At the end of June 2021, the Maryland Comptroller released its revised income tax forms to reflect the recent law changes to Maryland’s new pass-through entity (PTE) election.
Under the new Maryland law Senate Bill 523, for tax years beginning January 1, 2020, PTEs can have their net income taxed at the entity level instead of at the individual partner level thereby creating an entity-level tax deduction. The benefit of this election is that the entity-level tax deduction is not subject to the $10,000 cap on individual State and Local Tax (SALT) deductions specified in the federal 2017 Tax Cuts and Jobs Act.
The purpose of SB 0523 is to shift the deduction for state income taxes from the limited individual income tax return to the PTE tax return where it is not limited.
The tax rate charged will be the top marginal state income rate (5.75% for Maryland) for individuals plus the lowest county tax rate (2.25%) or the Maryland corporate tax rate (8.25%) for owners of a PTE. Members are still required to report their PTE income on their federal and Maryland return, however, they can take a tax credit on their return for taxes paid by the PTE on their allocable share of PTE income.
Qualifying PTEs include Maryland residents who operate S-Corporations, partnerships, Limited Liability Corporations (LLCs) not taxed as corporations in Maryland, and business or statutory trusts not taxed as corporations in Maryland. Qualifying PTEs with resident individual and corporate members are permitted to make the election. Partnerships may have non-Maryland partners and still be eligible for the election and tax credit. Eligible businesses are not required to operate solely in Maryland but must be subject to Maryland tax. Qualifying PTE’s have the flexibility to make the election every year.
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For more information, access Frequently Asked Questions on the Maryland Pass-Through Entity Tax.