One-page FTE test for Michigan's 4.25% tax before Sept 30

The Michigan FTE tax paid by the entity is treated as a federal business expense deduction, not as an individual SALT deduction subject to the SALT cap. If you read the bank balance daily, the question is whether the election is worth the cash.

The cash cost is the number that hurts first

The cash leaves the business before the owners see any benefit. For a bootstrapped founder, that timing is the whole argument. Profit can be a paper number; cash is the number that keeps payroll running. The charge is 4.25% of the apportioned positive business income tax base. If the base is small, the cash cost may be trivial. If the base is large, the payment can feel like a big payroll.

The state tax cap is why the election can matter

The One Big Beautiful Bill Act raised the individual SALT deduction cap to $40,000 for tax years 2025 through 2029, up from the prior $10,000 limit. Above the $500,000 line, the SALT deduction is cut by 30% for each dollar over that line, but it cannot fall below $10,000. The cap matters because the election moves the benefit out of the personal deduction line.

The election does not create a new profit line. It changes how the state tax is treated on the return. The payment can reduce taxable income. That reduction is the benefit. The haircut is the cost of that reduction: the deduction lowers the income that can qualify for the pass-through benefit. If the haircut is larger than the tax saved, the election is a cash burn with no net gain.

Price the lock before you sign

A Michigan FTE election is irrevocable for three consecutive tax years once made. That means the test is not a short experiment. You are committing to the same cash outflow and the same deduction treatment for a fixed period. If your business income can swing, the lock can turn a good year into a bad one. Slower growth is a deliberate choice, but a fixed-period tax commitment is a different kind of commitment.

The mistake is treating the election like a normal filing. If the election is made after the March 31 return due date, the full first-year FTE tax liability is payable on the election date. That can hit the bank balance before the deduction is realized.

Run the math before the date

Use this election math sheet. It forces the decision into the lines that matter: deduction, QBI haircut, cash cost, lock, and date.

1. Calculate the cash cost. Multiply the base by the rate. Done looks like a dollar amount you can pay without touching operating cash.
2. Estimate the deduction by treating the payment as a business expense on the return. Done looks like a lower taxable income line.
3. Measure the haircut. Compare the pass-through income before and after the deduction. Done looks like a dollar amount of lost pass-through benefit.
4. Subtract the cash cost from the tax savings, then add the haircut back as a cost. Done looks like a net number, not a percentage.
5. Project the lock by repeating the net number for the required period. Done looks like a total you are willing to commit.
6. Check the date. A calendar-year Michigan pass-through entity must make its 2025 FTE election by September 30, 2026. Done looks like a signed election before the date.

If the net number is negative, do not elect. If it is positive, ask whether the cash can be paid without borrowing. Profit tells you the business is working. Cash tells you whether the tax can be paid without borrowing. The election can improve the tax number while worsening the bank balance. A small positive number may still be a bad choice if it forces you to draw on a line of credit. A larger positive number may be worth the lock if your income is stable. Check the date before you sign.