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Taxes on Business Income in Maryland

Filed under State Taxes. Fact checked on February 12, 2013.

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Maryland imposes a corporate income tax on business income attributable Maryland. This tax is computed at 8.25 percent based upon corporate taxable net income. It also imposes entity-level taxation on entities that have non-resident participants. If you operate your business as a sole proprietorship or via a pass-through entity, then you must report your business income on your personal income tax return.

In Maryland, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

C Corporations Are Subject to Corporate Income Taxation

If your corporation is a domestic corporation (a corporation organized in Maryland), you must pay tax at the rate of 8.25 percent of taxable net income. For foreign corporations (corporations organized in a state other than Maryland), you pay at the rate of 8.25 percent of the taxable net income derived from property and business transacted in Maryland.

In Maryland, a franchise tax is imposed on public utilities like telephone, electric, and gas companies. The rate of the tax is 2 percent of gross receipts derived from business in Maryland.

Maryland Imposes Tax on Pass-Throughs with Nonresident Participants

In Maryland a tax is imposed on each S corporation, partnership, and limited liability company (LLC) that has nonresident members and taxable income. The tax is imposed on the entity based on the nonresident's share of the pass-through entity's income allocable to Maryland. The tax rate for a pass-through entity is 6.75% for nonresident individual members (including nonresident fiduciaries) and 8.25% for nonresident entity members.

S Corporation Income Is Passed Through to Shareholders.

If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any corporate level federal income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

Maryland extends this favorable tax treatment to state corporate income tax liability for resident members. S corporations with only resident members will not be subject to entity level tax.

Partnership Income Is Passed Through to Partners

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Maryland taxable adjusted gross income their distributive share of partnership income.

Federal Election Governs LLC Taxation

Maryland law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Maryland are classified as partnerships for Maryland tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Maryland taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Maryland tax purposes.

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