Cactus flower


Maryland enacts optional election allowing pass-through entities to pay income tax with respect to resident members

Multistate Tax alert | June 3, 2020

This Tax Alert summarizes these law changes that are effective July 1, 2020, applicable for tax years beginning after December 31, 2019.


On May 7, 2020, Senate Bill 523 (S.B. 523) was enacted into law without signature.1 This tax alert highlights the notable Maryland tax law changes that are contained in S.B. 523 including:

  • An optional election for pass-through entities (PTEs) to pay income tax imposed with respect to resident members’ shares of distributive income
  • Applicable tax rates for PTEs that elect to pay income tax imposed on resident members
  • A corresponding income tax credit for corporate and individual PTE members
  • Expansion of certain income tax credits for taxes paid to another state by a PTE

Optional entity-level taxation election for PTEs

Under current law, any PTE (S corporation, partnership, limited liability company not taxed as a corporation, or business trust not taxed as a corporation) doing business in Maryland must pay a tax for each nonresident individual and nonresident entity partner or shareholder.2 The nonresident tax paid by a PTE is “treated as a tax imposed on the nonresident or nonresident entity members that is paid on behalf of the nonresidents or nonresident entities by the pass-through entity.”3 Tax paid on behalf of a nonresident member that is also a PTE is allocated to the upper tier partners of the nonresident PTE member. The nonresident PTE member must file a Maryland income tax return to flow up the credit for nonresident tax paid.

Effective for tax years beginning after December 31, 2019, S.B. 523 allows a PTE to elect to pay tax at the entity level with respect to the distributive shares of certain resident members of the PTE.4 The tax paid for any taxable year may not exceed the total sum of all members’ share of distributable cash flow from the PTE.5 The tax does not apply to members of a PTE that meet the definition of a real estate investment trust (REIT) under § 856 of the Internal Revenue Code (IRC) or tax exempt entities under IRC § 501.6

cactus ball

Applicable tax rates for the PTE level income tax

Qualifying PTEs that elect to pay taxes at the entity level must pay the corporate income tax rate (currently 8.25 percent) on entity members’ distributive shares of taxable income.7 PTEs with individual members that make the election must pay tax on behalf of individual PTE members at the highest marginal state income tax rate (currently 5.75 percent) and the lowest county tax rate (currently 2.25 percent, for a combined rate of 8 percent for tax year 2020) applied to individual members’ distributive shares of taxable income.8

Aloe leaves

Income tax credit for corporate and individual members

The election to pay tax imposed on resident members at the PTE level does not eliminate the members’ filing responsibility. Under S.B. 523, PTE members can claim a corresponding state credit for taxes paid at the entity level.9 Corporate members would receive a credit for the attributable taxes paid by the PTE at the corporate income tax rate. Individual members would receive a state credit for the taxes paid attributable to the 5.75 percent state tax rate plus the lowest county tax rate imposed. If the amount of credit exceeds the tax otherwise due, then the excess amount of credit over tax will generally trigger an overpayment that is refundable to the individual or corporate member.

cactus in pot

Credit for taxes paid to another state

S.B. 523 also expands certain provisions that allow residents to claim a credit for taxes paid to another state by a PTE. Members of all PTEs, rather than only shareholders of S corporations, who are Maryland residents may claim a credit against state income tax for taxes paid to other states equal to the member’s pro rata share of the tax paid by the PTE.10

Cactus in pot


Taxpayers should consult with their tax advisers regarding the tax implications of the election for PTEs to be taxed at the entity level for Maryland income tax purposes.

Cactus ball


If you have questions regarding S.B. 523 or other Maryland tax matters, please contact any of the following Deloitte professionals:

Joseph Carr, managing director—Multistate, Deloitte Tax LLP, McLean, +1 703 251 1532

Jennifer Alban-Bond, senior manager—Multistate, Deloitte Tax LLP, McLean, +1 703 251 1419

The authors of this alert would like to acknowledge the contributions of Olivia Schulte to the drafting process. Olivia is a Tax Senior working in the Washington National Tax—Multistate Tax practice of Deloitte Tax LLP.

Back to top

Multistate Tax alert archive

The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

View the list of archived Multistate Tax alerts.

bulb filament


1 A copy of the senate bill is accessible here.

2 Md. Code Ann., Tax-Gen. § 10-102.1(a)(7)

3 Md. Code Ann., Tax-Gen. § 10-102.1(c)(1)

4 Md. Code Ann., Tax-Gen. § 10-102.1(b)(2)(II), 10-102.1(f)(1). Note that a PTE may not elect to pay tax at the entity level on behalf of a resident PTE member, which is itself required to comply with the withholding provisions in its capacity as a PTE.

5 Md. Code Ann., Tax-Gen. § 10-102.1(d)(3)(II)

6 Md. Code Ann., Tax-Gen. § 10-102.1(f)(2)

7 Md. Code Ann., Tax-Gen. § 10-102.1(d)(2)(II)

8 Md. Code Ann., Tax-Gen. § 10-102.1(d)(2)(I)

9 Md. Code Ann., Tax-Gen. § 10-102.1(e)

10 Md. Code Ann., Tax-Gen. § 10-703

Did you find this useful?