Massachusetts Enacts Pass-Through Entity Tax

Thoughtware Alert Published: Nov 01, 2021
State & Local Tax Government Building

On September 30, 2021, Massachusetts became the most recent state to enact a workaround to the federal state and local tax (SALT) deduction limitation. The Massachusetts legislature overrode Gov. Charlie Baker’s veto of House Bill 4009 to enact the change. The legislation allows an eligible pass-through entity to elect to pay an excise tax on its Massachusetts income, with a corresponding credit available for its qualified members. Making the election a pass-through entity would enable its qualified members to obtain the full benefit of the federal deduction for the state excise tax paid to Massachusetts. The election is made annually and is irrevocable for the tax year once made, and applies to all qualified members of the electing entity. The election is available for tax years beginning on or after January 1, 2021. The election is not applicable for any tax year in which the federal limitation for SALT deductions (currently limited to $10,000) under Internal Revenue Code Section 164(b)(6) has expired or is not in effect. The associated excise tax is imposed at a rate of 5 percent, equal to the individual tax rate.

Eligible entities include S corporations, partnerships, and limited liability companies that have elected to be treated as either S corps or partnerships for federal tax purposes. The term “qualified member” is defined as natural persons, trusts, and estates that are subject to Massachusetts personal income tax law. Qualified members of an entity making the election are afforded a refundable credit against their personal income tax liabilities. The allowable credit is 90 percent of the qualified member’s proportionate share of the tax paid by the eligible entity and can be used for the qualified member’s tax year in which the entity’s tax year ends. 

Note that the election doesn’t take the place of any existing filing obligation for entities or their members, and the excise tax paid at the entity level is not in lieu of any other Massachusetts taxes. Eligible entities reporting the elective excise tax must file their returns at the same time as nonelecting pass-through entities. Pass-through entity returns and payments are due on the fifteenth day of the third month of an entity’s fiscal year or March 15 for calendar-year taxpayers. 

While the legislation directs the Massachusetts Revenue Commissioner to promulgate regulations and other guidance regarding application of the credits in a tiered structure, rules for trusts and estates, and requirements for estimated payments, several questions remain to be addressed by the Commissioner, such as:

  • Can the credits be claimed by qualified members on a composite return?
  • Is a separate return required or can the elective excise tax be reported as part of an entity’s pre-existing filing requirement?
  • For nonresident members, is the tax eligible as a credit for taxes paid in their resident states?

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