Maryland Administrative Release 38: Decoupling, Form 500DM, and the $5M Trigger

Maryland Administrative Release 38 is the Comptroller’s guidance explaining where Maryland income tax law parts ways with federal law, mainly on bonus depreciation, Section 179 expensing, net operating losses, heavy-SUV depreciation, and discharged business debt.¹ If any of those apply to you, your Maryland return will not match your federal numbers, and you’ll need to compute addition and subtraction modifications on Form 500DM to get to the right Maryland figure.

What AR 38 Is and How Much Weight It Carries

Administrative Releases are interpretive documents from the Comptroller’s Office that lay out how Maryland tax law applies to a specific topic.² They are not statutes, and the Comptroller treats published rulings as informal, nonbinding guidance. In practice, though, the Comptroller follows these positions, so AR 38 is the operating rulebook for your Maryland depreciation and expensing calculations.

The underlying statutes are Tax-General Article Sections 10-210.1 (individuals) and 10-310 (corporations), with Section 10-107 directing the Comptroller to apply federal income tax interpretations “to the extent practicable.”³ Maryland generally starts from federal adjusted gross income or federal taxable income, then decouples where the legislature decided federal conformity would cost too much revenue.¹

Bonus Depreciation Under IRC Section 168(k)

This is the single biggest reason most taxpayers end up looking at AR 38. Federal bonus depreciation has at times allowed a 100% write-off of a qualifying asset in its first year. Maryland does not follow that.

If you are not a manufacturing entity, Maryland requires you to compute depreciation under IRC Section 167(a) and ignore the Section 168(k) additional allowance entirely.⁴ You add back the extra federal deduction on your Maryland return, then subtract it ratably over the remaining recovery period using the standard method. You still get the full deduction eventually. It’s just spread out instead of front-loaded.¹

If you claimed bonus depreciation federally and didn’t elect out of it, you’ll need to build pro forma federal returns calculated without Section 168(k). Those pro forma numbers feed the modification. That bookkeeping is where errors show up most often.

Section 179 Expensing

Federal Section 179 lets businesses expense certain tangible property immediately. The federal dollar limit has grown steadily. Maryland’s didn’t.

For Maryland purposes, you can expense no more than $25,000 of qualifying property costs, with a dollar-for-dollar phase-out once total qualifying purchases exceed $200,000.¹ The statute specifically disregards any changes to Section 179 made after December 31, 2002.⁴

A worked example: if you expensed $500,000 of equipment federally, Maryland recognizes $25,000 as an immediate expense. You add back the $475,000 difference and recover it through standard depreciation over the property’s useful life. Missing that addback is one of the more common Maryland filing mistakes.

Heavy-Duty SUVs

Federal law limits annual depreciation on passenger vehicles under IRC Section 280F, but those caps don’t apply to vehicles rated above 6,000 pounds gross vehicle weight. That’s what makes heavy SUVs and trucks popular business purchases federally.

Maryland disregards the weight rating. The state treats heavy-duty SUVs as if they fall under the Section 280F caps regardless of actual weight.⁴ Unlike the bonus depreciation and Section 179 exceptions discussed below, this one applies to every taxpayer, including manufacturers.¹ If you wrote off a large chunk of a $90,000 SUV federally, expect a much smaller Maryland deduction.

Discharged Business Indebtedness

When a business reacquires its own debt at a discount, IRC Section 108(i) historically allowed the resulting cancellation-of-debt income to be deferred and recognized ratably over future years. Maryland doesn’t honor that deferral. AR 38 states that Maryland recognizes income from discharged business indebtedness without regard to the federal deferral and ratable inclusion schedule.¹ If you deferred COD income federally, you may need to pick up the full amount for Maryland in the year of the discharge.

Net Operating Losses

Maryland’s NOL treatment has shifted several times around the Tax Cuts and Jobs Act and the CARES Act. The state conformed to federal NOL rules for tax years 2018 and 2019, and again for 2021 and later. For 2020, Maryland decoupled.¹ The TCJA eliminated the general two-year carryback and replaced it with an indefinite carryforward limited to 80% of taxable income, and Maryland largely followed that framework.⁵

If you’re carrying forward losses from earlier years, check the Maryland rules for the specific year the loss was generated. The answer isn’t uniform across the window.

The Manufacturing Entity Exception

The 2017 More Jobs for Marylanders Act created a significant carve-out. If you qualify as a manufacturing entity under the Act, you can claim federal bonus depreciation under Section 168(k) and the full federal Section 179 expense without any Maryland modification, provided the property was placed in service on or after January 1, 2019.¹ A qualifying manufacturer with no other decoupling modifications doesn’t even need to file Form 500DM.

The exception is worth real money. A manufacturer placing $1 million of equipment into service can potentially write off the full amount federally and in Maryland in the same year, while a non-manufacturer spreads the Maryland portion over the asset’s recovery period. If your business is close to qualifying, the classification is worth working through carefully. The heavy-SUV rule still applies either way.

The Automatic $5 Million Decoupling Trigger

Maryland has a built-in response to major federal tax changes. Under Tax-General Section 10-108, if a federal change would affect Maryland revenue by $5 million or more in the year of enactment, Maryland automatically and temporarily decouples. The decoupling covers any taxable year beginning in the enactment year, plus any prior taxable year the change affects.¹ This gives the legislature time to adopt, modify, or reject the federal change. It’s also why Maryland’s response to a big federal tax bill often lags a year or more.

Reporting the Modifications on Form 500DM

Form 500DM is where you compute the addition and subtraction modifications flowing from AR 38. The instructions walk through the calculations year by year, because assets placed in service in different years will have overlapping modification schedules as added-back depreciation gets subtracted ratably over time.¹

The pro forma requirement is the part most filers underestimate. You can’t just estimate the gap between the federal deduction and what Maryland allows. The Comptroller expects a complete parallel federal computation as if you had never claimed bonus depreciation or the enhanced Section 179 deduction, with those pro forma figures driving the Maryland numbers. If you’ve placed significant depreciable assets into service across multiple years, tracking the schedules gets complicated quickly, and working with a preparer who regularly handles Maryland decoupling is usually worth the cost.

1
Comptroller of Maryland. Administrative Release 38 – Maryland Income and Estate Tax
2
Comptroller of Maryland. Tax Guidance – Technical Bulletins/Administrative Releases
3
New York Codes, Rules and Regulations. Maryland Code Tax-General 10-107 – Application of Federal Income Tax Law
4
Maryland General Assembly. Maryland Code Tax-General 10-210.1
5
Comptroller of Maryland. CARES Act Tax Alert