Pass-Through Businesses in Maryland Electing to be Taxed at an Entity Level

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Maryland legislation allows pass-through entities to elect to pay taxes at the entity level. The law was originally enacted in response to the annual $10,000 cap on state tax deductions introduced under the federal Tax Cuts and Jobs Act enacted in December 2017.

What is the benefit of this election?

The entity-level tax may be deducted by the PTE in computing its federal ordinary income. However, the amount of tax paid and deducted on the federal return must be added back as income for computing MD taxable income. 

If the PTE tax election is made, members of the PTE will receive a corresponding and refundable Maryland state and county income tax credit. 

These tax credits may be used to offset your Maryland individual or entity tax liability. If your tax debt is less than the credit amount, the excess may be refunded to you or applied to the next tax year's liability.

Who is it available to?

The election is available to Qualifying PTE’s. Qualifying PTE’s includes an S-corporation, an association, a limited liability company not taxed as a corporation, a partnership, a business trust, or statutory trust not taxed as a corporation, or otherwise, as determined under the Internal Revenue Code.

How do you make the election?

The pass-through entity makes the election to pay the tax by filing form 511 and by checking the box at the time the form is filed. No election can be made on the MD form 510. The election is made annually.     

All members/shareholders must agree to enact the election. The term member/shareholder does not include a Real Estate Investment Trust as defined by § 856 of the Internal 

Revenue Code and an organization exempt under the Internal Revenue Code (including IRA's, Keoghs, pension and profit-sharing plans and other such organizations), or any other tax-exempt entity listed in TG § 10-104.    

What income is applicable?

An electing PTE’s taxable income equals the portion of a pass-through entity’s income under the federal Internal Revenue Code, calculated without regard to any deduction for taxes based on net income that are imposed by any state or political subdivision of a state.

Are there any limitations?  

For entities that elect to pay tax on members’ shares of income, the law limits the liability of the pass-through entity to the sum of all the resident and nonresident members’ shares of the pass-through entity’s distributable cash flow.   

The limitation operates solely for the relief of those pass-through entities that have taxable income attributable to the members but do not have sufficient distributable cash flow to pay the total tax.

What are the tax rates?

If the PTE has entity members, it calculates its PTE tax at the Maryland corporate income tax rate (8.25% for the 2021 tax year).  

For individual members, the electing PTE must pay tax at the highest marginal state income tax rate, plus the lowest county tax rate. The highest marginal state individual income tax rate for the 2021 tax year is 5.75%, and the lowest county individual income tax rate is 2.25%, for a total of 8%.

Is my qualifying PTE required to make quarterly PTE payments?

When the tax is expected to exceed $1,000 for the tax year, the PTE must make quarterly estimated payments. The total estimated tax payments for the year must be at least 90% of the tax developed for the current tax year or 110% of the tax that was developed for the prior tax year to avoid interest and penalty.  

Form 510D is used by a pass-through entity (PTE) to declare and remit estimated tax. The PTE may elect to declare, and remit estimated tax on behalf of all members/shareholders. 

Have Questions?

Contact us to talk to one of our business tax advisory experts to ensure that this is the right decision for you and the business.