Maryland adjusts reporting rules for pass-through entities: Entity-level election changes, extension of deadline

Maryland Senate Bill 787 was enacted May 30, 2021, requiring the Maryland Comptroller to provide specific guidance and mechanics associated with pass-through entities (PTEs) electing to pay Maryland income tax on behalf of all owners, including state residents. The law specifically defines a “pass-through entity’s taxable income” to be the entity’s income calculated under the Internal Revenue Code without regard to any deductions for state income taxes deducted for federal income tax purposes. Consequently, any state income tax deducted from the PTE’s federal taxable income, including Maryland, would need to be added back before applying apportionment in calculating the amount of state income tax due at the PTE level.

In light of the recent law and administrative changes, the Comptroller recently released an updated version of Form 510, “Pass-Through Entity Income Tax Return,” for the 2020 tax year, as well as a new Form 511, “Pass-Through Entity Election Income Tax Return.” Given these recent form releases for the 2020 tax year, the Comptroller has announced an extension of the filing deadline for both of these forms to Sept. 15, 2021. PTE filers will also be able to pay any outstanding PTE income tax liabilities due with either of these returns by the Sept. 15 filing deadline without the imposition of any penalties or interest.

PTE not electing to be taxed at the entity level

PTEs not making the PTE election to pay Maryland tax on behalf of all members can continue filing Form 510. The tax paid at the PTE level on behalf of nonresident owner/members would be acting as an agent on behalf of the nonresident owner/members.

  • Unlike the prior version of Form 510 where no refunds were allowed for overpayments, refunds can be claimed on the new version of Form 510, but only to the extent that estimated payments were made on behalf of Maryland resident owner/members. This is due to the requirement that electing PTEs now must file Form 511 (as discussed below) instead of Form 510.  
  • PTEs not making the election to file Form 510 can continue to file a Form 510C composite income tax return on behalf of eligible nonresident individual members. Any refunds claimed on the Form 510C tax return will continue to be received by the PTE acting as the agent of the nonresident owner/members included on such return.

PTE electing to be taxed at the entity level

  • PTEs making the PTE election to pay Maryland tax on behalf of all members must now file the new Form 511.  
  • PTEs that have already made the election on a filed Form 510 return will now need to amend by filing the new Form 511 in order to secure this election.
  • Any taxes paid and credited on the previously filed Form 510 may be applied as a credit on the Form 511.
  • PTEs making the election are ineligible from filing a composite return on behalf of qualifying nonresident individual members.
  • Nonresident members of electing PTE’s have the option of filing their own Maryland income tax return and claiming a credit for their pro-rata share of tax paid on their behalf.
  • One common issue that had been identified with the prior version of Form 510, in the case of PTEs making the election, was that it was calculating the Maryland residents’ portion of the PTE entity-level tax at 100% vs. the proper state apportioned amount of income generated by the PTE from Maryland sources. This raised the possibility of Federal Schedule K-1 amounts attributable to those resident PTE owners overstating the amount of deductible Maryland income taxes from their pro-rata federal PTE taxable incomes. The newly released Form 511 properly calculates the amount of Maryland PTE tax due on behalf of both resident and nonresident owners and is now properly based on their pro-rata state apportioned share of distributable income.

The Comptroller also released an updated version of Administrative Release No. 6, “Taxation of Pass-Through Entities” (Revised July 2021), that highlights these changes. Despite the extended Sept. 15 deadline for the filing of the 2020 Maryland PTE income tax returns, there have been no deadline changes regarding the 2021 quarterly estimated income tax payments, which are still due on the 15th day of the fourth, sixth, ninth, and 12th months of the PTE’s tax year. Any tax paid by the nonresident members individually may not be applied from tax imposed at the PTE level.

What does CohnReznick think?

Electing PTEs that have not yet filed their 2020 tax returns must now file the Form 511 return in order to make a valid election to pay tax on behalf of all members.  

PTEs electing to pay tax on behalf of all members that have already filed their 2020 Maryland PTE return on Form 510 will need to amend their returns by filing the newly released Form 511.  Any excess PTE tax paid on behalf of Maryland resident filers under the prior version of Form 510 making the election will now be refunded to the PTE. Consequently, impacted resident members should assess any resulting state tax paid credit shortfalls on their respective state individual or upper-tier business entity income tax returns.

Contact

John Iannotti, CPA, Partner, State and Local Tax Services

678.640.3293

Marissa McClain, State and Local Tax Senior

724.977.3721

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