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On Monday, the IRS and Treasury announced it will allow certain businesses the ability to take a deduction for elective entity-level (partnerships and S corporations) income taxes (IRS notice N 20-75). Several states have implemented entity-level income taxes as a way to circumvent the $10,000 cap on the state and local tax deduction for individuals. Maryland enacted such a law, effective July 1, 2020 that would allow partnerships and S corporations to make an election to pay the tax for its’ resident owners (Maryland Income Tax Administrative Release No 6).
By making the election to have the business pay the tax on behalf of the MD resident owner, the business is then able to take the full deduction for taxes paid which then reduces the owner’s passthrough income and thereby their federal tax liability. Essentially, the election would allow business owners to pay their state taxes through their business instead of as an individual where they would be subject to the $10,000 limitation when they itemize their deductions on their federal income tax return. The business owner would then be able to claim a credit for the taxes paid on their behalf when they file their MD income tax return.
With the current highest federal marginal tax rate of 37%, a deduction that reduces pass-through income could result in significant tax savings. For example, a $100,000 deduction could result in federal tax savings of $37,000.
The election is made annually by checking the box on MD Form 510 and the business should make estimated tax payments using Form 510D.
As always, Lanigan, Ryan, Malcolm & Doyle will continue to monitor the evolving business landscape and add updates to our COVID-19 resource center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.