Dear Maryland Chamber of Commerce Federation Partners:
The Maryland Chamber of Commerce is actively supporting HB 129 and SB 523, legislation that would restore a federal income tax deduction to individuals and pass-through entities (PTEs) when they file their federal income tax returns.
As you know, many small businesses in Maryland are organized as pass-through entities. Pass-through entities include sole proprietorships, partnerships and S-corporations. These businesses are not subject to the corporate income tax. Instead, owners are taxed under the individual income tax.
This legislation would confirm that the state and local tax (SALT) currently remitted to Maryland by PTEs is a tax on the entity, and therefore not subject to the new $10,000 SALT deduction limitation enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).
Widely recognized as targeting taxpayers in Maryland and other “high-tax” states, the SALT cap impacts individuals and small businesses that are organized as pass-through entities since these businesses pay the income tax related to their business income on the owner’s individual income tax return. The TCJA does not cap the SALT obligations of non-PTE corporations, which gives C-corporations a tax advantage compared to individuals and small businesses.
The bill clarifies that at the entity-level, SALT is a tax on–and a tax paid by–the PTE itself (and not a tax “paid on behalf of” the owners), thus making the state income tax paid by the entity deductible against business income for federal taxable income purposes.
The bill is revenue-neutral for the state’s treasury, which means the income from the PTE still flows through to the owner’s individual income tax return. Six states have passed entity bills in response to the SALT cap. Most recently, New Jersey’s governor signed similar legislation into law on January 13, 2020.
This relatively minor code change provides federal tax relief for tens of thousands of Maryland’s small business owners, while remaining revenue-neutral to the state.
ACTION REQUESTED: Both of these bills will be heard in committee next Wednesday, February 12 (1 p.m. in House Ways & Means, 2 p.m. in Senate Budget and Taxation). We are looking for small business owners and/or others who can come to Annapolis to testify in support of the legislation.
If you or one of your clients stands to benefit from passage of this legislation and wishes to be heard, please contact Ashley Duckman ASAP at aduckman@mdchamber.org or 410-269-0642.
