PODCAST: Update on Maryland Pass-Through Entity Taxation Election

Published on: 11/20/2020 By: GSG

Maryland pass-through entities, including partnerships and S corporations, now have an option to elect to pay Maryland state income tax rather than tax being paid by the entity owner(s).

In 2017, the Tax Cuts and Jobs Act put a cap ($10,000 overall) on the amount of state income tax that’s deductible in Schedule A of individual tax returns. Various high tax states tried to brainstorm ways to avoid this cap for their taxpayers. A few states tried to develop a workaround that would treat the state deduction as a charitable deduction, which was ultimately rejected by the IRS.

States then came up with the solution in which pass-through entities (partnerships and S corporations) “pass-through,” meaning partners or shareholders ultimately pay the tax on the income of the S corporation or the partnership. These states later created this selection for entity level tax, where the pass-through entity pays the tax, not the owners of the S corporations or partnerships.

Just last week, the IRS officially provided guidance that they are going to allow for this workaround, making it quite the beneficial deduction for many taxpayers.

The first step most taxpayers will need to take is to pay estimates before year-end. There are different considerations to keep in mind for cash basis and accrual basis taxpayers:

  • Cash basis taxpayers – these taxpayers can only deduct expenses for which they pay by the end of the year and would need to pay an estimate. On the estimate voucher, there’s a box to mark to indicate you’re paying resident entity taxes on behalf of your resident partners, and this payment needs to be submitted in form before December 31st.
  • Accrual basis taxpayers – there’s some uncertainty on whether you need to make the payment before the end of the year or not. If you’re uncertain and just want make sure you take advantage of this deduction, pay the estimate before the end of the year. However, it’s possible that accrual basis taxpayers could still claim the deduction even if they don’t pay the tax until next year.

While there are still unanswered questions in Maryland, GSG is here to help taxpayers take advantage of the new deduction. Contact our team today with any questions or concerns.

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