After a veto from Gov. Gretchen Whitmer earlier this year, the Michigan House and Senate once again approved a bill aiming to help small businesses save more on their federal taxes.
The Michigan House approved House Bill 5376 on a 100-3 vote while the Senate voted 34-2.
Federal law allows taxpayers to deduct their state and local taxes (SALT) on their federal returns. The individual SALT deduction limit is $10,000 and the cap applies to small businesses that file taxes through their individual owners, such as S corporations, partnerships, and limited liability companies. These businesses, known as flow-through entities, are treated differently than larger C corporations, which can claim an unlimited SALT deduction.
If signed into law, HB 5376 will create an optional entity-level tax, which flow-through entities could pay instead of the individual state income tax. Under the new tax, the federal SALT deduction cap would not apply, and small businesses could increase savings on their federal taxes.
Rep. Mark Tisdel, R-Rochester Hills, sponsored the bill.
“Small businesses are so crucial within our local communities – selling goods, providing services and employing workers in good local jobs,” Tisdel said in a statement. “This new tax option will provide balance between small and large businesses on a federal tax deduction. Local businesses will be able to expand their savings, which can be used to benefit the Michigan economy.”
HB 5376 is Tisdel’s second attempt to create the flow-through entity tax. In July, Gov. Gretchen Whitmer vetoed the bill because it wasn’t funded.
In September, the legislature approved a bipartisan budget that funded $4.6 million for the tax. Whitmer has indicated she will likely support the flow-through tax now that funding has been appropriated.
Small Business Association of Michigan President Brian Calley called the bills a “game changer” for Michigan’s recovering small businesses.
“Earlier in 2021, pro-small business legislators proposed a thoughtful package of support to recognize and compensate for the extensive toll small businesses faced under the state’s pandemic response. SBAM was and is strongly in favor of that legislation and we are thankful to see it passed today alongside large deal economic incentives.”
The House and Senate also passed House Bill 5351, which aims to more than double the small taxpayer exemption to the state’s personal property tax from a current cap of $80,000 to a cap of $180,000 for industrial property.
The nonpartisan Senate Fiscal Agency expects “likely significant” financial impact on local units of government despite one year of funding if the bill is signed into law.
Sen. Jeremy Moss, D-Southfield said the vote to repeal without a long-term funding plan “continues to threaten the sustainability of our local governments” essential services.
Michigan Townships Association, Michigan Municipal League, and Michigan Association of Counties agreed with Moss and called for “creative solutions” for a permanent funding source The groups the state is using local government funding for other priorities and called for a permanent funding source for the program.
“Vibrant, livable, safe communities depend on thriving families and businesses,” the groups said in a statement. “Their success hinges on investments for improved competitiveness and increasing shared prosperity. Investments in people, place and business will deliver the strong and prosperous Michigan we all desire.”
This article was originally posted on Legislature approves tax break for small businesses
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