The Maryland Comptroller (Comptroller) had released instructions for Maryland Form 510/511D for tax years beginning after Dec. 31, 2022. Pass-through entities availed this elective entity level income tax are defined as partnerships, Subchapter S Corporations, and limited liability companies treated as partnerships for federal income tax purposes.

According to the instructions, pass-through entities that wish to make the Maryland Pass-Through Entity Tax (PTET) election were required to do so with the first estimated tax payment of the year starting with the 2023 tax year. For fiscal year taxpayers with tax years beginning after Jan. 1, 2023, the election was required to be made when they pay their estimated tax of their first quarter estimated payment.

Comptroller Policy Change in 2023 Tax Year Maryland PTET Election Requirements

On Feb. 28, 2024, the Comptroller released a Pass-Through Entity Tax Return Processing policy bulletin to tax practitioners noting that only 80% of taxpayers that had elected to file a Maryland PTET for the 2022 tax year had complied with this first quarter estimated payment requirement in making a 2023 Maryland PTET election in a timely manner.

In light of only 80% of 2022 Maryland PTET taxpayers following through on this first quarter estimated tax payment requirement in making their 2023 PTET election in a timely manner, the Comptroller’s bulletin announced that they have waived this requirement for the 2023 tax year only to allow PTE taxpayers to make the PTET election on the annual Maryland Form 511, Pass-Through Entity Income Tax Return, form.

According to the policy bulletin, to accomplish this waiver the PTE wishing to make the election to pay the entity level PTE tax for tax year 2023, even if they did not make the election with the first estimated tax filing/payment of tax year 2023, should electronically file Form 511 with a full and accurate list of member information detailed on schedule B.

If a Form 510/511E extension payment is to be made for a PTE wishing to make the PTET election for the 2023 tax year via the mailing of a paper extension voucher, it is imperative that Box A (Check here if PTE has made the irrevocable election for Tax Year 2024 to remit tax with respect to all members’ shares) is checked indicating the Taxpayer’s intent of doing so. Please refer to the Form 510/511E instructions for further information.

The electronic filing of the extension (on the Maryland Comptroller website) does not provide for a Box A vs. Box B filing option; however, the timely electronic filing of the Form 511 by the extended due date in that instance should suffice in meeting the Comptroller’s requirements in a timely filed PTET election for the 2023 tax year.

2024 Maryland PTET Election Requirements Remain Via Taxpayer’s “First Filing”

For tax year 2024, the election must be made, if at all, with the “first filing” of the tax year, whether that filing is a quarterly estimated declaration payment via the Form 510/511D or other filing, according to the policy bulletin. The election made with the first filing is irrevocable. Once the election is made for the tax year to remit tax at the entity level on behalf of only nonresident members or with respect to all members' shares, the same box must be checked with all subsequent filings. 

Recent guidance provided by the Comptroller to a tax practitioner panel indicated that the “first filing” required in making the PTET election can be made through the first estimated tax payment, extension, or actual tax return filing.

Comptroller guidance provided to tax practitioners also noted that overpayment carryforwards from the 2023 tax year Form 511 or Form 510, Pass Through Entity Income Tax Return, will not be treated as an automatic election or non-election for the 2024 tax year as such overpayments can be applied to either form based on taxpayer’s 2024 tax year election.

In the event that a taxpayer’s “first filing” will be made in the form of an estimated tax payment, the 2024 Form 510/511D has been updated to indicate making the election or non-election is mandatory starting with the initial estimated tax payment made by providing an answer to the following two check boxes allowing the option to either make the PTET election (Box A) or not make the election but merely make a withholding estimated payment of behalf of nonresident owners (Box B):

• Box A: Check here if PTE has made the irrevocable election for Tax Year 2024 to remit tax with respect to all members’ share.
• Box B: Check here if paying tax only on behalf of nonresident members.

It’s important to note that failure to check either Box A or Box B on the 2024 tax year forms will be deemed as a failure to make the PTET election. In the case where no box is checked, the Comptroller will deem the entity to have chosen to pay tax only on behalf of nonresident members as per the statutory mandate, and that decision will be irrevocable for the tax year, according to the policy bulletin. If both boxes are checked in error, the Comptroller will deem you have elected to pay PTET tax on behalf of all members' shares, and that decision will be irrevocable. Please refer to the 2024 Form 510D/511D instructions for additional guidance and procedures for making the PTET election or nonelection with the first quarter estimated tax payment. The Comptroller has also provided informal guidance to tax practitioners that they will not process blank estimate vouchers which do not include a payment as elections or non-elections.

Failure to make required estimated tax payments for the pass-through entity for the 2024 tax year in itself will not preclude the entity from making a valid PTET election with their “first filing” being comprised of a filed extension or tax return; however, estimated tax penalties and interest may apply.

What Does CohnRenzick Think?

In light of recent guidance from the Comptroller, an opportunity exists for certain pass-through entities doing business in Maryland to revisit their ability to file their state income tax return under the state’s elective PTET for their 2023 tax year. The state’s guidance also provides specific requirements to pass-through entities in making a 2024 tax year Maryland PTET election that should be reviewed and applied in conjunction with a “first filing” in the state whether it be in the form of an estimated tax payment, extension, or tax return filing.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}