Thanks.  This has been driving me a little nuts because it would seem that the IRS wouldn't care what happens at the state level and shouldn't deny an entity the right to deduct a mandatory withholding tax, especially if they're already allowing the PTE which is basically the same thing.

BUT I did some experimenting and I think I see the big difference that makes this non deductible at the entity level. 

When the entity pays the mandatory non-resident withholding tax on a 510 without making the election, the FULL amount of that payment gets passed through to the non-resident shareholders, EVEN IF it's in excess of their actual tax. So, in this sense, it's truly an estimated tax payment which we all know is NOT deductible. ONLY actual taxes are deductible, and that gets figured out on the shareholders' individual returns.  Consequently, there's no refund due at the entity level for an overpayment.  When the election is MADE, the tax expense and amount passed through to the Maryland K-1 is the ACTUAL tax expense which is deductible. So it's the estimated treatment of the non-electing entity that makes it not deductible at the entity level.

Hopefully this post will help someone as I could NOT find any good explanation anywhere.