Maryland’s Pass-through Entity Tax Election: Is There a Benefit for Restaurants, Hotels, Distributors and Retailers?

Recent IRS and Maryland publications have provided additional guidance and clarification on Maryland’s pass-through entity (PTE) tax election. The election is a response to the Tax Cuts and Jobs Act (TCJA) of 2017 limiting the state and local tax (SALT) deduction to $10,000 and decreasing many taxpayers’ total itemized deductions. After dispelling some of the uncertainties surrounding the state’s workaround SALT deduction limitation, Maryland restaurant, hotel, distributor and retail owners can see substantial income tax benefits from the PTE election starting with the 2020 business tax return.

Maryland provided guidance last September in regards to the new PTE tax election. The election allows the PTE to pay the tax imposed with respect to its resident members’ distributive or pro rata shares of income at a rate of 8% for 2020 (8.25% for resident entity members). The tax paid as a result of the election is in addition to a PTE’s existing requirement to pay the tax imposed on nonresident members’ distributive or pro rata shares of income. This election allows restaurant, hotel, distribution and retail operators in Maryland to circumvent the $10,000 SALT limitation imposed on individuals by creating an entity-level deduction, which in turn reduces a PTE member’s distributive share of the PTE income reported on their individual returns.

Maryland business owners looking to make this election may do so by checking the appropriate boxes in Maryland forms 510 and 510D. Resident members will be able to claim a credit on their Maryland individual income tax return for the tax paid by the pass-through entity on form 502CR. Note that this is an annual election due every year on April 15 for most PTEs. The 2020 forms have been updated and published by the Comptroller of Maryland to reflect the new election.

The IRS has already expressed its approval of Maryland’s and other states’ SALT limitation workarounds, and intend to propose new regulations outlining the requirements for the types of PTE taxes that will create an allowable deduction for the business. While the election on the surface makes sense, Maryland business owners in the hospitality industry should discuss with their tax accountants the other factors that are involved with making this election.

Contact Aprio’s State and Local Tax (SALT) team today to connect with an experienced advisor. 
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