What Is Maryland's Pass-Through Entity Tax, and How Does It Work Around the SALT Cap?
Last reviewed: July 2026
Maryland's pass-through entity (PTE) tax lets the business itself pay state income tax on its owners' behalf, which converts a non-deductible personal tax into a fully deductible business expense at the federal level. For owners of S-corporations, partnerships, and multi-member LLCs in Harford County and across Maryland, this election can recover thousands of dollars in federal deductions that the SALT cap would otherwise eliminate. It works because the IRS confirmed in Notice 2020-75 that state taxes paid at the entity level are not subject to the individual SALT cap.
Key Takeaways
- The Maryland PTE tax lets your business deduct state income tax federally, bypassing the individual SALT cap on your personal return.
- The election is annual and applies at an 8% rate for individual members of the entity.
- The IRS blessed this structure in Notice 2020-75, so it is a sanctioned workaround, not an aggressive loophole.
- Owners must coordinate the election with estimated payments and Maryland Form 511 to capture the benefit each tax year.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate business tax strategy since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff sees the same thing every spring: owners who qualified for the PTE election but never made it, leaving real federal deductions on the table simply because their return was filed before anyone asked the question.
What Is the Maryland PTE Tax and Why Does It Exist?
The Maryland pass-through entity tax is an optional, entity-level income tax that S-corporations, partnerships, and multi-member LLCs can elect to pay on behalf of their owners. Instead of the income flowing through untaxed at the entity level and then being taxed on each owner's personal Maryland return, the business pays the Maryland tax directly. The owners then receive a credit on their personal returns for their share of what the entity paid.
The reason this exists comes down to the Tax Cuts and Jobs Act. That 2017 law capped the federal deduction for state and local taxes (SALT) at $10,000 per return. For a Maryland business owner paying far more than that in combined state income and property taxes, the cap meant a large chunk of their state tax bill simply stopped being deductible. The PTE election sidesteps that ceiling by moving the state tax payment off the personal return and onto the business return, where the $10,000 cap does not apply.
The federal authority for this comes straight from the IRS. In Notice 2020-75, the IRS stated that state and local income taxes imposed on and paid by a partnership or S-corporation are deductible by the entity in computing its non-separately stated income. That single piece of guidance is why more than 30 states, Maryland included, built PTE elections into their tax codes.
How Does the Maryland PTE Election Work for Owners in Harford County and Maryland?
For a Maryland business owner, the mechanics run on an annual cycle. The entity elects to pay Maryland tax on the members' distributive shares of income at an 8% rate for individual members. The entity files Maryland Form 511 to make and report the election, and it makes estimated payments throughout the year just as an individual would.
Here is where the math turns in the owner's favor. Say a partnership in Bel Air generates $400,000 of income split between two owners. Under the PTE election, the entity pays roughly $32,000 in Maryland tax (8% of $400,000) and deducts that full amount as a business expense on its federal return. That deduction lowers each owner's federal taxable income. Without the election, those same owners would pay the Maryland tax personally and run straight into the SALT cap, deducting almost none of it federally.
The owners are not taxed twice. On their personal Maryland returns, they claim a credit for their share of the PTE tax the business already paid. The net Maryland liability comes out roughly the same; the win is entirely at the federal level. Jeff Judge often frames it for clients this way: the PTE election does not lower your Maryland tax, it lowers your federal tax by making your Maryland tax deductible again.
This is exactly the kind of decision our Chesapeake Financial Planners office in Forest Hill works through with business owners across Harford County. Most of our owner-clients run S-corps or partnerships, and for many of them the PTE election is the single highest-leverage tax move available in a given year. It pairs directly with broader How Should Business Owners Pay Themselves Salary vs Distributions? decisions, because how you pay yourself affects how much income flows through the election.
Who Should Consider the Maryland PTE Election?
The election makes the most sense when three things are true: the business is profitable, the owners pay more than $10,000 a year in combined state and local taxes, and the owners itemize or would benefit from a larger federal deduction. For a high-earning S-corp owner in Maryland, those conditions are usually all met.
