Why is MD state asking for a payment on income taxes for an S Corp?

Forum|Forum|7 years ago
June 6, 2019
6 replies
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I recently finished and submitted my MD state income tax return within TurboTax Business for my S Corp. The electronic form is 510. At the end of it, it is asking for me to pay income taxes to MD state. Last year, when I got my taxes done by H&R Block, the tax preparer told me that since that S Corp income shows on my personal taxes, I am paying that tax there (on my personal tax return), and there is no need to send my taxes on my S Corp return to MD state. Why is TurboTax asking me to print a voucher and asking me to send my S Corp taxes to MD state if I am going to record that business income on my personal MD state return? I am using TurboTax Premier for my personal (individual) return as well.

TurboTax Business Windows

Best answer by Irene2805

The short story is that you’re paying the taxes once (with the MD 510) and you get credit for it on your personal return, MD-505.

The longer story:

The tax that MD wants your S-Corp to pay is on behalf of the nonresident shareholders (you). Apparently MD feels more secure getting the payment from the S-Corp than trying to collect it from a nonresident shareholder several states away.

The estimated tax payments the S-Corp has made to MD (on your behalf) should be reflected on the 1120S and they will then flow to the MD-510 return.

If you haven’t already, the tax payments should be entered on the 1120S, page 3, in the Deductions section, line 12, on the yellow lines below line F. [See Screenshot #1, below.]

Enter Code S – Other Deductions.
In the middle section enter something like MD nonresident shareholder taxes.
Enter the amount in the far right part of the line.

From here, the figures just flow: (like the song, the “knee bone is connected to the leg bone…ankle bone…, etc..)

The MD tax entered on line 12 of the 1120S Sch. K flows to line 12 of the K-1 [Screenshot #2] with the description that you added. [Screenshot #3]
It appears on lines 7-9 of the MD-510 and onto the MD K-1, line D-1. [Screenshot #4]
When you enter the K-1 into your personal return, it will eventually show up on line 45 of the MD Form 505 (personal nonresident return.) [Screenshot #5]

Ashwin1Author

Level 2

It's been three days since I posted this question - can someone from the TurboTax team please answer the question? I don't have any phone support for TurboTax Business, so this seems to be my only avenue to get some support attention. Thank you.

Ashwin1Author

Level 2

Hello Irene (or anyone else that is listening from TurboTax),

The answer that Irene provided was part-helpful, so thank you very much, but the eventual answer is still to be provided. I have a comment underneath's Irene's answer below, but I am not sure anyone got informed that there was a clarification required. Could someone from TurboTax please look at my followup question in the response to Irene? You will have to look underneath Irene's answer in the Answer section below for my question, but here is some more clarification on the issue:

I am the owner & sole member of an S Corp, which is based in Colorado and does business part-year in MD. I recently filed my S-Corp MD return - 510, through TurboTax, and at the end, it asked me to send in my tax burden. I realize that I need to pay the MD tax on the S-Corp income, and I have been doing this every month on the Comptroller website. Since the business is an S Corp, and a pass through entity, it in and of by itself is not taxable, but because I earn in MD, and I am a single member LLC, I am paying these income taxes on my individual 505 state tax return. I am paying the tax owed to MD, which is the 5.75% of the Maryland income and the 1.75% non-resident income on my 505 state return. The reason for doing it this way is because the S Corp business earnings eventually flows to me, the individual, because I am sole member. If I am paying MD state income tax on the business portion of my income on my individual/personal 505 return, then I should not have to pay the same tax on that income the second time on my business return 510. Either that, or I pay that tax on the 510, and then I ask for credit on the 505 OR I list the MD business income as zero on my individual/personal return 505. The latter does not seem right because for both the IRS (1120S) and the CO state return, neither of them are asking for a payment on the business earnings - they both expect this to be on the individual returns for federal and state respectively. The confusion is only with the MD return, which is somehow expecting the tax payment on both the 510 and the 505. To explain this better, here is an example:

Let's say I have Maryland taxable income of $10000. The 510 expects me to pay 5.75+1.75 = 7.5 of that income which is $7500 on the 510 (line 9), but that $10000 also lists on the 505 return on line 10 column 2. So I end up paying $7500 twice, which is not right.

