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Many Michigan business owners assume the Flow-Through Entity (FTE) election is only valuable because of federal SALT deduction limits. In reality, the FTE election can reduce federal income taxes even without considering SALT, by letting the business pay state income taxes at the entity level.
What Is the FTE Election?
Owners of S corporations, partnerships, or LLCs taxed as partnerships normally pay Michigan state taxes personally on profits that flow through from the business. Those state taxes do not reduce federal taxable income at the business level.
The FTE election allows the business itself to pay state taxes, which are treated as a deductible expense. This lowers the income that flows to the owners, reducing federal income taxes even if the SALT cap isn’t an issue.
Example: Federal Tax Savings
(Example assumes the owner is married filing jointly and uses a 12.8% effective federal tax rate. Actual tax savings may vary based on filing status, deductions, and individual circumstances).
Business Income |
Michigan Tax (4.25%) |
Federal Rate (12.8%) |
Federal Tax Saved via FTE |
|---|---|---|---|
$100,000 |
$4,250 |
12.8% |
$544 |
How it works: Without the FTE election, the $100,000 flows to the owner, and the $4,250 state tax is paid personally without lowering federal taxable income. With the FTE election, the business pays the $4,250 directly, reducing the income that flows to the owner and saving $544 in federal taxes.
Takeaway
The Flow-Through Entity election is more than a workaround for SALT limits—it’s a way to lower federal income taxes by deducting state taxes at the business level. Talk with your tax advisor before year-end to determine if the FTE election is right for your business—it could put money back in your pocket.
Disclaimer: This blog is for informational purposes only and does not constitute tax advice. Please consult a qualified tax professional regarding your specific situation before making any tax elections.
