The Maryland PTE election guide for 2026.

If you own an S-corporation, partnership, or multi-member LLC in Maryland, you may be leaving a meaningful federal tax deduction on the table. Maryland's Pass-Through Entity (PTE) tax election is one of the most valuable tax planning tools available to Baltimore small business owners, and yet a surprising number of the businesses we onboard have never made the election, or made it once and then forgot to renew.

Here is what it is, why it exists, when to elect, and how it flows through your bookkeeping.

The problem it solves: the $10,000 SALT cap.

The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes (SALT) at $10,000 per year for individuals. For an owner of a profitable Maryland S-corp or LLC, this is a big deal. Maryland state income tax alone (at 5.75 percent for higher earners) can easily exceed $10,000 — plus you have local tax (Baltimore City tacks on 3.2 percent, Baltimore County 3.2 percent, other counties vary), property tax, and other state and local levies.

Before the SALT cap, you deducted all of that on your personal federal return. Now, the maximum you can deduct is $10,000 total across all state and local taxes. For a Baltimore S-corp owner making $250,000 in personal income, this alone can add several thousand dollars to their federal tax bill.

The workaround: state-level PTE tax.

The IRS clarified in 2020 that state income taxes paid at the entity level are deductible on the entity's federal return without regard to the individual SALT cap. States responded by creating optional entity-level tax elections that shift income tax from the individual to the entity.

Maryland was one of the first states to enact this. Under Maryland's PTE election, an S-corp, partnership, or multi-member LLC can elect to pay Maryland state income tax at the entity level. The entity pays the tax, deducts it as an ordinary business expense on the federal return, and the owner claims a corresponding tax credit on their Maryland individual return.

The mechanical result: the owner's federal taxable income is reduced by the amount of Maryland tax paid by the entity. That deduction is federal and no longer subject to the $10,000 SALT cap.

Who should consider making the election.

The election typically benefits:

• Profitable Maryland pass-through entities (S-corp, partnership, multi-member LLC taxed as partnership or S-corp)
• Where owners are in higher federal tax brackets (the deduction is more valuable at higher marginal rates)
• Where total state and local taxes already exceed the $10,000 SALT cap (so the SALT cap is actually costing you something)
• Where owners reside in Maryland (out-of-state owner situations get more complex)

The election is less useful, or occasionally net-negative, when:

• The entity is not profitable (no state tax to shift)
• The owner is not in a high federal bracket (the federal deduction is less valuable)
• The state and local tax total is already below $10,000 (SALT cap is not binding)
• The entity has out-of-state owners with complex resident-credit interactions

How to make the election.

Under current Maryland law:

1. The election is made on the entity's Maryland Form 510 (or the applicable pass-through return)
2. It is an annual election — you decide each year whether to elect
3. The entity remits the PTE tax with estimated tax payments during the year and any balance with the return
4. Owners receive a Maryland K-1 showing the PTE tax paid on their behalf, which they claim as a credit against their Maryland individual tax on Form 502

Timing matters. If you plan to elect for 2026, the entity should be making estimated PTE tax payments during 2026 (following the same quarterly schedule as regular estimated tax: April 15, June 15, September 15, and January 15 of the following year). Skipping estimates and trying to make the election at return time can create underpayment penalties.

How the election affects your bookkeeping.

Before the PTE election, Maryland state income tax was paid by the owner and never appeared on the entity's books. After the election, it does. Here is what changes:

• Chart of accounts: Add a “State Income Tax Expense – PTE” line on the P&L for the current period's PTE tax
• Estimated PTE tax payments during the year post as a prepaid asset (State Income Tax Prepaid) or directly to the expense account, depending on your accountant's preferred method
• Year-end true-up reconciles actual liability against estimates and books any remaining payable or receivable
• Owner K-1 reflects the PTE tax as a state credit item for the owner's personal return

Your CPA needs this line-item detail to prepare the return correctly. Without clean bookkeeping around the PTE tax, the election benefit can be understated or entirely missed at filing time.

Real numbers example (illustrative).

Consider a Baltimore-based S-corp with $500,000 of ordinary income flowing to a single owner in a 35 percent federal bracket and 5.75 percent Maryland state bracket:

Without PTE election:

• Owner's Maryland state tax: ~$28,750
• Federal SALT deduction allowed: $10,000 (capped)
• Federal deduction lost to SALT cap: $18,750
• Federal tax cost of lost deduction: ~$6,562 (at 35 percent)

With PTE election:

• Entity pays $28,750 as Maryland PTE tax
• Entity deducts full $28,750 on federal return (not subject to SALT cap)
• Owner claims $28,750 credit on Maryland personal return, owing $0 Maryland state tax personally
• Owner's SALT cap is not consumed by Maryland income tax and can be used for property tax and other state/local taxes
• Approximate federal tax savings: ~$6,500 per year

Multiply that over several years and it is real money. And it is entirely legal — the IRS explicitly blessed this workaround.

What to watch out for.

A few common mistakes:

• Making the election but not paying estimates on time triggers underpayment penalties
• Nonresident owners complicate the math and may not fully benefit
• State tax laws change — the PTE regime is relatively new and continues to evolve. What was optimal in 2024 may not be in 2027
• Balance sheet reconciliation at year-end — the PTE prepaid or payable account must reconcile to what the entity actually paid and owes

The bookkeeping is what makes the tax move work.

A CPA cannot make the election benefit real if the underlying books do not support it. Clean tracking of PTE estimated payments, correct P&L classification, and a reconciled year-end position — all things a good bookkeeping partner sets up in advance of the election, not after.

At RS Accounting & Bookkeeping we handle this end-to-end for Maryland pass-through entities. If you have not made the PTE election yet, or you made it once and then let it lapse, this is worth a 30-minute conversation before your next quarterly estimated tax deadline.