One thing the One Big Beautiful Bill Act changed in 2025 matters here. That law raised the federal SALT cap from $10,000 to $40,000 for many taxpayers, with a phase-down for higher incomes. A larger cap means the personal SALT deduction goes further than it used to, which narrows the gap the PTE election fills for some owners. But for owners whose state and property taxes still exceed the new cap, or whose income triggers the phase-down, the PTE election remains valuable. This is the part that catches people off guard. The right answer changed, and an owner running on 2023 logic may now be over- or under-using the election.
Coordinating this with your full picture matters. The PTE election interacts with retirement plan contributions, since Should I Choose a Solo 401(k) or SEP IRA for My Business? strategies reduce the income that flows through the entity. It also feeds into longer-range planning around your eventual exit, which we cover in When Should I Start Planning My Business Exit Strategy?.
What Are the Risks and Limits of the PTE Election?
The biggest risk is procedural, not legal. The election is annual and must be made affirmatively; miss the window or file the personal returns first, and the benefit can be lost for that year. Cash flow is a second consideration, because the entity has to fund the estimated tax payments, which can strain a business that distributes most of its profit. There is also the matter of multiple owners with different tax situations, where one owner's benefit may not match another's. This is where coordination through a process like the What questions should I ask before hiring a financial advisor? conversation earns its keep.
The R.U.D.D.E.R. Method™ is Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. For a decision like the PTE election, the "Reassess and Refine" step matters most, because tax law keeps moving and last year's answer is not automatically this year's answer.
Frequently Asked Questions
What is the Maryland PTE tax rate for owners?
The Maryland PTE tax applies at an 8% rate on the distributive shares of income allocated to individual members of the electing entity. Corporate members are taxed at the separate corporate rate. The entity calculates and pays this tax through Maryland Form 511, and owners claim a corresponding credit on their personal Maryland returns.
How does the Maryland PTE election work around the SALT cap?
The SALT cap workaround moves the state income tax payment from your personal return to the business return. The IRS confirmed in Notice 2020-75 that entity-level state taxes are not subject to the $10,000 individual SALT cap. The business deducts the full Maryland tax federally, recovering deductions you would otherwise lose on your personal return.
Is the Maryland PTE tax election worth it after the SALT cap increased?
It depends on your numbers. The 2025 law raised the federal SALT cap to $40,000 with a phase-down for higher incomes, which narrows the benefit for some Maryland owners. But owners whose combined state and property taxes still exceed the new cap, or whose income triggers the phase-down, generally still benefit from the PTE election each year.
Do I pay Maryland tax twice if my business makes the PTE election?
No, you do not pay twice. When the business pays the Maryland PTE tax on your behalf, you claim a credit for your share of that payment on your personal Maryland return. The net Maryland liability stays roughly the same. The entire benefit shows up at the federal level through the restored deduction.
Which Maryland businesses can make the pass-through entity election?
S-corporations, partnerships, and multi-member LLCs taxed as partnerships can make the Maryland PTE election. Single-member LLCs taxed as sole proprietorships generally cannot, because they do not file as pass-through entities. Owners in Harford County should confirm their entity type before assuming eligibility, since the structure determines whether the election is available.
When does my Maryland business need to make the PTE election?
The PTE election is made annually on Maryland Form 511 and must be in place before the entity return is filed for that tax year. Estimated payments should be made throughout the year. Missing the election window or filing personal returns first can forfeit the benefit, so owners near Bel Air and Forest Hill should plan it early in the year.
Ready to Put a Plan Around the Maryland PTE Tax?
The Maryland PTE tax is one of the few decisions where filing your return a few weeks early can cost you thousands, and filing it correctly can recover them. Jeff Judge and the Chesapeake team serve business owners across Harford County, Bel Air, and the greater Baltimore metro. Schedule a free fit call at chesapeakefp.com to see whether this election belongs in your plan this year.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
The CAP® is the property of The American College of Financial Services, which reserves sole rights to its use, and is used by permission.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
