Changes in Maryland Tax Payments to Reduce Your Federal Income

This will save taxes, so we want to do this for you now.

If you live or have a business in Maryland, we will be emailing you shortly about changes to your Maryland taxes.  We have been working on your tax planning.  We have estimated the savings to each of you already….as best we can at this time of the year.

We will want your business to pay the Maryland tax that you would normally pay personally. 

This means the federal net income passed through to your personal return will be lower.  It means lower federal taxes for you.  This will save many of you thousands in federal taxes.

Background
This summer, the Comptroller of Maryland finally released its revised income tax forms to reflect the impact of recent law changes to the state’s new pass-through entity (PTE) election.  New tax forms have been created on the business and personal side to handle these changes.

The new law allows Maryland pass-through entities (S Corps, etc) to elect to pay the income tax imposed with respect to resident/shareholders members’ distributive or pro rata shares of income.

On February 15, 2021, Senate Bill 496 was signed into law.  The bill made changes to the PTE tax election. Specifically, the bill expanded the scope of the election so that the entity-level tax applied directly to the distributive or pro rata shares of income of all members (i.e., resident and nonresident members).

A PTE now has two filing options. First, a PTE can decide to not make the election, which means that the PTE will only be required to pay the non-resident withholding tax..nothing new here.  A non-electing PTE will file Form 510, as it has in the past.

Second, a PTE can elect to pay the income tax at the entity-level on the distributive or pro rata shares of income of all members. An electing PTE will file Form 511.

Pass-through Entity Addback
An electing PTE is taxed on the “pass-through entity’s taxable income.” This is the income/loss amount entered on line 2 of the new Form 511.

The term “pass-through entity’s taxable income” means the  “the portion of a pass–through entity’s income under the federal Internal Revenue Code, calculated without regard to any deduction for taxes based on net income that are imposed by any state or political subdivision of a state.”  This means the income/loss amount on line 2 of Form 511 is required to include a modification for the amount of federal income tax deduction attributable to taxes based on net income.

For whatever reason, the Comptroller decided to embed the state income tax addback in the same line where net income/loss is entered. Thus, the amount of the addback will not appear on a separate line of Form 511.

Member Addback for PTE Credit
A member of a PTE that elects to pay the entity level tax is required to addback to income the amount of the credit allowed on the member’s return for the taxes paid by the electing PTE.

Each member of an electing PTE will receive a K-1 that includes the member’s share of the entity-level tax paid by the PTE.

The Maryland K-1 has been updated to include a line for this amount on line 2 of part D.  This amount flows to the Form 500CR, Income Tax Credit for Individuals, Part CC, line 7.

The credit will then be shown as a payment for the member on either the Maryland resident or nonresident income tax return.

The addback for this amount is reported on line 1 of Form 500LU, and then combined with any other additions on the member’s Maryland income tax return.

Although all of this seems very complicated, the goal and effect will be substantial federal tax savings to you.