Maryland Business Owners Getting Around Federal SALT Deduction Cap? (and Maryland Paper Return Processing)

Pass-Through Entity-Level Tax

2020 Maryland Senate Bill No. 523 of Maryland’s 441st Session of the General Assembly will become effective on July 1, 2020.

For tax years beginning on or after January 1, 2020, pass-through entities (PTE) will be allowed to elect entity-level taxation. This effectively allows taxpayers to avoid the $10K state and local tax (SALT) deduction limitation by deducting these taxes at the entity level without limitation for federal tax purposes.

If the election is made the sum of each resident member’s distributive share of the PTE’s taxable income will be subject to:

  • A tax equal to the lowest county tax rate imposed + the top marginal state tax rate for individuals, or
  • A tax equal to the state corporate income tax rate

This tax cannot exceed the sum of all members’ share of PTE distributable cash flow.

Each member can claim the tax paid on their distributive income as a credit against the state income tax.

PTEs are still required to pay withholding tax on nonresidents’ distributive income.

The Comptroller has yet to issue regulations on this new law.  We anticipate guidance that will explain the mechanics of the election, tax payments and planning opportunities for individuals to have estimated tax payments paid by PTE instead of individual estimated tax payments.

Paper Return Processing

Maryland Comptroller’s office has resumed processing of paper individual income tax returns as of May 18, 2020. Paper returns have not been processed since April 15th due to concerns of essential employee safety during the COVID-19 pandemic. With a reduced workforce of 40 staffers returning to work, the process of opening, sorting and processing more than 100,000 mail items is anticipated to take approximately 30 days. Taxpayers due refunds should start seeing them in early June.

Questions? Contact us at covid19relief@hertzbach.com.