Michigan Tax Clearance: Form 5156 and the Buyer's Escrow

Why the Buyer Holds Money Back

Michigan law puts a duty on the buyer of a business. If the buyer purchases your company, or its stock of goods, it is expected to set aside enough money to cover any state taxes you still owe.

That money stays in escrow until you give the buyer a receipt or certificate showing your taxes are paid. A buyer who skips this step can be held personally liable for your unpaid taxes, interest and penalties.

So every careful buyer and every lender will insist on an escrow. It is not a sign of distrust. It is how they protect themselves under state law.

What Form 5156 Does

Form 5156 is the Michigan Department of Treasury's Request for Tax Clearance or Tax Status. Sellers use it in two ways during a sale.

Before closing

You can ask Treasury what it shows you owe. Treasury replies with known or estimated amounts, so you and the buyer can size the escrow. The escrow should be at least the amount in that letter.

After closing

Once the sale is done, you request again. If everything is paid, Treasury issues a Tax Clearance Certificate. You give it to the buyer, and the escrowed money is released to you.

There is no fee. Treasury says it responds within 60 days of receiving the request. Plan for that wait.

File Form 163 First

If you are closing out or selling the business, Treasury wants to know through Form 163, the Notice of Change or Discontinuance, filed online in Michigan Treasury Online. It should be filed before Form 5156.

Our Form 163 guide covers what it closes and when.

How Big the Escrow Might Be

If your returns are filed and your balances are paid, the letter from Treasury should show little or nothing owed. The escrow then can be small, and the release is quick once the certificate arrives.

If there are gaps, like a missing return, an old assessment or a payment plan, the escrow grows and your cash at closing shrinks until it's sorted out.

• Sales and use tax returns, especially for retail and restaurant businesses
• Withholding for employees
• Any corporate income tax or flow through entity filings
• Old notices you set aside and forgot

The best time to find these is long before a buyer is involved.

Partial Sales

Not every sale is the whole company. Some owners sell one location, one division or a line of equipment. A buyer of only part of a business is generally exposed up to the fair market value of what it bought, not your whole tax bill.

Escrow still comes up in these deals. Your attorney and the buyer's will agree on how much is fair.

Unknown Taxes Can Still Surface

A clearance covers what Treasury knows when it issues the certificate. Buyers know that taxes can sometimes be assessed later for periods before the sale, so purchase agreements usually include a promise from you to cover anything that turns up.

That promise, called an indemnity, is normal. Your attorney will negotiate how long it lasts and how much it can cost you.

Timing It With Everything Else

Because the certificate can take weeks, your escrowed money may arrive well after closing day. Build that into your plans. If you need cash at closing for a payoff or a down payment on your next move, tell your broker early.

The other closing week filings, like the UIA 1027 notice to the buyer, run at the same time. The full order of events is on our how a sale works page.

Who Handles What

Your CPA usually prepares the filings and talks to Treasury. Your attorney writes the escrow terms into the purchase agreement and decides who holds the money, often a title company or an attorney's trust account.

Your broker keeps everyone on schedule so the clearance doesn't hold up the closing date.

Outside Michigan

Everything here is Michigan law. A company based in another state follows that state's rules, and some states have no clearance process at all.

Want to see what your company could sell for before you think about any of this? Send the short form or call (313) 555-0152. If you are still early, start with sell my Detroit business.