Maryland Comptroller Brooke Lierman issued a letter Feb. 28 to address the challenges and concerns of tax practitioners regarding the policy and procedural changes to pass-through entity (PTE) filings and payments. Most significantly, the comptroller has agreed to provide a one-time waiver for taxpayers who missed electing PTE treatment on the first filing of the year.

Background

The comptroller said last April that, 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. The first form filed for that tax year must have an election indicated by checking the box or it would be deemed as an irrevocable nonelection for that tax year. If the first payment of the tax year is submitted without an accompanying form that checks the box, the PTE shall be deemed as making an irrevocable nonelection for that tax year. Because the election (or nonelection) is irrevocable once made, it could not be changed by filing an amended return.

Relief and Updates

In her recent letter, the comptroller said 20% of tax preparers did not make the election in the first filing as required, and the failure adversely impacted their clients.

Accordingly, the comptroller has provided that a PTE that seeks to elect to pay entity-level PTE tax for tax year 2023 that and missed the first filing requirement for the election may electronically file Form 511 with a full and accurate list of member information detailed on Schedule B.

The letter emphasized that this would be a one-time waiver and that, for tax year 2024, if a PTE is seeking to take the election, it must be made with the first filing of the year. Failure to check either the box electing PTE or not electing PTE shall be deemed a failure to make the election. The comptroller will regard the inaction as the entity choosing to pay tax only on behalf of nonresident members (per statutory mandate), and the decision shall be irrevocable for the tax year. Checking both boxes in error shall result in a deemed election to pay tax on behalf of all member’s shares and shall also be irrevocable for the tax year.

The average processing time for PTE returns has decreased from 100 days to 30 days due to various internal changes and increased electronic filing rates, according to the comptroller.

Commentary

Even though Maryland has provided relief for the 2023 tax year, it is unlikely, especially given the manner the letter addresses 2024 filings, that any other tax year will be afforded the same opportunity.

The election must be made on an annual basis and does not automatically return the same indication as the prior year’s action. Requests for overpayments to apply to estimated payments for a subsequent year have no bearing on this. Rather, if a 2023 electing PTE that is still uncertain about electing for 2024 requests an overpayment from 2023 to be applied to estimated payments for 2024, the overpayment shall be credited to the PTE’s account for 2024 based on the 2024 election. Additionally, as previously noted, the state will not accept amended returns as indicative of a change of election.

Therefore, taxpayers should note the deadlines and ensure that adequate action is taken, especially since not checking a box or neglecting to include an accompanying form will result in an irrevocable nonelection.

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.

[View source.]