The Maryland Comptroller today announced that counties will receive $231 million in a special income tax distribution related to administrative complexities for pass-through entities in tax year 2020.
A pass-through entity is any business recognized as a separate entity for federal income tax purposes and the owners of which report their distributive or pro-rata shares of the entity’s income, gains, losses, deductions, and credits on their individual returns.
The state and local tax (SALT) deduction allows taxpayers to subtract state and local income, sales, and property taxes from their federal tax payments as part of their itemized deductions. But, Congress in 2017 capped the SALT deduction at $10,000 – a move of particular import in states like Maryland.
Several states — including Maryland — allow non-corporate businesses to pay state income taxes at the entity level rather than the individual level on their owners’ returns. Because the SALT cap applies only to individuals, these laws aim to help PTEs avoid the cap.
Two laws passed during the 2021 General Assembly session affected tax year 2020 PTE returns: SB 496 – Recovery for the Economy, Livelihoods, Industries, Entrepreneurs, and Families (RELIEF) Act and SB 787 – Digital Advertising Gross Revenues, Income, Sales and Use, and Tobacco Taxes – Alterations and Implementation. Both laws created extensive changes to PTE tax forms, which led to administrative complexities for some PTE returns.
According to the Maryland Comptroller:
This distribution is intended to accelerate local governments’ receipts of certain funds related to tax year 2020. The ability for pass-through-entities (PTEs) to make estimated payments on behalf of resident members created a labyrinth of scenarios through which a tax return might pass. As such, we have a relatively small batch of tax returns (i.e., thirty-two thousand, but very high dollar values), that in the absence of the new PTE functionality would likely have been processed prior to your January distribution; therefore, we have determined it more appropriate to make this distribution rather than delay until the next delinquency distribution. We do anticipate that our feedback to the tax preparation community will prevent this occurrence in the future.
Stay tuned to Conduit Street for more information.