May 22nd, 2020

Maryland Enacts a “Work-around” to Increase the Deduction for Taxes

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Author: David S. De Jong

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Maryland has become the seventh state to allow pass-through entities such as partnerships, limited liability companies and S-corporations to elect to be taxed at the entity level as a “work-around” to the $10,000 cap on deducting state taxes as itemized deductions.

The Tax Cuts and Jobs Act of 2017 imposed the state tax deduction limitation for 2018-2025. With the state’s high income and property tax rates, Marylanders have been significantly impacted.

Effective 2020, pass-through entities can elect to pay a tax at the entity level on Maryland residents. The underlying individuals will compute their individual tax liabilities as always and will claim a credit for their share of taxes paid by the entity. Pass-through entities have traditionally paid a tax only on behalf of their nonresident principals.

The mechanics of the entity level payment are complicated, particularly for accrual basis businesses. Additionally, this technique is untested and an IRS challenge is possible.

If you would like our assistance in determining if this election makes sense for you and your business, contact our Tax Department at 301-340-2020.