Maryland PTE Tax Election: How S-Corp and Partnership Owners Reduce Federal Taxes

What Is the Maryland PTE Tax Election?

Maryland's Pass-Through Entity (PTE) tax election allows S-Corporations, partnerships, and LLCs taxed as partnerships to elect to pay Maryland income tax at the entity level rather than passing the tax obligation through to the individual owners. When the entity pays the Maryland tax, it generates a deduction on the entity's federal return — a deduction that is not subject to the $40,000 SALT cap that limits individual deductions.

The result is that Maryland business owners can effectively deduct their Maryland income tax on their federal return in full, without being limited by the SALT cap. This is the core of what makes the PTE election valuable — and it is a planning opportunity that national tax software frequently misses for Maryland filers. For a complete overview of Maryland's business tax obligations, see our Maryland Tax Guide.

Why the PTE Election Exists — The SALT Cap Background

The 2017 Tax Cuts and Jobs Act (TCJA) limited the federal deduction for state and local taxes (SALT) to $10,000 per year for individuals. For Maryland taxpayers — who face some of the highest combined state and local tax rates in the country — this cap eliminated a significant federal deduction overnight.

Maryland responded by enacting the PTE election, which allows business owners to shift their Maryland tax obligation from the individual level (where the SALT cap applies) to the entity level (where it is deductible as a business expense without the cap). This is sometimes called a SALT cap workaround.

The One Big Beautiful Bill Act, signed July 4, 2025, raised the individual SALT cap to $40,000 for 2025 through 2029. This changes the calculus for some taxpayers — but as we explain below, the PTE election remains valuable for many Maryland business owners even with the higher cap. See our full OBBBA guide for details on the SALT cap change.

Who Can Make the Maryland PTE Election?

The following entity types are eligible to make the Maryland PTE election:

• S-Corporations filing Maryland Form 510/511
• Partnerships — general partnerships, limited partnerships, and LLPs
• LLCs taxed as partnerships — multi-member LLCs with pass-through taxation

C-Corporations and single-member LLCs taxed as sole proprietorships are not eligible for the PTE election. The election is made at the entity level and applies to all members or partners — individual owners cannot opt in or out separately.

How the Maryland PTE Election Works

Here is a simplified example of how the election creates federal tax savings for a Maryland S-Corp owner:

When the entity pays the Maryland tax, the owners receive a Maryland credit for the tax paid at the entity level — so they are not double-taxed. The net effect is that Maryland income tax is paid once, but deducted at the federal level as a business expense rather than as a SALT itemized deduction.

Is the PTE Election Still Worth It After the SALT Cap Increase?

This is the key question for 2025 and 2026. The One Big Beautiful Bill Act raised the individual SALT cap to $40,000 — which means many Maryland taxpayers can now deduct more of their state taxes on their individual returns than they could under the $10,000 cap. Does that make the PTE election unnecessary?

For many Maryland S-Corp owners, the answer is still no — the PTE election remains valuable. Here's why:

• The SALT cap covers all state and local taxes combined — income tax, property tax, and local income tax. A Frederick County homeowner paying $15,000 in property taxes and $20,000 in Maryland income tax has $35,000 in SALT. The new $40,000 cap helps but may still leave some Maryland tax non-deductible at the individual level.
• High-income owners hit the phaseout — the $40,000 SALT cap phases out for taxpayers with income above $500,000. Owners above that threshold may still benefit significantly from the PTE election.
• The PTE election sunsets in 2029 under current law — and so does the $40,000 SALT cap. Planning for 2030 and beyond still favors the PTE election.
• The math still works for many — depending on your specific income level, property tax burden, and Maryland local tax rate, the PTE election may still produce a net federal tax benefit even with the higher SALT cap.

The honest answer is that whether the PTE election makes sense in 2025 and 2026 requires running your actual numbers. There is no universal answer. This is exactly the analysis our tax planning team performs for every eligible client.

