The Maryland Comptroller’s Office issued a Tax Alert on April 11, 2023 addressing policy and procedural changes to pass-through entity (PTE) filings and payments. For tax years beginning after Dec. 31, 2022, PTEs are required to elect (or not elect) to pay tax at the entity level on all members’ shares of income or pay the mandatory tax on behalf of its nonresident members by the first filing or tax payment for the applicable tax year.
Additionally, the annual election (or non-election) is irrevocable once made. This affirms the instructions for 2023 Maryland Form 510/511D: Pass-Through Entity Declaration of Estimated Income Tax and also applies to 2023 Form 510/511E Application for Extension to File Pass-Through Entity Return.
For tax years beginning after Dec. 31, 2022, the deadline for election (or non-election) is with the first filing or payment for the tax year. For taxpayers with tax years beginning after Dec. 31, 2022 that are required to make estimated tax payments, the deadline for the election (or non-election) would have been on the PTE’s first estimated tax payment, due April 17, 2023 (if one was made).
Background
Maryland is one of several states that has enacted PTE legislation to strategically navigate the state and local tax (“SALT”) deduction limitation of the federal Tax Cuts and Jobs Act (“TCJA”, P.L. 115-97 (Dec. 22, 2017). [SB 523, Chapter 641, Laws of 2020.] PTEs eligible for the election include S corporations, partnerships, limited liability companies (not taxed as a C corporation) and business or statutory trusts (not taxed as a C corporation). (Md. Code. Ann., Tax-Gen. § 10-102(a)(7). The workaround allows electing PTEs to pay an entity-level income tax on Maryland taxable income. This entity-level tax is calculated without including a federal deduction for state and local income taxes.
Additionally, an electing PTE’s member must add back the amount of the tax credit claimed on the member’s Maryland tax return as reported on the member’s Maryland Schedule K-1. In turn, the PTE owners may claim a credit against their Maryland tax for their pro rata share of the Maryland income tax paid by the PTE, and a credit for the owner’s pro rata share of entity-level income taxes that the PTE pays to another state. (Md. Code. Ann., Tax-Gen. § 10-102(b)(2)).
Previously, beginning in July 2021 and through tax year 2022, electing PTEs reported estimated tax payments on Form 510D andindicated by checking a box on the form that they were electing to remit tax with respect to all members' shares. For taxpayers not required to make estimated payments, the election was due only with the timely filing of Form 511 (by the 15th day of the fourth month following the close of the tax year or period, plus any extensions).
Current Law
For tax years beginning after Dec. 31, 2022, the election is now required to be made by checking the box on the first form that is filed for the tax year (including payment if applicable), and is irrevocable for that tax year. All forms subsequently filed for that same tax year, including Forms 510/511D, 510/511E, must also indicate the election with the box checked. Non-electing PTEs must leave the election check box blank on the first filed form and subsequently filed forms. The election (or non-election) is annually made and independent of the election made in prior tax years. It is important to note that if the first PTE payment of the tax year is made without an accompanying form, the PTE is deemed to have made an irrevocable nonelection for the tax year.
A PTE is not required to file a Form 510/511D solely to make the election, however. Rather, a PTE that does not make an estimated payment in the first or any following quarter may make the election (or non-election) on the extension Form 510/511E, if the form includes the first payment of the tax year. A PTE that has not submitted a Form 510/511D, 510/511E or any estimated payments prior to the year-end return may make the election (or non-election) by filing either Form 511 (electing PTEs) or Form 510 (non-electing PTEs).
Any late-filed forms submitted with the first payment of the tax year will be considered by the comptroller as having a valid election or (non-election) for the entirety of the tax year and will not be disregarded due to late receipt. And the comptroller could still apply applicable penalties and interest for late payment. .
Commentary
It is extremely important for taxpayers to note simple inaction can affirm whether an entity makes the election, given that a submission of the first estimated payment even without a form will be deemed as a non-election.
Because the election (or non-election) is irrevocable once made, it cannot be changed by filing an amended return. However, since it must be made on an annual basis, taxpayers may choose to change the election (or non-election) in subsequent tax years. Accordingly, requests for overpayments to apply to estimated payments for a subsequent year do not change this. Rather, if a 2022 electing PTE still uncertain about electing for 2023 requests an overpayment from 2022 to be applied to estimated payments for 2023, the overpayment shall be credited to the PTE’s account for 2023 based on the 2023 election.
Other states with early PTE election requirements include California and New York. Taxpayers should analyze the varying rules per jurisdiction to ensure the most beneficial strategy for the tax year, including consideration of events that may transpire later in the same year that could impact the potential tax due.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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