Maryland Pass Through Entity: Important Updates Regarding Form 511

Updated on: July 2, 2021

The Maryland Comptroller’s Office has issued a new Form 511 with related instructions and updated the Administrative Release #6.  

Key Developments: 

  • Form 511 is now released and will be needed for any PTE making the election to pay tax on behalf of all members. 
  • Form 511 will allow refunds to come back to the PTE, even if the gross PTE tax is more than zero. This will mean that the credit available to owners would be limited to the tax incurred by the entity, not necessarily the amount paid by year-end 2020. 
  • The income taxed at the Maryland PTE level will be federal taxable times one’s Maryland apportionment factor.

Now that Form 511 has been released, third-party vendors will need to do the same in order to effectively release this to the public. This should occur by the end of July. Form 511 can be filed by September 15, 2021, without penalty. 

Other considerations: 

  • PTE tax credit might vary per state: Before making the election, companies need to consider how other states will handle the PTE tax in terms of a credit being available to owners. Learn more about the Maryland PTE taxation election here.
    • For example, Maryland allows entity-level state taxes to generate a credit for an individual taxpayer in Maryland, just as a credit would be granted if the tax was paid by the PTE owner. However, some states may not follow this treatment and may not allow a resident taxpayer to take a credit for Maryland taxes paid at the entity level. This would mean those PTE owners who are nonresidents of Maryland might be taxed on their full federal K-1 income in their home state and not be able to offset that tax with the Maryland PTE Creditthus, they would face some level of double state taxation.   
  • Guaranteed payments: These payments are part of the PTE tax calculation, which creates complexity. 
  • Different tax rates:An 8.25% entity rate creates economic issues amongst the partners when the tax is aa different rate amongst the ownership group. These two rates will not change for 2020 or 2021. 
  • Overpayments of PTE Tax: Form 511 allows a PTE to apply an overpayment or refund it. This makes it easier to track the federal overpayment income in Year two.  
  • Clarity on the addback: The credit taken on the member’s return is added back to the member’s Maryland income.
  • Federal deduction could be open to interpretationSome commentators believe the federal deduction is limited to the actual tax versus the payment made, though this is not explicitly outlined in Notice 2020-75. We do not see a prohibition against deducting more state taxes than the actual liability, so this artificial limitation seems unlikely. As long as a reasonable estimate was made, the full payment should be deductible.

Our team at SC&H will continue to keep you updated as any more guidance is issued. In the meantime, please visit our Coronavirus Resource Center for additional insights and resources.

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