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‘Flow-Through’ Exemption Restorer Bill Heads To House

December 4, 2018

Nearly 250,000 Michigan “Flow-Through” business organized as S Corporations or partnerships could claim state income tax exemptions under legislation that the Senate unanimously passed Thursday.

Under the 2017 U.S. Tax Cut, “Flow-Through entities” lost their ability to deduct what they pay in state income taxes. C Corporations, by contrast, did not lose that ability under the measure. The difference between C Corporations and S Corporations is the way they are taxed. C Corporations actually pay income taxes, while S Corporation shareholders pay taxes on their share of the corporation’s income instead of the corporation paying the taxes.

Senate Appropriations Committee Chair David Hildenbrand’s (R-Lowell) SB 1170 would allow Michigan’s Flow-Through businesses to annually elect to be taxed at the C Corps level.

Although Senate Democrats supported the bill on final passage, Senate Minority Leader Jim Ananich (D-Flint) offered an amendment that would have exempted unemployment benefit income from being taxed.

“This would bring real relief to many of my constituents,” Ananich said. “And its impact on the budget would be a drop in the bucket.”

For a brief moment it appeared that there were enough “yes” votes on the board for the amendment to pass, but then some Republicans switched. In the end the amendment failed on a 17-20 vote. Republican Senators: Ken Horn (R-Frankenmuth), Joe Hune (R-Hamburg Twp.), Rick Jones (R-Grand Ledge), Mike Nofs (R-Battle Creek), Margaret O’Brien (R-Portage) and Tory Rocca (R-Sterling Heights) joined the Democrats in support.

MIRS asked Senate Majority Leader Arlan Meekhof (R-West Olive) why he felt that unemployment benefit income should not be tax exempt.

“I think you can probably roll back, in my mind, to when President [Bill] Clinton taxed Social Security income,” Meekhof said. “But I appreciate his (Ananich’s) ingenuity.”

According to committee testimony, the Michigan Treasury Department agrees with the bill sponsor that SB 1170 would “overall” be revenue neutral, regarding its impact on the Michigan budget. However, it would reduce the state’s School Aid Fund revenue while increasing the state’s General Fund revenue. As a result, the measure is supported by the state’s business community, but is opposed by several education groups.

Treasury has expressed concerns about implementing the legislation, considering it would need to be ready for the 2018 tax season. Treasury estimates that implementation would have a one-time cost of from $8 million to $10 million. 

In addition, Treasury expressed concerns over the bill’s use of Michigan Business Tax language and the potential for the Flow-Through entities to frequently switch year-to year from one classification under which it would taxed to the other.

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