The Maryland taxable income of a corporation is its Maryland modified income as allocated to the State under Subtitle 4 of this title.

Except as provided in Subtitle 4 of this title, the Maryland modified income of a corporation, including a real estate investment trust or regulated investment company, is: the corporation’s federal taxable income for the taxable year as determined under the Internal Revenue Code and as adjusted under this Part II of this subtitle; if the corporation is exempt from taxation under § 501 of the Internal Revenue Code, the sum for the taxable year of the corporation’s unrelated business taxable income, as defined under § 512 of the Internal Revenue Code, and its income that is subject to tax under § 527(f)(1) of the Internal Revenue Code, as adjusted under this Part II of this subtitle; if the corporation is an S corporation, its income that is subject to federal income tax, for the taxable year, as adjusted under this Part II of this subtitle; or if the corporation is an investment conduit or a special exempt entity, the applicable tax base of the corporation as adjusted under this Part II of this subtitle.

To the extent excluded from federal taxable income, the amounts under this section are added to the federal taxable income of a corporation to determine Maryland modified income. The addition under subsection (a) of this section includes the net capital loss carryback, as defined in § 1212 of the Internal Revenue Code. The addition under subsection (a) of this section includes any taxes based on net income that are imposed by any state or by a political subdivision of any state. The addition under subsection (a) of this section includes the additions required for an individual under: § 10–204(b) of this title (Dividends and interest from another state or local obligation); § 10–204(c)(2) of this title (Federal tax–exempt income); § 10–204(e) of this title (Oil percentage depletion allowance); § 10–204(i) of this title (Deduction for qualified production activities income); § 10–204(j) of this title (Deduction for costs for security clearance administrative expenses and construction and equipment costs incurred to construct or renovate a sensitive compartmented information facility); and § 10–204(l) of this title (Deduction for donations to qualified permanent endowment funds).

In addition to the modification under § 10–305 of this subtitle, the amounts under this section are added to the federal taxable income of a corporation to determine Maryland modified income. The addition under subsection (a) of this section includes the additions required for an individual under: § 10–205(b) of this title (Enterprise zone wage credit, employment opportunity credit, disability credit, and qualified ex–felon employee credit); § 10–205(c) of this title (Reforestation and timber stand modification); § 10–205(e) of this title (Net operating loss modification); § 10–205(g) of this title (Unlicensed child care facility operating expenses); § 10–205(i) of this title (Maryland research and development tax credit); and § 10–205(m) of this title (Credit for share of taxes paid by pass–through entities). Repealed. Repealed. Repealed. The addition under subsection (a) of this section includes the amount of a credit claimed under § 10–726 of this title for research and development expenses for cellulosic ethanol technology.