Maryland PTE Tax Rates

When a Maryland entity makes the PTE election, it pays Maryland income tax on behalf of its owners at the following rates for tax year 2026:

• Individual owners (residents): taxed at the owner's applicable Maryland income tax rate, up to 5.75% state plus applicable local rate
• Individual owners (nonresidents): taxed at the Maryland nonresident rate of 8.0%
• Corporate owners: taxed at the Maryland corporate income tax rate of 8.25%

For Frederick County residents, the combined Maryland state and local income tax rate is up to 8.75% (5.75% state + 3.0% Frederick County local). The entity-level PTE tax generates a deduction at the federal level for the full amount paid — which at a 37% federal bracket creates a federal tax savings of approximately $0.37 for every dollar of Maryland PTE tax paid.

How to Make the Maryland PTE Election

The Maryland PTE election is made on the entity's Maryland income tax return — Form 510/511 for S-Corps and partnerships. Here is how the process works:

1. Elect on the Maryland return — the election is made by checking the appropriate box on Form 510/511 when filing the entity's Maryland return
2. Pay estimated PTE tax — entities that make the election are required to make estimated payments of the PTE tax during the year, similar to individual estimated tax payments
3. Owners receive a credit — each owner receives a Maryland credit on their individual return for their share of the PTE tax paid by the entity, preventing double taxation
4. Federal deduction flows through — the PTE tax paid reduces the entity's net income reported on the federal K-1, reducing the owner's federal taxable income

PTE Estimated Tax Payments

Once a Maryland entity makes the PTE election, it must make estimated payments of the PTE tax during the year. Maryland PTE estimated payments are due on the same schedule as individual estimated payments:

• April 15 — Q1
• June 15 — Q2
• September 15 — Q3
• January 15 — Q4

Underpayment of PTE estimated taxes triggers the same underpayment penalty as individual estimated tax underpayments. We calculate and coordinate PTE estimated payments as part of our overall estimated tax planning for every eligible client. See our guide on Maryland estimated tax payments for more on the quarterly payment system.

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The PTE Election and the S-Corp Decision

For Maryland business owners considering an S-Corp election, the PTE tax election adds another layer to the analysis. The two elections interact in important ways:

• The S-Corp election reduces self-employment tax by splitting income between salary and distributions
• The PTE election reduces federal income tax by converting Maryland income tax from an individual SALT deduction to an entity-level business deduction
• Together, they can produce significant combined tax savings for Maryland S-Corp owners above the income thresholds
• The QBI deduction (Section 199A) reduces federal taxable income by 20% but does not reduce Maryland taxable income — the PTE election partially offsets this Maryland disadvantage

These elections interact with each other and with the new SALT cap rules in ways that require coordinated analysis. Our S-Corp vs. LLC guide covers the S-Corp election analysis in detail, and we run both analyses together for every eligible client.

Frequently Asked Questions

Can I make the PTE election for just one year and skip it the next?

Yes. The Maryland PTE election is made annually on the entity's return and can be made or revoked each year. There is no multi-year commitment. This flexibility allows you to evaluate the election annually based on your income level, the SALT cap rules in effect, and your overall tax situation.

Do all owners of an S-Corp or partnership have to agree to the PTE election?

Maryland law requires that owners holding more than 50% of the entity's interest consent to the PTE election. In practice, this means you generally need majority owner approval — a single minority owner cannot block the election. We recommend documenting the consent of all owners as part of the election process.

If the entity pays Maryland tax under the PTE election, do I still file a Maryland individual return?

Yes. Maryland resident owners still file a Maryland individual income tax return and report their share of the entity's income. The PTE tax paid by the entity flows through as a credit on your individual Maryland return, offsetting the individual Maryland tax that would otherwise be due on the same income. You are not double-taxed — the credit eliminates the individual Maryland liability.

What happens to nonresident owners under the PTE election?

Nonresident owners benefit particularly from the PTE election. Maryland taxes nonresidents on Maryland-source income at an 8.0% rate. Under the PTE election, the entity pays this tax on the nonresident owner's behalf, generating a federal deduction. Nonresident owners may not need to file a Maryland individual return if all their Maryland income flowed through an entity that made the PTE election — though this depends on their specific situation.