Maryland’s RELIEF Act Expands Pass-through Entity Tax Election to Apply to Nonresidents

On February 13, 2021, the Maryland legislature approved Governor Larry Hogan’s Recovery for the Economy, Livelihoods, Industries, Entrepreneurs and Families (RELIEF) Act (Senate Bill 496). The $1 billion emergency legislative package includes up to $300 million of direct support for small businesses, but the RELIEF Act also made a very important change to the pass-through entity (PTE) tax election that was enacted into law last year. Prior to the enactment of the RELIEF Act, the PTE election created an entity-level tax only for the portion of the distributive share of income of the PTE attributable resident members of a PTE. The RELIEF Act now makes the election applicable to the distributive share of income of the PTE of all members of the PTE (i.e., resident and nonresident members). This change applies to tax year 2020 and those thereafter. However, the Comptroller is yet to release revised forms reflecting the law change made by the RELIEF Act.

The purpose of the PTE election is to create an additional federal income deduction at the business entity’s return. The expansion of the election by the RELIEF Act to have it apply to the distributive share of income of nonresident members created a larger deduction for the business, which directly flows-through to the PTE members as a reduction to each member’s distributive share of pass-through entity income reported on their personal income tax return.

The RELIEF Act also updates the personal income tax and corporate income tax laws to require such taxpayers that are members of a PTE that make the Maryland PTE election to add back to their federal adjusted gross income (for individuals) or federal taxable income (for corporations) the amount of tax paid by the PTE that is attributable to that member’s share of the PTE tax. This aspect of Maryland income tax regime is an interesting and somewhat complicated one.  Generally, a business that is subject to an entity-level state income tax will make addition and subtraction modifications on its own return prior to determining state taxable income and income tax liability.

Maryland’s election, which is similar to those enacted by a number of other states, effectively circumvents the $10,000 SALT deduction limitation, as the limitation only applies to individuals. This type of election was preliminarily approved by the IRS in December of 2020. Logistically, Maryland’s PTE election is made on a timely filed Maryland PTE income tax return. Thus, the act of making the election is relatively straightforward. With respect to quarterly estimated payments that were made by a PTE and originally intended to be for nonresident withholding, the Comptroller is likely to allow those payments to be treated as estimated payments for the entity-level tax for PTEs that choose to make the PTE election. Further, taxpayers that wish to make the election will have to delay filing their Maryland PTE income tax return because the Comptroller has not yet updated the applicable form to reflect the change in the law. Based on information provided by the Comptroller, Aprio suspects that the updated forms will be available in early March.

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