In this section the following words have the meanings indicated. “Aggregate effective tax rate” means the sum of the effective rates of tax imposed by this State, other states or possessions of the United States, and foreign nations that have entered into comprehensive tax treaties with the United States government, where a related member receiving a payment of interest expense or intangible expense is subject to tax and where the measure of the tax imposed included the payment. “Bank” means: a bank holding company as defined in the federal Bank Holding Company Act of 1956, as amended, or a bank, trust company, savings bank, or savings and loan association incorporated or chartered under the laws of this State, another state, or the United States; or a subsidiary or affiliate of an entity described in item (i) of this paragraph. “Effective rate of tax imposed” means, as to any state, possession of the United States, or foreign nation, the maximum statutory tax rate imposed by the state, possession, or foreign nation multiplied by the applicable apportionment rate. “Intangible expense” means: an expense, loss, or cost for, related to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, to the extent the expense, loss, or cost is allowed as a deduction or cost in determining taxable income for the taxable year under the Internal Revenue Code; a loss related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions; a royalty, patent, technical, or copyright fee; a licensing fee; or any other similar expense or cost. “Intangible property” means patents, patent applications, trade names, trademarks, service marks, copyrights, and similar types of intangible assets. “Interest expense” means an amount directly or indirectly allowed as a deduction under § 163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue Code. “Related entity” means a person that, under the attribution rules of § 318 of the Internal Revenue Code, is: a stockholder who is an individual or a member of the stockholder’s family enumerated in § 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder’s family own directly, indirectly, beneficially, or constructively, in the aggregate, at least 50% of the value of the taxpayer’s outstanding stock; a stockholder or a stockholder’s partnership, limited liability company, estate, trust, or corporation, if the stockholder and the stockholder’s partnership, limited liability company, estate, trust, or corporation own directly, indirectly, beneficially, or constructively, in the aggregate, at least 50% of the value of the taxpayer’s outstanding stock; or a corporation or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of § 318 of the Internal Revenue Code, if the taxpayer owns directly, indirectly, beneficially, or constructively, at least 50% of the value of the corporation’s outstanding stock. “Related member” means a person that, with respect to the taxpayer during all or any portion of the taxable year, is: a related entity; a component member, as defined in § 1563(b) of the Internal Revenue Code; or a person to or from whom there is attribution of stock ownership in accordance with § 1563(e) of the Internal Revenue Code. Except as otherwise provided in this section, in addition to the modifications under §§ 10–305 and 10–306 of this subtitle, the amounts under paragraph (2) of this subsection are added to the federal taxable income of a corporation to determine Maryland modified income. The addition under this subsection includes any otherwise deductible interest expense or intangible expense if the interest expense or intangible expense is directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members. The addition required under subsection (b) of this section does not apply to any portion of the interest expense or intangible expense to the extent that the corporation establishes, as determined by the Comptroller, that: the transaction giving rise to the payment of the interest expense or intangible expense between the corporation and the related member did not have as a principal purpose the avoidance of any portion of the tax due under this title; the interest expense or intangible expense was paid pursuant to arm’s–length contracts at an arm’s–length rate of interest or price; and during the same taxable year, the related member directly or indirectly paid, accrued, or incurred the interest expense or intangible expense to a person who is not a related member; the related member was subject to a tax measured by its net income or receipts in this State, another state or possession of the United States, or a foreign nation that has entered into a comprehensive tax treaty with the United States government; a measure of the tax imposed by this State, another state or possession of the United States, or a foreign nation that has entered into a comprehensive tax treaty with the United States government included the interest expense or intangible expense received by the related member from the corporation; and the aggregate effective tax rate imposed on the amounts received by the related member is equal to or greater than 4%; or in the case of an interest expense, the corporation and the related member are banks. Subject to regulations adopted by the Comptroller, the addition required under subsection (b) of this section does not apply if, in lieu of the 4% effective tax rate requirement under subsection (c)(3)(ii)3 of this section, the aggregate effective tax rate imposed on the amounts received by the recipient is greater than or equal to the aggregate effective tax rate that would have been imposed on the additional income of the payor corporation if the interest expense or intangible expense had not been deducted. For purposes of subsection (c)(3)(ii) of this section, the Comptroller may provide by regulation for an alternative to the effective tax rate requirement of subsection (c)(3)(ii)3 of this section if: the related member: is subject in another state or in a foreign nation that has entered into a comprehensive tax treaty with the United States government to a tax that is measured by gross receipts or is measured by net capital or net worth; and is not subject in that state or in that foreign nation to a tax measured by net income or receipts; or under other circumstances demonstrating to the satisfaction of the Comptroller that avoidance of any portion of the tax due under this title is not a principal purpose of the transaction giving rise to the payment of the interest expense or intangible expense between the corporation and the related member, the Comptroller determines that it is impractical for a related member that is subject to tax in this State, another state, or a foreign nation that has entered into a comprehensive tax treaty with the United States government, where the measure of the tax includes the payment to satisfy the requirements of subsection (c)(3)(ii) of this section. If the payor and the recipient are both included in a combined or consolidated report filed in a jurisdiction: for purposes of subsection (c)(3)(ii)2 of this section, the measure of the tax imposed by that jurisdiction shall be deemed to include the interest expense or intangible expense; and for purposes of determining the effective rate of tax imposed by the jurisdiction, the applicable apportionment rate is the lesser of: the apportionment rate of the recipient corporation, determined by using only that corporation’s factors in the numerators and denominators of the apportionment formula; or the apportionment rate of the combined or consolidated group, determined by combining the recipient corporation’s factors with the factors of other members of the group included in the combined or consolidated report. In addition to the modifications under §§ 10–305 and 10–306 of this subtitle, subject to paragraph (2) of this subsection, to determine Maryland taxable income, an amount is subtracted from the federal taxable income of a corporation equal to the amount received as royalties, interest, or similar income from intangibles from a related member to the extent the related member, with respect to the payment, is subject to the addition modification under subsection (b) of this section or a similar addition modification of another state or of a foreign nation that has entered into a comprehensive tax treaty with the United States government for intangible expenses or interest expenses paid to related members. The subtraction modification under this subsection is not allowed to the extent that: the transaction giving rise to the payment of the interest expense or intangible expense had as a principal purpose the avoidance of State income taxes; the interest expense or intangible expense was not paid pursuant to arm’s–length contracts at an arm’s–length rate of interest or price; or the aggregate effective tax rate imposed on the amounts received by the recipient exceeds the aggregate effective tax rate imposed on the income of the payor corporation. This section may not be construed: to require a corporation to include in or add to its net income more than once any amount of interest expense or intangible expense that the corporation pays, accrues, or incurs to a related member; or to limit or negate any other authority provided to the Comptroller under this article, including: the authority to make adjustments under § 10–109 or § 10–402(e) of this title; or the authority to enter into agreements and compromises otherwise allowed by law. The Comptroller shall adopt any regulations that are necessary or appropriate to implement this section.