I feel that for S Corps in particular, that I should be able to defer the $7500 payment to the individual/personal tax return just like the CO and the Federal business tax returns.

Can someone confirm that this is correct? Perhaps the solution is that I need to send a copy of this explanation to the Comptroller's office with the voucher I was provided by TurboTax with this explanation? If I need to do this, why does the 510 even expect to be paid the business taxes when the personal tax return ensures that the income tax for MD gets paid with the individual's tax return?

Thank you for your kind attention,

Ashwin

Irene2805

Level 15

Working on it! Will reply soon.

Irene2805

Level 15

I added another answer at the bottom of the page, with an explanation of how the MD nonresident tax works. Good news -- no double taxation.

Irene2805Answer

Level 15

The short story is that you’re paying the taxes once (with the MD 510) and you get credit for it on your personal return, MD-505.

The longer story:

The estimated tax payments the S-Corp has made to MD (on your behalf) should be reflected on the 1120S and they will then flow to the MD-510 return.

If you haven’t already, the tax payments should be entered on the 1120S, page 3, in the Deductions section, line 12, on the yellow lines below line F. [See Screenshot #1, below.]

Enter Code S – Other Deductions.
In the middle section enter something like MD nonresident shareholder taxes.
Enter the amount in the far right part of the line.

From here, the figures just flow: (like the song, the “knee bone is connected to the leg bone…ankle bone…, etc..)

The MD tax entered on line 12 of the 1120S Sch. K flows to line 12 of the K-1 [Screenshot #2] with the description that you added. [Screenshot #3]
It appears on lines 7-9 of the MD-510 and onto the MD K-1, line D-1. [Screenshot #4]
When you enter the K-1 into your personal return, it will eventually show up on line 45 of the MD Form 505 (personal nonresident return.) [Screenshot #5]

Ashwin1Author

Level 2

Thank you for the detailed answer - I've already filed these - I suppose I need to file an amendment? Can I do this using TurboTax?

Irene2805

Level 15

Are any of the S-Corps' shareholders nonresidents of Maryland? Payment of the Maryland income tax is not required with the filing of Form 510 unless the pass-through entity is subject to the nonresident member tax.

According to the Comptroller of Maryland's website :

Nonresident members.

If a pass-through entity has a nonresident member and any nonresident taxable income, then the pass-through entity is subject to the Maryland income tax. The pass-through entity is taxed on the nonresident taxable income, which is the sum of the nonresident members' distributive or pro-rata shares of the pass-through entity's income allocable to Maryland.

A "nonresident member" includes a nonresident individual member (defined as a person or fiduciary) and a nonresident entity member. A nonresident entity member is a corporation or pass-through entity that is not qualified or registered with the Maryland Department of Assessments and Taxation to do business in Maryland or not formed under Maryland law.

Ashwin1Author

Level 2

I am a non-resident of Maryland, resident of CO, BUT I am paying Maryland state taxes every month AND I file a Maryland personal/individual state return each year which has the 5.75% normal state income tax PLUS the non-resident 1.75% tax which you are mentioning. I would *have* to if my S Corp business operates partially in MD. I can't have the business pay a corporate tax anyway - it is a pass-through entity. I have to pay all the MD taxes for the business income and my own wages on my personal/individual return. Otherwise I am getting taxed twice for the business income.

The quote from the website above says that I have to pay MD income tax - that quote from the website does not anywhere say that I have to file that tax on the 510 (business return). As long as I pay it on the individual return, it should be fine? In any case, it is a pass through entity, and such entities aren't suppose to pay any tax on their business returns - always only on the individual return - it is so for the 1120S and the Colorado 106 (which is where I reside). TurboTax is telling me that I have to pay this on the 510D, and has prepared a voucher for me and everything. Please confirm that if I am paying this 5.75% MD state tax plus the non-resident 1.75% MD tax on my personal MD return on everything including the business side income, then I am good to not pay it on the 510 for MD.