When Maryland Senate Bill 523 passed in May of 2020, no one imagined that it would have taken state legislators more than nine months to address the state and local tax (SALT) workaround technical challenges. That all came to end on February 15, 2021, when Governor Hogan signed into law the Recovery for the Economy, Livelihoods, Industries, Entrepreneurs, and Families (RELIEF) Act. While this new piece of legislation is in large part a response to the adverse effects of the COVID pandemic, state legislators used this opportunity to provide the promised technical corrections to Senate Bill 523. The important takeaways are as follows:
- The election will now be available to ALL members of the pass-through entity– not just residents. This means the election would convert nonresident tax to entity level tax to be taken as an expense, rather than withholding payment (distributions) made on behalf of non–resident members. The previous treatment of nonresidents would still apply if the entity does not make the election. It’s important to note the yearly election applies to all members during that year. It is all or nothing!
- The ability to claim a credit from another pass-through entity will now be available to ALL members of the current pass-through entity, thereby addressing our concerns regarding multi-tiered pass-through structures.
- An addition modification will now be required on the individual or trust’s Maryland income tax return. Despite this new requirement, the law still does not clarify whether or not the pass-through entity itself needs to take into account the addition modification when calculating their Maryland entity level tax. The result is a circular equation at the pass-through entity level.
- The addition modification should be the taxpayer’s share of the Maryland pass-through entity tax deducted for federal income tax purposes. This may not necessarily be the same as the pass-through entity tax credit reported on the MD K-1 due to many factors. Therefore, it’s important to separately disclose this amount to members of pass-through entities.
There’s no question these technical corrections are welcome, but there are still many issues surrounding this new law. Also, please note that this may not lend itself to the best overall tax benefit for all members of the pass through entity, so it is worthwhile to run the numbers before making the election. Do not hesitate to contact a member of our tax team with any questions you may have regarding this new law and how it may affect you.