Maryland Business Owners: You May Have Another Deduction Coming Your Way

If you own a business which operates as a partnership or S-corporation in Maryland, you might find some unexpected tax relief this year.

The Tax Cuts and Job Act of 2017 limited the amount of state and local taxes–including real estate taxes–that individual taxpayers could deduct on their tax returns to $10,000. As a result, many Maryland taxpayers found that their itemized deductions were significantly less than in prior years.

In the summer of 2020, Maryland enacted legislation to bypass this limitation for business owners; and last week, in an unexpected turn of events, the IRS issued a notice (IRS Notice 2020-75) announcing their intention to issue proposed legislation to allow these new rules enacted by Maryland (and a handful of other states).

So what does this mean for you? A Maryland partnership or S-corporation can now make an election to remit state taxes at the entity level (to the tune of 8% of your taxable pass-thru income), thereby reducing the net income which flows through to your individual income tax return and also passing through a credit to you equal to the amount of your share of Maryland taxes paid by the entity. The end result is that your federal taxable income would be reduced by the state taxes paid, thereby bypassing the $10,000 limitation on deducting state and local taxes on your individual tax return.

Of course, the devil is in the details–many of which have yet to be defined–and we are still awaiting final guidance. It is our interpretation that if you wish to take advantage of this election for the current tax year, your business entity must remit the taxes on or before December 31, 2020.

If you own a partnership or S-corporation with Maryland taxable income, contact your accountant today for help understanding this new option and determining the potential benefit to you.

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