January 13, 2022
Law firm clients | Virginia Tax Commissioner evaluates effect of Maryland SALT-cap workaround on Virginia taxpayers holding interests in PTEs doing business in Maryland
Responding to an inquiry by the Virginia Society of CPAs, Virginia Tax Commissioner Craig Burns has advised that Virginia residents who own interests in pass-through entities (PTEs) that conduct business in Maryland and utilize Maryland's workaround to the state and local tax (SALT) deduction cap enacted under the Tax Cuts and Jobs Act (TCJA), may not be able to claim a tax credit in Virginia for taxes paid in Maryland.
Under Maryland law (Md. Code. Ann. §10-102.1(b)), a PTE subject to state tax may choose to be taxed either at the entity or member level. If choosing to be taxed at the member level, the PTE pays tax on the distributive share of its nonresident members' income and the tax is treated as being imposed on the members. If the PTE elects to be taxed at the entity level, however, the PTE pays tax on the distributive share of all members' income and the members may claim a deduction on their Maryland individual income tax returns for their share of the tax that the PTE paid. Maryland law (Md. Code Ann. § 10-102.1 (c)(3)) expressly treats the tax as one imposed on the PTE.
Ruling request and decision
Replying to the Virginia Society of CPAs' August 2021 ruling request, Commissioner Burns explained on December 28, 2021 that "PTEs other than S-corporations would not come within the scope of the statute" because applicable Virginia law (Va. Code §58.1-332) "expressly provides" that an S corporation may claim a credit for taxes paid to another state. Further, Burns' letter states, a Virginia law provision (23 VAC 10-110-221) "makes it clear that the credit is not available if the tax is imposed by another state on the distributing entity. Under the Maryland statute at issue, the tax is imposed on the distributing entity if the election is made."
Commissioner Burns rejected the assertion that Virginia should allow the credit even if the PTE elects to be taxed at the entity level because the Virginia-resident taxpayer is subject to Maryland income tax on Maryland-source income, whether or not the election is made.
Although the Maryland PTE SALT-cap workaround "involves a tax on income for which a Virginia credit for taxes paid to another state is typically available," the out-of-state credit permitted under the Virginia code does not allow attribution of an entity-level tax to individual members, unless they are S corporation shareholders. Virginia residents who are shareholders of an S corporation that elects to be taxed at the entity level under Maryland's SALT cap workaround must evaluate on a case-by-case basis whether the tax payment would otherwise qualify for the out-of-state credit in the hands of the individual shareholder, according to Burns' letter.