Maryland Pass-Through Entity Tax: Rates, Election, and Credit

The Maryland pass-through entity tax lets partnerships, S corporations, and qualifying LLCs pay Maryland income tax at the business level instead of passing that liability to their owners. For 2026, the rate on individual members’ shares of income is 8.75%, and each owner receives a fully refundable Maryland credit for their share of the tax the entity paid. The election is voluntary, made year by year, and irrevocable once made.

The point of the election is federal. State income tax paid by the entity is deductible as a business expense on the federal return, so it sidesteps the federal cap on state and local tax deductions that would otherwise apply on the owners’ personal returns.

Why Maryland Offers the Election

The 2017 federal tax law capped the personal SALT deduction, hitting owners of pass-through businesses whose state tax on business profits flowed to their individual returns. Maryland’s response was to let the entity pay the tax itself, which the IRS confirmed is a federal business deduction with no cap in Notice 2020-75.¹ The current election procedures took effect for tax years beginning after December 31, 2022.²

Which Entities Can Elect

The election is open to entities that file as pass-throughs for federal purposes:

Partnerships as defined by the Internal Revenue Code
S corporations
LLCs treated as partnerships or S corporations federally
Business trusts that file pass-through entity returns

Members can be individuals, trusts, estates, or other entities such as partnerships and corporations.³

Several entities are shut out. Single-member LLCs that are disregarded for federal purposes are treated as part of their owner’s return and don’t file pass-through returns.³ Sole proprietorships are similarly ineligible. Fiduciaries filing Maryland Form 504 cannot elect at the entity level, though they can receive PTE credits as members of an electing entity.⁴

How and When To Make the Election

The election is made on the entity’s first filing or first payment for the tax year, whichever comes first. If the first action is an estimated payment on Form 510/511D, the election box on that form locks in the choice. If the entity files an extension on Form 510/511E before making any payment, the election is made on the extension.²

Once made, the election is irrevocable for the year. The entity cannot amend to switch in or out, and all subsequent filings for the year must match the first.³ Electing entities file Form 511 (Electing Pass-Through Entity Income Tax Return) as their year-end return. Non-electing entities file Form 510.⁴

An entity that makes no filing and no payment until its year-end return, and then files Form 510, is treated as having irrevocably decided not to elect. Missing the window with an estimated payment or extension cannot be cured later by filing Form 511. Decide before the first estimated payment is due.

The Rate and What It Applies To

The PTE tax rate on individual members’ shares equals Maryland’s highest marginal state income tax rate plus the lowest county income tax rate. For 2026, the highest state rate is 6.5%⁵ and the lowest county rate is 2.25% (Worcester County),⁶ for a combined rate of 8.75%.⁷

For entity members (a partnership or corporation that owns a share of the electing PTE), the rate is Maryland’s corporate income tax rate, which was 8.25% for 2025.⁷

Building the Tax Base

The tax base starts with federal taxable income from Schedule K (Form 1065 for partnerships, Form 1120S for S corporations). Any federal deduction the entity took for state or local taxes based on net income must be added back.⁸

Multistate entities then apportion income to Maryland. Since 2022, most Maryland businesses use a single receipts factor rather than the older property-payroll-sales formula.³ Rental and leasing companies, financial institutions, and transportation companies use special formulas.

Maryland Decoupling

Maryland doesn’t follow the federal treatment of certain deductions, which matters for the PTE base. Section 179 expensing is capped at $25,000 in Maryland, with a phaseout beginning at $200,000 of qualifying property placed in service during the year, while the federal limit exceeds $2.5 million.⁹ Starting in tax year 2026, HB 801 ends a prior exception that had let qualified manufacturers use the higher federal limits, so the $25,000 Maryland cap now applies to everyone. Maryland also decouples from federal bonus depreciation under Section 168(k), requiring add-backs and recovery over the asset’s standard useful life.

The Capital Gains Surcharge Is Separate

Maryland’s new 2% surcharge on net capital gains for individual taxpayers with federal AGI above $350,000 is not rolled into the PTE rate. The Comptroller has confirmed that entities are not required to calculate or remit any additional tax on capital gain income included in members’ shares, because the PTE rate is fixed by statute.⁷

Individual members over the $350,000 threshold still owe the 2% surcharge on their personal returns for capital gain income received from the PTE. The PTE credit doesn’t offset it, because the entity never paid it. Budget for the separate liability if significant capital gains flow through the entity.

How Owners Claim the Credit

Every member of an electing PTE receives a refundable credit equal to their share of the entity-level tax, reported on the Maryland Schedule K-1 (510/511).⁴ Resident individuals claim it on Form 502CR, Part CC, Line 9, and add the credit amount back to income on their personal return (Line 5, code r) so the income is properly included before the credit offsets tax.

Because the credit is refundable, a resident whose credit exceeds total Maryland tax liability gets the difference back as cash. That is what makes the mechanism work: the entity pays and takes the federal deduction, and the owners are made whole through the state credit.

