October 16, 2020

Law360 Quotes Walter Calvert on Pass-Through Entity Taxes

2 min

On October 16, 2020, Walter Calvert was quoted in Law360 on pass-through entity taxes. According to the article, whether the Treasury Department and Internal Revenue Service will ultimately bless the use of entity-level taxes on pass-throughs, meant as a workaround to the $10,000 state and local tax (SALT) deduction cap, remains uncertain even as more states slowly move to adopt them.

The question of whether the agencies will issue guidance and what position they will take is not the only uncertainty surrounding the creation of entity-level taxes on pass-throughs. Other issues exist, including whether a partner's residency affects the workaround scheme and how such taxes would work with non-SALT parts of the Tax Cuts and Jobs Act (TCJA), such as the limitation on business interest expense deductions under Section 163(j) of the Internal Revenue Code.

Some of these issues are coming to a head now in Maryland, the most recent state to adopt an entity-level tax, said Calvert. He said the entity-level tax is fairly straightforward in situations where pass-throughs have only resident partners, but that's not necessarily true if a pass-through has a mix of resident and nonresident partners.

"That's where the train slips off the track a little," Calvert said, explaining that ambiguities have cropped up because Maryland had already imposed an entity-level tax with respect to nonresident members.

That original tax was considered a tax paid by the pass-through "on behalf of" the members. Now Maryland has extended the tax to include resident members, but instead of being a tax on their behalf, it's a tax on the whole entity. That can result in different amounts of taxable income, depending on where the member lives, Calvert said. Moreover, both resident and nonresident members get the federal deduction for taxes paid, but only Maryland residents get the corresponding state credit.