Maryland Becomes Latest State to Enact Pass-Through Entity Tax as State and Local Deduction Cap Workaround

Joining states such as Connecticut, Louisiana, New Jersey, Oklahoma and Wisconsin, Maryland has enacted an elective pass-through entity tax to circumvent the $10,000 cap for the federal state and local tax deductions. While the IRS rendered other state and local tax workarounds ineffective, such as the state charitable deduction, to date the IRS has not issued guidance limiting the use of the pass-through entity tax workarounds.

The new Maryland legislation, S.B. 523, allows pass-through entities to elect to be taxed at the entity level for income tax purposes beginning in 2020:

• The total tax paid by the entity may not exceed the sum of all partners’ shares of the distributable cash flow.
• Individual and corporate partners may claim a credit against income tax paid by the entity on the partners’ share of the pass-through entity’s taxable income (no such credit is available for pass-through partners).

This legislation is effective July 1, 2020, and will be applicable to all taxable years beginning after December 31, 2019.

Read about other similar state workarounds: “Wisconsin Adds Pass-Through Entity Tax as Workaround to State and Local Deduction Cap”

Contact Cynthia Pedersen or a member of your service team to discuss this topic further.

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