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Earlier this month, Maryland passed Senate Bill 523, which will take effect July 1 and apply to tax year 2020. The bill gives pass-through entities (PTE) the option of paying state income taxes at the entity level instead of at the individual partner level.
Under the federal Tax Cuts and Jobs Act of 2017, the maximum state and local tax deduction is limited to $10,000 through tax year 2025. In response to this limitation, several states have enacted or proposed legislation subjecting PTEs to an entity-level income tax to allow state and local taxes to be deducted.
A PTE income tax return is generally an information return. The entity’s income or loss is passed through to the separate members for taxation purposes. Nonresident owners are generally subject to the Maryland nonresident PTE income tax. A credit may be claimed on a member’s income tax return for any tax paid on behalf of a nonresident member by the PTE.
Under the bill, PTEs may elect to pay state taxes on behalf of all members. PTEs making the election pay tax on behalf of individual PTE members at the highest marginal state income tax rate (5.75 percent) and the lowest county tax rate (2.25 percent). PTEs will also pay a tax rate of the current corporate rate (8.25 percent) for corporate members. The members will then receive a state credit for the taxes paid.
Maryland will still need to issue guidance to provide additional clarification on this new law.