In this section the following words have the meanings indicated. “Captive REIT” means a corporation, trust, or association: that is considered a real estate investment trust for the taxable year under § 856 of the Internal Revenue Code; that is not regularly traded on an established securities market; and of which more than 50% of the voting power or value of the beneficial interests or shares, at any time during the last half of the taxable year, is owned or controlled, directly or indirectly, by a single entity that is subject to the provisions of Subchapter C of Chapter 1 of the Internal Revenue Code. “Captive REIT” does not include: a corporation, trust, or association of which, at any time during which the corporation, trust, or association satisfies subparagraph (i)3 of this paragraph, more than 50% of the voting power or value of the beneficial interests or shares of the corporation, trust, or association is owned or controlled, directly or indirectly, by: a real estate investment trust other than a real estate investment trust described in subparagraph (i) of this paragraph; a person exempt from taxation under § 501 of the Internal Revenue Code; a listed Australian property trust, or an entity organized as a trust in which a listed Australian property trust owns or controls, directly or indirectly, 75% or more of the voting power or value of the beneficial interests or shares of the trust; or a qualified foreign entity; or subject to regulations that the Comptroller adopts, a real estate investment trust that is intended to become regularly traded on an established securities market and that satisfies the requirements of § 856(a)(5) and (6) of the Internal Revenue Code by reason of § 856(h)(2) of the Internal Revenue Code. “Qualified foreign entity” means a corporation, trust, association, or partnership that is organized under the laws of a foreign government and: at least 75% of the total asset value of the entity at the close of the entity’s taxable year is represented by real estate assets, as defined in § 856 of the Internal Revenue Code, cash and cash equivalents, and United States government securities; is not subject to tax on amounts distributed to the entity’s beneficial owners; or is exempt from entity–level taxation; on an annual basis, distributes at least 85% of the taxable income of the entity, as computed in the jurisdiction in which the entity is organized, to the holders of the shares or certificates of the beneficial interests of the entity; of which not more than 10% of the voting power or value of the beneficial interests or shares of the entity is owned or controlled directly, indirectly, or constructively by a single entity or individual; or the beneficial interests or shares of the entity are regularly traded on an established securities market; and the entity is organized in a foreign country that has a tax treaty with the United States government. In addition to the modifications under §§ 10–305 through 10–306.1 of this subtitle, an amount equal to the amount of the dividends paid deduction allowed under the Internal Revenue Code for the taxable year is added to federal taxable income to determine the Maryland modified income of a captive REIT. For purposes of this section, the constructive ownership rules prescribed under § 318(a) of the Internal Revenue Code, as modified by § 856(d)(5) of the Internal Revenue Code, shall apply in determining the ownership of stock, assets, or net profits of any person.

