In summary, for Federal income tax purposes, the election\nresults in the following:<\/p>\n\n\n\n

• The electing PTE reports the Maryland state tax\npayment as a deductible state tax payment on its Federal tax return in\ncomputing its non-separately stated ordinary business income.<\/li>
• The PTE owner receives a tax benefit for the\nentity level taxes paid by reporting the now reduced distributive or pro rata share\nof PTE ordinary business income on their individual Federal income tax return. This\novercomes the $10,000 SALT itemized deduction for Federal tax purposes for\npayments that were previously paid at the individual level.<\/li><\/ul>\n\n\n
  \n

  <\/figure>\n<\/div>\n\n\n

  In summary, for Maryland income tax purposes, the election results in the following:<\/p>\n\n\n\n

  • The electing PTE pays the Maryland entity level\ntax computed based on a PTE\u2019s resident owners in addition to the mandatory\nnonresident tax payment based on a PTE\u2019s nonresident owners.<\/li>
  • A PTE owner will be required to add-back the\nMaryland state taxes deductible at the Federal level when calculating Maryland\ntaxable income. A PTE owner\u2019s add-back should be reported on their K-1. <\/li>
  • A PTE resident owner will receive a credit, for\ntheir share of Maryland taxes paid at the entity level, to be claimed on their\nindividual Maryland tax return.<\/li>
  • If a PTE resident owner\u2019s Maryland tax liability\nis less than the amount of the credit, then the excess is treated as a tax\nrefund to the owner.<\/li>
  • A PTE resident owner may not need to pay\nestimated taxes at the individual level by virtue of the taxes being paid at\nthe entity level.<\/li><\/ul>\n\n\n\n

    Potential\nTax Savings Example<\/strong><\/h3>\n\n\n\n

    Consider the following example that illustrates the\npotential tax savings a Maryland resident PTE owner may receive when making the\nelection for a business to pay tax at the entity level.<\/strong><\/p>\n\n\n\n

    Assumptions:<\/em><\/p>\n\n\n\n

    • Taxpayer is a Maryland resident that holds 100%\nstock ownership in a S Corporation. <\/li>
    • The employee shareholder taxpayer earns\n$200,0000 in taxable W-2 wages from the S Corporation as reasonable\ncompensation for services rendered to the corporation. <\/li>
    • The S Corporation reports $600,000\nnon-separately stated ordinary business income that flows through to the\nTaxpayer\u2019s individual income tax return. <\/li>
    • The S Corporation is a Specified Service Trade\nor Business for Section 199A purposes.<\/li>
    • Taxpayer files a Married Filing Joint return\nthat only includes the taxable income from the W-2 and S Corporation K-1. <\/li>
    • Taxpayer elects to take the itemized deduction\nby reporting deductible mortgage interest of $30,000 and the maximum SALT\ndeduction of $10,000 when taking into account real estate taxes and Maryland\nincome taxes.<\/li><\/ul>\n\n\n\n

      If choosing to not make the election, then based on the\nassumptions listed above, the taxpayer will report Taxable Income of $760,000\n($800,000 Adjusted Gross Income less $40,000 Itemized Deduction) and be subject\nto regular Federal income tax liability in the amount of $218,349 with respect\nto the 2020 tax year. <\/p>\n\n\n\n

      Please note that in this example, the taxpayer would\npersonally pay their full Maryland tax liability but would not see any tax\nbenefit for the payments by virtue of the Federal $10,000 SALT deduction\nlimitation.<\/p>\n\n\n

      \n

      <\/figure>\n<\/div>\n\n\n

      However, if the Taxpayer decides to make the election and\nhave the S Corporation pay the $48,000 ($600,000 x 8%) entity level tax in 2020,\nthen the S Corporation is able to include the $48,000 as a deductible entity\nlevel tax payment on its 2020 tax return. This results in non-separately stated\nordinary business income being reduced from $600,000 to $552,000. <\/p>\n\n\n\n

      The Taxpayer will now report Taxable Income of $712,000\n($752,000 Adjusted Gross Income less $40,000 Itemized Deduction) and be subject\nto regular Federal income tax liability in the amount of $200,589 with respect\nto the 2020 tax year. Please note that in this example, the Taxpayer receives a\ncredit for the entity level taxes paid that is claimed on the Taxpayer\u2019s\nindividual Maryland tax return.<\/p>\n\n\n\n

      In the example above, the Taxpayer experiences $17,760\n($218,349 less $200,589) in tax savings by making the PTE election. <\/p>\n\n\n\n

      Other\nConsiderations<\/strong><\/h3>\n\n\n\n

      Administrative guidance still needs to be issued from the State of Maryland concerning the election. There is still much uncertainty including how to make the PTE tax election and how and when the PTE is to make the tax payment. Maryland will need to issue clarity regarding the potential entity level election treatment with regards to nonresident owners\u2019 distributive or pro rata share of PTE income. Also, clarification is needed regarding how this may affect Maryland\u2019s credit mechanism for taxes paid to other states and localities. <\/p>\n\n\n\n

      For planning purposes, Maryland PTE owners will need to consider the election and potentially alter their Maryland tax payments. Finally, the electing PTE may need to consider the accounting for this tax liability in their financial statements moving forward.<\/p>\n\n\n\n

      If you found this article helpful or would like to know more about what was discussed above, please reach out to a member of our SALT team for further assistance.  <\/p>\n\n\n\n

      <\/div>\n\n\n\n

      \n

      Contact us<\/a><\/div>\n<\/div>\n\n\n\n

      <\/div>\n\n\n\n

      Today’s Thought Leaders<\/strong><\/p>\n\n\n\n

      Contact us today by calling 301-585-0506.<\/tcxspan><\/strong><\/p>\n\n\n\n

      <\/figure>

      \n

      About Eric Ingis<\/strong><\/h3>\n\n\n\n

      Supervisor & CPA<\/strong><\/h4>\n\n\n\n

      With the firm since 2014, Eric has become an integral part of the firm\u2019s tax team. Eric focuses on providing various tax advisory services for high net worth individuals, corporations and partnerships as well as providing state and local tax (SALT) advisory services to businesses of all sizes in order to mitigate risk, identify tax savings opportunities and remain in compliance with various state and local laws. <\/p>\n\n\n\n

      Read Eric’s full bio<\/a>.<\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

      Senate Bill 523 creates an election for Maryland PTEs, permitting tax payment at the individual level by the pass through entity owners. <\/p>\n","protected":false},"author":2,"featured_media":79915,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","_themeisle_gutenberg_block_has_review":false,"_ti_tpc_template_sync":false,"_ti_tpc_template_id":"","footnotes":""},"categories":[2],"tags":[218,176],"class_list":["post-74046","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manufacturing","tag-state-tax","tag-state-tax-laws"],"yoast_head":"\n