Most tax savings get found after the fact. Someone opens your books in the spring, sorts through a year that already happened, and tells you the number.
This one does not work that way. It is a choice you make during the year, and in one of the three places we serve, the window closes in the first quarter of the year you are already in. Miss it and the money is gone until next year.
If your business is an S corporation or a partnership, the profit reaches your personal tax return, and you pay the state income tax on that profit personally. Here is the catch. Your federal return limits how much state and local tax you can deduct on your personal return. A profitable practice owner passes that limit early in the year, so you pay real money in state income tax and get little or no federal deduction for paying it.
States built a fix. They let the business pay the state tax instead of you. A tax the business pays is a business expense, so the business deducts it, and the profit that reaches your personal return is smaller. Then the state gives you credit for what the business already paid, so the same income is not taxed twice. The name for it is the pass-through entity tax. It is an election, and nobody signs you up.
In Virginia, a qualifying pass-through entity can elect to pay Virginia income tax at the entity level at a rate of 5.75 percent. Owners then get a refundable credit on their own return equal to their share of the tax the business paid. Two things a Virginia owner should know. It is permanent now, because under the old law the election and the related credits would have expired on January 1, 2027, and the 2026 Amendments to the 2025 Appropriation Act (House Bill 29, Chapter 7) removed that expiration date effective February 20, 2026. You can build a multi year plan around it instead of watching for a renewal every session. Electing entities also have to make estimated payments and file electronically, so this is not a box you tick once the year is over.
Maryland offers the same idea with a much harder deadline. The election is made with the first estimated payment of the tax year, by checking the election box on Form 510/511D, and once it is made it is irrevocable for that year. Sit with what that means. If you reach next spring and your accountant works out that the election would have saved you thousands, there is no repair. The window for that year shut with the first quarter payment, months before anyone opened the books.
One more trap in Maryland. Carrying an overpayment forward from last year does not make the election for you. Someone has to check the box, on purpose, every year. Maryland has also been changing how an electing entity's income gets calculated, and the Comptroller has published guidance on tax year 2026 estimated payments. If you are electing in Maryland, that guidance is worth reading before your first payment rather than after.
DC starts from a different place. DC already taxes many unincorporated businesses at the entity level through the unincorporated business franchise tax. The rate is 8.25 percent of DC taxable income. Businesses with gross receipts over $12,000 file. Owners get a 30 percent salary allowance and a $5,000 exemption before the tax is figured, and there is a minimum tax of $250, or $1,000 once gross receipts pass $1 million.
An election like Virginia's and Maryland's for S corporations and partnerships has been in front of the Council. The Pass-Through Entities Income Tax and Tax Credit on Certain S Corporations and Partnerships Amendment Act of 2025 (Bill 26-0324) drew testimony from the Office of Tax and Revenue before the Committee of the Whole on March 19, 2026. A bill is not a law. Do not build this year's plan on it, and do check where it stands before you assume DC works the way Maryland does.
Nothing here is exotic. All three rules sit on public government websites. The reason owners miss the savings is timing. Compliance work happens after the year ends. This decision happens while the year is running, in the first quarter, when nobody is thinking about taxes. Your return preparer sees the year once it is finished, and by then the choice has already been made for you by default. That is the difference between someone who files your return and someone who watches your numbers through the year. One reports what happened. The other changes what happens.
Five things to do with this. Write down which entity type your business is, and in which state it files, because an S corporation in Maryland and a single member LLC in DC face two different questions. If you file in Maryland, put the first quarter estimated payment on a calendar now and decide the election before that payment goes out. If you file in Virginia, ask whether the election has been run against your numbers for this year and whether the estimated payments are set up. If you file in DC, ask how the unincorporated business franchise tax is hitting you today and treat any change as news to watch rather than a plan. And ask one question of whoever handles your taxes: has anyone modeled this for my business, with my numbers, this year? If the answer is no or unclear, that is the gap.
We work with practice owners and small business owners across Virginia, Maryland, and DC, and this is the kind of decision that gets made once a year and quietly costs money every year it gets skipped.
Sources: Virginia Tax, Virginia Elective Pass-Through Entity Tax and 2026 legislative summary 26-82 (tax.virginia.gov). Comptroller of Maryland, Form 510/511D and the tax alert on changes to tax year 2026 pass-through entity estimated payments (marylandcomptroller.gov). DC Office of Tax and Revenue, DC Business Franchise Tax Rates (otr.cfo.dc.gov). DC Office of the Chief Financial Officer, testimony on Bill 26-0324 (cfo.dc.gov).