To the extent included in federal taxable income, the amounts under this section are subtracted from the federal taxable income of a corporation to determine Maryland modified income. The subtraction under subsection (a) of this section includes the amount included in the income of a domestic corporation claiming a foreign tax credit as dividends under § 78 of the Internal Revenue Code. The subtraction under subsection (a) of this section includes the percentage of the dividends received from an affiliated domestic international sales corporation equal to the percentage that would be excluded if the corporation did not qualify under § 992(a) of the Internal Revenue Code. The subtraction under subsection (a) of this section includes dividends received from a corporation if: the receiving corporation owns, directly or indirectly, 50% or more of the paying corporation’s outstanding shares of capital stock; and the paying corporation is organized under the laws of a foreign government. Repealed. The subtraction under subsection (a) of this section includes interest attributable to an obligation of the United States or an instrumentality of the United States. The subtraction under subsection (a) of this section includes the amounts allowed to be subtracted for an individual under: § 10–207(i) of this title (Profits on sale or exchange of State or local bonds); § 10–207(k) of this title (Relocation and assistance payments); § 10–207(m) of this title (State or local income tax refunds); § 10–207(c–1) of this title (State tax–exempt interest from mutual funds); § 10–207(ii) of this title (Gain on the transfer of property within the Pimlico site or Bowie Race Course Training Center property and income recognized as result of governmental expenditures); or § 10–207(jj) of this title (Coronavirus relief payments).

In addition to the modification under § 10–307 of this subtitle, the amounts under this section are subtracted from the federal taxable income of a corporation to determine Maryland modified income. The subtraction under subsection (a) of this section includes the amounts allowed to be subtracted for an individual under: § 10–208(d) of this title (Enhanced agricultural management equipment expenses); § 10–208(i) of this title (Reforestation or timber stand expenses); § 10–208(k) of this title (Wage expenses for targeted jobs); § 10–208(p) of this title (Elevator handrails in health care facilities); § 10–208(z) of this title (Donations to diaper banks and other charitable entities); and § 10–208(bb) of this title (Trade or business expenses of a licensed or registered cannabis grower, processor, dispensary, or any other cannabis establishment). In the case of a regulated investment company, the subtraction under subsection (a) of this section includes an amount equal to the exempt–interest dividends paid by the company that are attributable to amounts received by the company that are included in the addition modification for dividends and interest from state or local obligations of another state under § 10–305(d)(1) of this subtitle.

In addition to the modifications under §§ 10-307 and 10-308 of this subtitle, the amounts under this section are subtracted from federal taxable income to determine Maryland modified income of a public service company engaged in an electric or gas business if the public service company was subject to the public service company franchise tax on December 31, 1999. The gain or loss realized by a public service company on the sale, retirement, or other taxable disposition or transfer of assets used in its electric or gas business shall be adjusted in an amount equal to the difference between the adjusted basis of the assets as recorded on the books of the public service company and the adjusted basis of the assets for federal income tax purposes calculated as of January 1, 2000. If the adjustment determined under subsection (b) of this section results in a subtraction that exceeds Maryland modified income computed without regard to the subtraction under this section, the amount of the excess may be carried forward to succeeding taxable years and used to reduce Maryland modified income in each succeeding taxable year until the excess is fully used. The modifications under this section shall continue to apply to assets transferred under a reorganization within the meaning of § 368(a) of the Internal Revenue Code or on the organization of a corporation principally in consideration for the issuance of its stock.

In addition to the modifications under §§ 10-305 through 10-309 of this subtitle, to determine Maryland modified income the federal taxable income of a corporation shall be adjusted as provided for an individual under § 10-210.1 of this title.