Nonresident Members of LLCs Liable for Maryland Allocable Income Tax

Several out-of-state limited liability companies (LLCs) were subject to tax on their Maryland allocable income. The Maryland Tax Court held that state tax liability existed even though the LLCs had no federal tax liability.

Liability for Maryland Income Tax

The six out-of-state companies, organized as LLCs under Maryland state law, were wholly owned by another out-of-state LLC. The six LLCs had no federal taxable income for the period at issue.

Maryland imposes income tax on pass-through entities that have:

  • members that are nonresidents; and
  • nonresident taxable income.

Maryland Tax Starts with Federal Taxable Income

Federal taxable income is the starting point for calculating Maryland corporate income tax liability. If the taxpayer has no federal taxable income, the figures calculated under federal return rules determine the starting point.

Taxing of Nonresident LLC Members

As each wholly-owned LLC was a nonresident pass-through entity with a single member that was a nonresident of Maryland, the tax of 8.25% could be imposed on their nonresident taxable income that was allocable to Maryland.

Although federal law didn’t require the parent LLC to file a federal return, the parent and the six LLCs were required to do so in order to complete the Maryland return. The fact that the LLCs were not required to file federal returns did not change the tax liability of the subsidiaries in Maryland.

CNI Technical Services, LLC v. Comptroller of Maryland, Maryland Tax Court, Nos. 17-IN-00-0743 and 17-IN-00-0748, January 17, 2019, ¶202-056

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All stories by: CCHTaxGroup