Trusts and Estates

A trust or estate that is a member of an electing PTE receives its credit on Schedule K-1 and reports it on Form 504CR, Part CCC, Line 10, with an add-back to fiduciary income.⁴ If the trust distributes all income to beneficiaries, the credit flows to them on the 504 K-1, Line 6. If the trust retains the income and uses the credit on Form 504, any overpayment is refunded to the trust.

Nonresident Owners

Nonresident members claim their credit on the Maryland nonresident return. The PTE tax paid on a nonresident’s behalf satisfies that member’s nonresident withholding obligation on the entity-level income.

For nonresidents who live in another state, the Maryland PTE payment is generally treated as a tax the member paid to Maryland, so the nonresident can typically claim a credit for taxes paid to other states on their home-state return. The Comptroller has acknowledged inconsistencies in how these credits have been processed, so verify that the credit amounts on the Maryland return match the K-1.⁴

One procedural point: an electing PTE cannot file a composite return (Form 510C) for its nonresident members. Composite returns are limited to non-electing PTEs.⁴

Tiered Ownership Traps

When an electing PTE has other pass-through entities as members, the credit flows through the ownership chain along a specific path. Say the electing entity has two members that are themselves non-electing PTEs. Each lower-tier PTE receives its share of the credit and reports it on its own Form 510.¹⁰

If the lower-tier PTE has nonresident tax due, the credit from the upper-tier PTE is first applied against that obligation. Any remaining credit is then passed to that lower-tier PTE’s nonresident members on their K-1s. Resident members of the non-electing lower-tier PTE, however, do not receive a K-1 credit for the tax paid at the upper level, and must account for the income on their personal returns without a pass-through credit from their own PTE.¹⁰

This is the scenario most likely to produce an unexpected result. Businesses with multiple layers of pass-throughs need the election decision coordinated at every level.

Deadlines and Estimated Payments

Form 511 is due on the 15th day of the fourth month after the tax year ends, which is April 15 for calendar-year entities.¹¹ Extensions require Form 510/511E filed on or before the original due date.

Any PTE that expects its Maryland tax to exceed $1,000 must make quarterly estimated payments on Form 510/511D,³ due April 15, June 15, September 15, and January 15. Payments go through Maryland Tax Connect.¹²

No underpayment penalty or interest applies if the entity paid at least 90% of the current year’s tax or 110% of the prior year’s tax through estimated payments.¹⁰ When penalties do apply, Maryland charges interest at an annual rate equal to the greater of 9% or three percentage points above the average prime rate from the prior fiscal year.¹³

Is the Election Still Worth Making in 2026?

The One Big Beautiful Bill Act raised the federal SALT cap to $40,000 for 2025, with 1% annual increases through 2029 (roughly $40,400 for 2026). The cap phases down for taxpayers with income above $500,000 at 30 cents per dollar over that threshold. A married couple filing jointly with $650,000 of income, for example, would see the cap reduced by $45,000, effectively to zero.

The election remains valuable in two situations. First, when an owner’s total state and local taxes exceed the new $40,000 cap, the entity-level deduction is still unlimited. An owner with $500,000 of Maryland PTE income would face about $43,750 in PTE tax at 8.75%, exceeding the cap on that item alone. Second, high earners caught in the phasedown may face an effective SALT cap well below $40,000 or zero altogether, making the entity-level deduction the only route to deducting the full state tax federally.

For owners with more modest incomes whose total SALT sits comfortably below the cap, the election adds complexity without a federal payoff. The entity-level payment still generates a refundable Maryland credit, so no state tax is lost, but the administrative work of the election, estimated payments, and coordinated filings may not be worth it when the personal SALT deduction already covers the full amount.

1
Internal Revenue Service. Notice 2020-75
2
Comptroller of Maryland. Technical Bulletin No. 6 – Taxation of Pass-Through Entities
3
Comptroller of Maryland. 2024 Form 510 – Pass-Through Entity Income Tax Return Instructions
4
Comptroller of Maryland. Pass-Through Entity Practitioner Questions and Answers
5
Comptroller of Maryland. 2026 Maryland State and Local Income Tax Withholding Information
6
Comptroller of Maryland. Withholding Tax Facts January 2025
7
Comptroller of Maryland. Technical Bulletin 58 – Capital Gains
8
Comptroller of Maryland. 2023 Form 511 – Electing Pass-Through Entity Income Tax Return Instructions
9
Maryland General Assembly. Fiscal and Policy Note for House Bill 801
10
Comptroller of Maryland. Frequently Asked Questions on the Maryland Pass-Through Entity Tax
11
Comptroller of Maryland. 2024 Maryland Form 511 Pass-Through Entity Election Income Tax Return
12
Comptroller of Maryland. Business Tax Services
13
Maryland General Assembly. Income Tax – Income Tax Reconciliation Program – Established