Michigan PTET Guide
How to Make a Michigan PTET Election: The Flow-Through Entity Tax and Its 3-Year Lock (2026)
Michigan calls its SALT cap workaround the flow-through entity tax, and the mechanics are clean: a flat 4.25%, paid through the state's online portal. The catch is not the rate. It is that the election locks you in for three tax years, and a lot of owners who elected before 2025 are now stuck in a workaround that stopped helping them.
A Michigan dentist emails me in July. She elected into the flow-through entity tax back in early 2024 to beat the SALT cap, locked in for three years the way the rules require, and now she has read that Congress raised the federal SALT deduction to $40,400. Her question is short: can she get out? For most of a three-year term the answer is no, and that is the part of the Michigan election almost nobody thinks about before they check the box. The dentist is theoretical, but the trap is real, so here is how the election works in 2026 before you commit to it.
What the Michigan flow-through entity tax is
Michigan enacted the flow-through entity tax with Public Act 135 of 2021, as a direct response to IRS Notice 2020-75, which blessed a pass-through paying state income tax at the entity level and passing the federal deduction to owners. An S-corp or partnership elects to be taxed itself on its business income allocated to Michigan, the entity deducts that tax on its federal return, and the owners take a credit back home. The tax is imposed under Mich. Comp. Laws 206.815 at the same rate individuals pay under section 51, and the Department of Treasury confirmed that rate is 4.25% for the 2026 tax year. The federal cap the whole thing works around is IRC §164(b)(6).
What the Michigan flow-through entity tax rate is for 2026
The Michigan flow-through entity tax is a flat 4.25% for 2026. It is set by Mich. Comp. Laws 206.815 at the same rate levied on individuals under section 51, which the Department of Treasury confirmed is 4.25% for the 2026 tax year. Because the entity rate equals the individual rate, there is no state-level rate premium and no rate discount from electing. The entire reason to elect is the federal deduction. So in Michigan, unlike a state such as Wisconsin where the entity pays a flat 7.9% that can top the owner's own bracket, the whole decision comes down to whether that federal deduction is worth the three-year commitment.
How to make the election, and by when
You make the election through Michigan Treasury Online, the state's tax portal, by submitting a payment or filing the election there. There is no separate paper election form to mail. Under House Bill 5022, enacted as Public Act 216 of 2024, the deadline for tax years beginning on or after January 1, 2024 is the last day of the ninth month after the end of the tax year, which is September 30 of the following year for a calendar-year business. So a calendar-year S-corp has until September 30, 2027 to elect for its 2026 tax year. That is a big change from the old rule, which forced the election by the fifteenth day of the third month of the tax year. The later deadline lets you see nearly a full year of numbers before making a call that is hard to undo.
The three-year lock nobody reads
The Michigan FTE election is irrevocable and continues for the tax year it is made plus the next two tax years, so three tax years in total, under Mich. Comp. Laws 206.813. You cannot simply revoke it in year two because the SALT cap changed or the business had a bad year. Once you elect, you file Form 5772, the annual flow-through entity return, and report each owner's share on Form 5774 every year until the term runs out. Public Act 216 did add estimate relief, so an entity that pays four roughly equal installments covering 90% of the current year's tax avoids penalty and interest on the quarterlies, but that does not shorten the commitment. Three years is three years.
Why the lock suddenly matters: OBBBA changed the math
The One Big Beautiful Bill Act, signed July 4, 2025, raised the individual SALT deduction cap to $40,400 for 2026, up from the old $10,000, with a phasedown that begins once modified AGI passes $505,000 and never drops the cap below $10,000. For a lot of Michigan owners, that single change gutted the reason they elected. If your Michigan income tax and property tax together now fit under a $40,400 personal cap, you can deduct that Michigan tax yourself, and paying it through the entity buys you nothing extra federally. Owners who elected in 2023 or 2024, when the cap was still $10,000, made a sensible call at the time and are now locked into a workaround that no longer works for them.
Treasury saw this coming and issued limited relief. A taxpayer still in the first year of the three-year term can back out, but only if it has not yet filed its annual FTE return and it requests relief before the election window closes for that year. If you are in year two or three, or you already filed the return, the relief does not reach you. So the escape hatch is narrow, and it exists precisely because the lock is otherwise absolute.
Two theoretical Michigan owners, 2026
Same 4.25% election, opposite verdict
The state side is a wash in Michigan because the entity rate equals the individual rate. The only question is what the federal deduction is worth against the new $40,400 SALT cap.
Owner A still wins
$900,000 MI income · 37% federal · MAGI above the $505,000 phasedown, personal SALT cut toward $10,000
Owner B is stuck
$200,000 MI income · 24% federal · MAGI under $500,000, state and property tax fit under $40,400
Theoretical owners, not clients. Figures are 2026 estimates that stack the pass-through income at the stated marginal rate and assume Owner A's personal SALT is cut back to roughly the $10,000 floor.
What the members get back
The entity pays the 4.25% tax, and each member then claims a refundable credit on their own Michigan return equal to their allocated share of the tax the entity paid. So the same income is not taxed twice at the state level. The credit is refundable, meaning any excess over the member's Michigan liability comes back as a refund, which keeps the state result close to a wash and leaves the federal deduction as the real prize. Public Act 135 built that credit into the Income Tax Act so it reaches individual owners and corporate members alike. Treasury lays out how members compute and claim it in its flow-through entity tax credit guidance.
When the Michigan election still makes sense in 2026
The election is still a clear winner for high earners whose modified AGI sits above the $505,000 phasedown threshold, because their personal SALT deduction is being clawed back toward the $10,000 floor while the entity-level deduction is not touched. For them the election restores a deduction OBBBA is taking away, which is worth real money at a 37% federal rate. It is a much closer call, and often a loser, for an owner in the middle who can now deduct the Michigan tax personally under the $40,400 cap. If the federal deduction is a wash, all you have signed up for is three years of extra returns. Before you elect, confirm that the federal benefit is real at your income level, and remember that you are committing through 2028 if you elect for 2026.
None of this matters until you are actually an S-corp, and whether that election pays at your income level is a separate question worth answering first. Run your numbers in the EntityIQ S-Corp tax calculator, and if the S-corp election makes sense it will generate a pre-filled Form 2553. The Michigan entity-level election is the second layer, and it only earns its keep once you are an S-corp and the SALT cap is a live constraint on your return. For the bigger picture, the SALT cap after OBBBA piece and the general PTET deduction guide cover the federal side in more depth.
This article is educational and is not legal or tax advice. The owner described is theoretical, and the figures are 2026 estimates that stack the pass-through income at the stated marginal rate. Please consult a Michigan CPA or enrolled agent before you make an election that binds you for three years.