tax yourself, it counts toward the federal state and local tax (SALT) deduction. For 2026, that deduction is capped at $40,400. The cap shrinks by 30% of your modified AGI over $505,000, down to a floor of $10,000. After 2029 it drops back to $10,000 for everyone (Cooley).
When the business pays the tax instead, IRS Notice 2020-75 lets the business deduct it. That deduction isn’t subject to the SALT cap at the owner level. The 2025 federal tax law (the One Big Beautiful Bill Act) kept this PTET workaround in place, and it dropped a House proposal that would have limited it for service businesses.
The Michigan PTE election tends to help most if you:
- Earn over $505,000. Your SALT cap shrinks, often down to $10,000.
- Pay more than $40,400 in state income and property taxes. Anything over the cap is lost without the election.
- Take the standard deduction. The business deduction still lowers your income, even though you don’t itemize (Thomson Reuters).
On the Michigan side, it’s roughly a wash. You add the FTE tax back to your Michigan income and claim a refundable credit for your share (Michigan Treasury). For more on the cap itself, see my post on the SALT deduction limit for 2026.
Example: a Royal Oak S corp owner
In this example, the PTE election saves about $11,900 in federal tax. A married couple owns an S corporation with $800,000 of Michigan business income. They pay $15,000 in property taxes, and their income puts them in the 35% federal bracket.
At $800,000 of income, their 2026 SALT cap shrinks to the $10,000 floor. Their property taxes use all of it.
| 2026 | Without the PTE election | With the PTE election |
|---|---|---|
| Michigan tax on business income (4.25%) | $34,000, paid by the owners | $34,000, paid by the S corp |
| Federal deduction for that tax | $0 (cap already used) | $34,000 |
| Federal tax saved at 35% | $0 | About $11,900 |
| Total Michigan tax | $34,000 | $34,000 (credit offsets the add-back) |
This simplified example leaves out the QBI deduction and other interactions covered below. Your numbers will differ, which is why a projection comes before the election.
Michigan flow-through entity tax deadlines and how to elect
You can still make the Michigan PTE election for 2026, but pay by December 31, 2026 if you want the federal deduction on your 2026 return.
How to elect: the business makes an electronic payment through Michigan Treasury Online (MTO). There’s no separate form, and paper elections aren’t valid (Michigan Treasury FAQ).
How long it lasts: the election covers the year you make it plus the next two years, and it can’t be revoked.
| Calendar-year deadline | What’s due |
|---|---|
| April 15, June 15, Sept. 15, Jan. 15 | Quarterly estimated payments, if you expect more than $800 of FTE tax |
| December 31, 2026 | Pay by now to deduct the tax on your 2026 federal return (cash-basis businesses) |
| March 31, 2027 | Form 5772, the annual FTE tax return, filed through MTO |
| September 30, 2027 | Last day to elect for 2026 |
The September 30 deadline comes from a 2024 law change, Public Act 216. It moved the deadline from March 15 of the tax year to the last day of the ninth month after year end.
A few timing rules matter:
- Federal timing: the business deducts the tax in the year it pays it (IRS). Tax for 2026 paid in 2027 is a 2027 deduction.
- Owner credits: if the business pays by the return due date, including extensions, owners claim the full credit on that year’s Michigan return. If you elect after March 31, the return is automatically extended to September 30.
- Penalties: no penalty applies to estimates that were due before you elected. Estimates due after the election have to be paid on time.
Downsides of the PTE tax election
The PTE election isn’t automatic savings. These are the trade-offs I check before recommending it:
- Three-year commitment. Once you elect, you’re in for that year and the next two, even if your income drops.
- Smaller QBI deduction. The entity-level tax reduces the qualified business income used for the 20% Section 199A deduction (Kitces).
- Lower retirement contribution limits. Less business income can mean a smaller SEP-IRA or solo 401(k) contribution.
- Owners in other states. A nonresident owner’s home state may not give credit for Michigan FTE tax, which can mean paying twice.
- Multiple owners. The election covers the whole business. S corps also need to keep distributions in proportion to ownership (Thomson Reuters).
- Cash flow. The business has to fund the quarterly estimates.
Michigan flow-through entity tax FAQ
Is the Michigan flow-through entity tax mandatory?
No. It’s an election. Businesses that don’t elect never pay it.
Can a single-member LLC make the PTE election?
Not as a disregarded entity. It would need to be taxed as an S corporation first.
What is the Michigan FTE tax rate for 2026?
4.25%, the same as the individual income tax rate.
Is it too late to elect for 2026?
No. The deadline is September 30, 2027. Paying by December 31, 2026 keeps the federal deduction on your 2026 return.
Does the PTE election still matter now that the SALT cap is $40,400?
Often, yes. It helps high earners whose cap is phased down, people over the cap, and owners who take the standard deduction.
Talk to a Michigan CPA before you elect
The PTE tax election is a three-year decision, so it’s worth a projection first. If you own a business in Huntington Woods, Royal Oak, Berkley or anywhere in Michigan, I can run your numbers and make the election through MTO. Learn more about my business tax returns and business consulting, or book a free consultation.
This article is general information, not tax advice for your situation.
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