Maryland Enacts Optional Entity-Level Tax for Passthroughs

calendar iconMay 22, 2020

Recently enacted legislation allows certain passthrough entities to elect to pay Maryland income tax at the entity level for tax years beginning on or after January 1, 2020.

Individual and corporate members may claim a tax credit for income tax paid at the entity level on their Maryland tax returns. This eliminates any double taxation for the state of Maryland, however, the election may result in double taxation of flow-through income if out-of-state members aren’t offered a similar credit in their resident state.

The tax rate for electing passthrough entities is the sum of the lowest county tax rate imposed and the top marginal state tax rate for individuals, applied to the sum of each individual member’s distributive or pro rata share of the passthrough’s taxable income. For passthrough entities with corporate members, the tax rate is equal to the state corporate income tax rate applied to the sum of each member’s distributive or pro rata share of the passthrough’s taxable income.

Tax is not paid for a member that is itself a passthrough entity, rather such passthrough entity may determine its own tax at its level. The total tax paid by the entity may not exceed the sum of all members’ shares of the distributable cash flow.

With this bill, Maryland becomes the latest state to adopt a workaround to circumvent the $10,000 cap for the federal state and local tax (“SALT”) deductions. To date, the IRS has not issued guidance limiting the use of passthrough entity tax workarounds, as it did with the state charitable deduction.

If you have questions about whether an entity-level tax is the right option for your Maryland passthrough entity, please contact Cathie Stanton or our SALT team.

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