Maryland pass-through entity SALT deduction workaround becomes law

May 17, 2020
May 17, 2020
0 min. read

On May 7, 2020, Maryland Gov. Larry Hogan allowed Senate Bill 523 to become law, without his signature, creating an elective federal state and local tax deduction limitation workaround for pass-through entities. 


State entity-level taxes have become increasingly popular since the enactment of the Tax Cuts and Jobs Act (P.L. 115-97), which limited the state and local tax (SALT) deduction to $10,000 for individuals. The benefit of the pass-through entity paying the tax is that the ultimate partner can in effect re-characterize a non-deductible individual state income tax expense as a deductible state income tax expense for federal income tax purposes. The taxes paid by the pass-through entity may be deductible for federal income tax purposes, whereas the SALT limitation would apply if that tax were passed through to the member.

Before Senate Bill 523, Maryland imposed a nonresident member tax on pass-through entities at the entity level. While the tax is imposed on the entity, it was treated as a tax imposed on the nonresident or nonresident entity members paid on behalf of the nonresident members by the pass-through entity. Senate Bill 523 amends the tax by providing that a pass-through entity may pay the distributive share or pro rata share of the nonresident and nonresident entity member of the pass-through entity (essentially the status quo), or, as amended, the entity may elect to pay the tax with respect to the distributive shares or pro rata shares of the resident members of the pass-through entity.

Pass-through entity tax election

If the entity elects to pay the tax on the distributive or pro rata shares of the resident members, then the partners, members or shareholders of the pass-through entity would be eligible to claim a Maryland income tax credit based on their share of the entity’s taxable income. 

The tax rates under the measure are complicated. For electing entities, the rate is the highest state rate plus the lowest county income tax rate for individual members. For corporate members, the rate is the current corporate rate. The entity’s income is reported on the member’s return and the member will claim the credit for the part of the entity’s state plus local tax that relates to the member’s share of the entity income. 

For purposes of the law, pass-through entities include S corporations, partnerships, limited liability companies and business trusts or other entities not taxed as corporations. The law is effective July 1, 2020 and applicable to tax years beginning after Dec. 31, 2019. 


The Maryland law is similar to those enacted in six other states: Connecticut, Louisiana, New Jersey, Oklahoma, Rhode Island and Wisconsin. Connecticut’s version of the workaround is the only mandatory tax, while the other states are elective.

The Maryland pass-through entity tax is intended to provide a workaround to the federal $10,000 limitation on the state and local tax deduction. The federal deduction for the new state tax would be claimed at the entity level, but the members would receive a state credit. Importantly, taxpayers should analyze whether making the election and paying the entity-level tax will result in a lower overall tax burden. Not all pass-through entity members may benefit from the election and there may be other tax considerations that make the election undesirable. Taxpayers are encouraged to contact their state and local adviser to determine if paying the entity-level tax is a favorable option and to consider whether this provision, and those similar provisions enacted in other states, will withstand IRS scrutiny.

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