Insights
Maryland pass-through entity tax workaround clarified under new law
TAX ALERT |
Authored by RSM US LLP
On Feb. 16, 2021, Maryland Gov. Larry Hogan signed Senate Bill 496 to amend the Maryland pass-through entity tax election to apply to all members (resident and non-residents) as the law previously applied to only resident members. Additionally, the amended law clarifies that the tax is imposed on the pass-through entity itself, and to the extent the members are subject to Maryland income tax they are entitled to a credit for their share of the pass-through entity tax. Finally, the amendments are retroactively effective for tax years beginning on or after Dec. 31, 2019 so taxpayers can make this election on their 2020 Maryland tax returns.
Background and the election
Recall that in 2020, Maryland first adopted a pass-through entity state and local tax deduction limitation workaround joining, at that time, six other states. Before the elective tax, the state imposed a nonresident member tax on pass-through entities at the entity level. While the tax was imposed on the entity, it was treated as a tax imposed on the nonresident or nonresident entity members paid on behalf of the nonresident members by the pass-through entity. The pass-through entity workaround amended the tax by providing that a pass-through entity may pay the distributive share or pro rata share of the nonresident and nonresident entity member of the pass-through entity (essentially the status quo), or, as amended, the entity may elect to pay the tax with respect to the distributive shares or pro rata shares of the resident members of the pass-through entity. Senate Bill 496 extends the elective tax to nonresidents.
If an entity elects to pay the tax on the distributive or pro rata shares of the members, then the partners, members or shareholders of the pass-through entity are eligible to claim a Maryland income tax credit based on their share of the entity’s taxable income. The tax rate is the highest state rate plus the lowest county income tax rate for individual members. For corporate members, the rate is the current corporate rate. The entity’s income is reported on the member’s return and the member will claim the credit for the part of the entity’s state plus local tax that relates to the member’s share of the entity income. For purposes of the election, pass-through entities include S corporations, partnerships, limited liability companies and business trusts or other entities not taxed as corporations.
Finally, Maryland requires quarterly estimated tax payments for the pass-through entity tax. For tax year 2021, taxpayers should consider the election before the first quarterly estimated tax payment is due, otherwise taxpayers risk being subject to underpayment penalties. Furthermore, since the original law was enacted in May of 2020 and applies to tax years beginning after Dec. 31, 2019, taxpayers who make the election for tax year 2020, but failed to remit the appropriate quarterly estimated tax payments, may also receive underpayment penalties.
Takeaways
The Maryland Attorney General noted some concerns with the treatment of nonresident members in the adopted statutory language when the workaround was enacted in 2020. Senate Bill 496 appears to resolve those concerns.
The Maryland pass-through entity tax is intended to provide a workaround to the federal $10,000 limitation on the state and local tax deduction. The federal deduction for the new state tax would be claimed at the entity level, but the members would receive a state credit. Importantly, taxpayers should analyze whether making the election and paying the entity-level tax will result in a lower overall tax burden. Maryland pass-through entities considering electing into the new tax are cautioned that not all owners may benefit from such an election. As in the seven other states that have adopted the workaround tax, making the election may, or may not, create significant tax savings when aggregating federal and state tax liabilities.
Taxpayers are encouraged to contact their state and local advisers to determine if electing into an entity-level tax is a favorable and ultimately tax-saving strategy.
Let's Talk!
Call us at +1 213.873.1700, email us at solutions@vasquezcpa.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Steve Arluna, David Brunori , Amol Jain and originally appeared on 2021-02-18.
2020 RSM US LLP. All rights reserved.
https://rsmus.com/what-we-do/services/tax/state-and-local-tax/income-and-franchise/maryland-pass-through-entity-tax-workaround-clarified-under-new.html
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.