Md. Code Regs. 03.04.07.02

Current through Register Vol. 51, No. 22, November 1, 2024

Section 03.04.07.02 - Imposition and Computation of Tax

A. Imposition of Tax on Nonresident Members.

(1) A tax is imposed on a pass-through entity that:

(a) Has a nonresident member;

(b) Has nonresident taxable income for the taxable year; and

(c) Does not elect to pay the tax with respect to the distributive shares or pro rata shares of all members of the pass-through entity under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland.

B. The tax paid under Tax-General Article, § 10-102.1(b)(2)(i), Annotated Code of Maryland, with respect to nonresident members' distributive or pro rata shares of income shall be treated as a tax imposed on the nonresident member that is paid by the pass-through entity on behalf of the nonresident member.

C. Election to Pay Tax with Respect to All Members

(1) A pass-through entity may elect to pay tax on the distributive or pro rata shares of all members of the pass-through entity under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland.

(2) When a pass-through entity elects to pay tax on the distributive or pro rata shares of all members of the pass-through entity under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland, the tax shall be treated as a tax on the pass-through entity itself.

D. Allocation of Income for a Multistate Pass-Through Entity.

(1) A multistate pass-through entity that is a partnership (including a limited liability company taxed as a partnership and a business trust taxed as a partnership) shall allocate income to this State using:

(a) The apportionment formula for corporations under COMAR 03.04.03.08A -E; or

(b) Separate accounting.

(2) A multistate pass-through entity that is an S corporation shall allocate income to this State using:

(a) The apportionment formula for corporations under COMAR 03.04.03.08A -E; or

(b) Separate accounting, but this method is only allowable if the business activity of the S corporation within this State is not unitary.

E. Amount of Tax.

(1) Calculation of Nonresident Tax for Pass-Through Entities Paying Tax with Respect to Nonresident Members' Distributive or Pro Rata Shares Under Tax-General Article, § 10-102.1(b)(2)(i), Annotated Code of Maryland.

(a) If the pass-through entity has one or more nonresident members that are individuals, and does not elect to pay the tax with respect to the distributive or pro rata shares of all members under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland, the amount of tax is the sum of:

(i) The nonresident taxable income of the nonresident members that are individuals, multiplied by the lowest rate of income tax for an individual under Tax-General Article, §10-106.1, Annotated Code of Maryland; and

(ii) The nonresident taxable income of the nonresident members that are individuals, multiplied by the top marginal State tax rate for an individual under Tax-General Article, §10-105(a), Annotated Code of Maryland.

(b) If the pass-through entity has one or more nonresident entity members, the amount of tax is computed by applying the rate of tax for a corporation under Tax-General Article, §10-105(b), Annotated Code of Maryland, to the nonresident taxable income of the nonresident entity members.

(c) If the pass-through entity has a nonresident member that is an individual and a nonresident entity member, then the amounts as computed in §E(1)(a) and (b) of this regulation shall be summed to arrive at the amount of tax.

(2) Calculation of Tax for Pass-Through Entities Electing to Pay Tax with Respect to All Members' Distributive or Pro Rata Shares Under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland.

(a) If the pass-through entity has one or more members that are individuals, the amount of the tax is the sum of:

(i) The individual members' distributive or pro rata share of the pass-through entity's taxable income, multiplied by the lowest rate of income tax for an individual under Tax-General Article, § 10-106.1, Annotated Code of Maryland; and

(ii) The individual members' distributive share or pro rata share of the pass-through entity's taxable income, multiplied by the top marginal State tax rate for an individual under Tax-General Article, § 10-105(a), Annotated Code of Maryland.

(b) If the pass-through entity has one or more entity members, the amount of the tax is computed by applying the rate of tax for a corporation under Tax-General Article, § 10-105(b), Annotated Code of Maryland, to the distributive or pro rata share of the pass-through entity's taxable income of entity members.

(c) If the pass-through entity has a member that is an individual and an entity member, then the amounts as computed in §E(2)(a) and (b) of this regulation shall be summed to arrive at the amount of the tax paid on all members distributive or pro rata share.

F. Limitation on Tax Imposed. The tax imposed on a pass-through entity is the lesser of:

(1) The amount of tax imposed as computed under §E of this regulation;

(2) For a pass-through entity paying the nonresident tax under Tax-General Article, § 10-102.1(b)(2)(i), Annotated Code of Maryland, the sum of the shares of all the nonresident members in the pass-through entity's distributable cash flow; or

(3) For a pass-through entity paying tax on all members' distributive or pro rata shares under Tax-General Article, § 10-102.1(b)(2)(ii), Annotated Code of Maryland, the sum of the shares of all members in the pass-through entity's distributable cash flow.

G. Special: Certain Members.

(1) A member that is itself a pass-through entity shall comply with the provisions of this regulation with respect to any of its members.

(2) A pass-through entity that has a member that is exempt from income tax under Tax-General Article, § 10-104(2), Annotated Code of Maryland, is exempt from complying with the provisions of this regulation with respect to that member.

Md. Code Regs. 03.04.07.02

Regulation .02C amended effective January 14, 1999 (26:1 Md. R. 22)
Regulation .02B amended effective April 19, 2010 (37:8 Md. R. 614)
Regulation .02C amended effective February 9, 2009 (36:3 Md. R. 207); amended effective 49:9 Md. R. 529, eff. 5/2/2022