JD, Principal, Practice Leader, State and Local Tax (SALT) Services
View full biography
Maryland passes new legislation for an elective pass-through entity tax
Maryland recently passed new legislation allowing pass-through entities (PTEs) such as partnerships and S corporations to make an election to be taxed at the entity level instead of being taxed at the owner level. This new elective tax could potentially allow for a federal tax deduction for owners who are capped at a $10,000-per-year state tax deduction under the Tax Cuts and Jobs Act of 2017 (TCJA).
One of the provisions of the TCJA was a new $10,000 state and local tax (SALT) deduction limit for individual taxpayers. In response to this cap, several states began to develop workarounds, with some enacting entity-level tax provisions to “give back” the SALT deduction on business income derived from pass-through entities.
The new Maryland legislation creates an elective entity-level tax for Maryland PTEs. The tax rate will be the top marginal Maryland tax rate for individuals (5.75%) plus the lowest applicable county tax rate (2.25%), or the Maryland corporate tax rate (8.25%). PTE owners must still report their business income derived from the PTE on their individual federal and Maryland tax returns, but they can claim a credit against Maryland state income tax equal to the tax paid by the PTE. Taxes due under this new regime can’t exceed the distributable cash flow of the PTE. Further, it is important to note that if the PTE makes this election but doesn’t pay the tax, Maryland can collect the taxes due from the owners.
Under the new legislation, distributable income to tax-exempt owners and real estate investment trust (REIT) owners will not be taxed. Owners that are themselves PTEs will not have the option to have their income taxed at the lower level. Instead, the upper-tier PTE must make an independent election to have income taxed at the entity level.
Currently, there are several questions that have yet to be addressed by the Comptroller of Maryland. These questions include but are not limited to: 1) whether the election will carry over when a PTE interest is sold; 2) whether PTEs must make the election on annual basis or the election will be permanent; and 3) how and when a PTE will need to make the election.
Stay tuned, as the Comptroller of Maryland will need to issue regulations on the various aspects of the law that takes effect July 1, 2020. Maryland residents impacted by this law should confer with their tax advisor to determine whether this “SALT deduction cap workaround” will actually allow for a federal income tax deduction as intended. The fact that owners have to pay if the PTE makes the election then fails to makes this look less like a deductible entity-level tax. In addition, Maryland nonresidents will need to review their resident state tax laws to determine if the Maryland tax paid by the entity will be creditable against their resident state income tax.
Myron Vansickel, CPA, Director, State and Local Tax Services
703.744.6752
Related Services
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.
Related Insights
-
InsightNew York State’s 2023-24 budget adjusts PTE tax, various creditsArvinder Kaur, Corey L. RosenthalThe state’s new budget extends, expands, or otherwise adjusts various tax rates, definitions, and provisions. Read highlights.
-
InsightFlorida court: No homestead tax exemption on exclusively rented residenceFaith L. Gorman, Melissa MagerCan a homeowner receive the homestead exemption on a portion of their residence that is rented exclusively to a tenant? Read more.
-
InsightWashington state capital gains tax ruled constitutional, due April 18Krista Schipp, Jamie KellyFollowing a state supreme court ruling that the new tax is constitutional, taxpayers should start assessing their liability right away. Read our overview.
-
InsightMaryland updates pass-through entity tax election date for 2023 tax yearJohn Iannotti, Jason Gajramsingh, James GaulMaryland’s updated PTE tax election due date means that taxpayers will need to understand their filing method far in advance of the return due date. Learn more.