After almost a year of negotiations, legislation that would lift the current cap on deductions for state and local taxes for non C-corporations passed and was signed by the governor. 

Often, small businesses file their business taxes on their personal income tax returns. Referred to as “flow through entities,” these businesses include sole proprietors, partnerships, and Sub S corporations and partnerships. Due to changes in federal tax law, these businesses were only allowed to deduct $10,000 of their state and local tax (SALT) bill on their federal taxes while C -Corporations have been allowed to claim an unlimited SALT deduction. This cap applied to approximately 250,000 resident owners of flow through entities and resulted in tax rates 1.3 to 1.6 percent higher than C-Corporations.

House Bill 5376, now Public Act 135 of 2021, addresses the disparity between the two entities and restores the full SALT deduction for tax years beginning with 2021.  This legislation does the following:

• Provides an election for pass-through businesses to pay their SALT at the entity level
• Includes an income exemption, so that owners of businesses making the election are not subject to double taxation
• Provides Michigan business owners with a credit for taxes paid to other states that have adopted similar SALT parity reforms.

This last provision is designed to ensure that businesses operating in multiple states are not disadvantaged by double taxation, and its increasingly important as the number of states adopting the SALT parity reform grows.  Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin have all passed similar SALT parity reforms, while more than a dozen other states are actively considering it. In November 2020, the Internal Revenue Service approved these efforts as “consistent with the longstanding position” of the agency.