PTET in Maryland: Delay Today, An Opportunity Tomorrow

Maryland just hit pause on a major tax change that had a lot of pass-through entity owners paying attention.

The pause occurred on April 8, 2026 when Governor Moore signed the 2026 Budget Reconciliation and Financing Act (SB284) into law, which introduced important updates for the 2026 tax year related to Maryland’s pass-through entity tax (PTET). To understand why this matters, it helps to rewind.

Back in 2025, Maryland enacted sweeping tax legislation through its earlier Budget Reconciliation and Financing Act. That law brought a wave of changes, such as a new capital gain surcharge, higher personal income tax rates, and the gradual phase-out of itemized deductions. But for many business owners, the most impactful provision was the planned overhaul of the PTET.

Under that 2025 legislation, beginning in tax years after December 31, 2025, pass-through entities electing into PTET would calculate tax differently depending on residency. Maryland resident owners would be taxed on their full distributive share of income—regardless of where it was earned—while nonresidents would continue to be taxed only on Maryland-source income.

That shift was a meaningful taxpayer benefit. Maryland residents are already taxed on their worldwide income at the individual level, but under the old PTET structure, the entity-level tax (and corresponding federal deduction) applied only to Maryland-source income. The new 2025 legislation closed that gap, allowing resident owners to effectively claim the PTET benefit on 100% of their income.

Now with the passage of SB284, that favorable change is postponed. The implementation has been pushed back to tax years beginning after December 31, 2026, meaning the 2026 tax year will continue under the existing rules.

The immediate benefit is delayed, but it’s not gone. And there is now some flexibility. The new law introduces an election that gives pass-through entities more control over how they calculate PTET. Entities can now choose between two methods: applying PTET to 100% of income for Maryland residents (and apportioned income for nonresidents) or sticking with Maryland-apportioned income for everyone.

This election helps resolve technical issues, particularly for S corporations, like the risk of creating a second class of stock, which could have jeopardized S corp status under the original framework.

PTET changes are not the only thing happening in Maryland tax. The state is also continuing to decouple from certain federal provisions, including full expensing of domestic R&E costs and changes to business interest limitations and bonus depreciation. Translation: There will be more adjustments on your Maryland return, and more complexity to manage.

Bottom line: Maryland is trying to strike a balance between taxpayer benefits and administrative practicality. For now, the rules are familiar, but the planning opportunities are shifting. Keeping an eye on these changes (and making the right elections) could make a meaningful difference in your 2026 and 2027 tax outcomes.