Maryland Taxes Single Member Limited Liability Company

Single member limited liability companies are routinely disregarded as entities separate from their sole owners. Yet, on January 17, 2019, the Maryland Tax Court ruled that multiple single member LLCs were subject to the 8.25% nonresident tax on income allocable to Maryland. Each single member LLC was organized under state law and wholly owned by another, nonresident LLC. Furthermore, these subsidiaries did not have federal taxable income or file federal tax returns. If Maryland conforms to federal law to disregard the classification of single member LLCs, why did the State levy its nonresident tax?

First, Maryland law permits the State to impose tax on “each pass-through entity that has a member who is a nonresident of the State or is a nonresident entity” and “any nonresident taxable income for the taxable year.” Each of the nonresident single member LLCs was a pass-through entity that had a member – the parent LLC as sole owner – that was both a Maryland nonresident and a pass-through entity. Therefore, they were subject to the nonresident tax on Maryland source income.

Next, the calculated amount of federal taxable income is the base used to determine Maryland taxable income. An entity is not required to file a federal income tax return to establish its amount of federal taxable income in order to provide the starting point for Maryland taxable income.

Nonresidents of Maryland that receive income allocable to Maryland will be subject to the State’s nonresident tax even if the entity classification is otherwise disregarded for federal income tax purposes.

Please contact your Marcum tax adviser for additional guidance.