Massachusetts enacts pass-through entity tax election

On September 30, 2021, the Massachusetts Legislature overrode Governor Baker’s veto of HB 4009, thereby enacting an elective pass-through entity (PTE) tax. Massachusetts is the latest to join the growing list of states creating workarounds to the $10,000 federal limitation on the deduction for state and local taxes that was enacted as part of the Tax Cuts and Jobs Act of 2017 and is effective through tax year 2025.

The PTE election is effective for tax years beginning on, or after, January 1, 2021. Under this provision, an eligible PTE (i.e. S corporation, partnership, or an LLC treated as an S corporation or partnership) can make an election to pay an excise tax on its qualified income taxable in Massachusetts at a rate of 5%.

Massachusetts defines “qualified income taxable in Massachusetts” as “the income of an eligible pass-through entity determined under chapter 62 allocable to a qualified member and included in the qualified member’s Massachusetts taxable income under said chapter 62.”

Qualified members are defined as a natural person, trust, or estate that is a shareholder of an S corporation or partner in a partnership; this includes members of an LLC that is treated as an S corporation or partnership and may be a resident, part-year resident or nonresident. Qualified members of an eligible electing PTE may claim a refundable credit against their personal Massachusetts income tax liability. The credit will be equal to the member’s proportionate share of the amount due and paid by the PTE multiplied by 0.9.

This election is irrevocable and must be made annually by the eligible PTE in the manner determined by the commissioner (the Massachusetts Department of Revenue has not announced how and when the election will be made yet). All members of the electing eligible PTE are bound by the election.

The MA pass-through election will automatically be inapplicable if the federal SALT limitation has expired or is no longer in effect. House lawmakers are currently discussing adding a two-year suspension to or an increase in the state and local tax deduction limitation, to the recent economic legislation that passed the House Ways and Means Committee this month.

Mazars will continue to monitor developments in this area. The workarounds passed by the various states are not uniform and taxpayers should consider their specific tax structures to determine if they could benefit from participating in the workarounds created by the various states.

Please contact your Mazars professional for additional information.

Published on October 28, 2021

Authored by Harold Hecht and Kevin Melson