How Does the New Massachusetts Entity-Level Excise Tax Work?

While the 2017 Federal Tax Cuts and Jobs Act lowered corporate tax rates and doubled the standard deduction, it also included a provision that limited annual itemized deductions for state and local taxes to $10,000. This cap on “SALT” deductions has prompted several states to introduce a “workaround” that allowed owners of pass-through businesses to offset this cap by electing to pay a pass-through entity (PTE) business excise tax.

Massachusetts has joined the list of states with a PTE excise tax option. Qualifying pass-through entities may annually elect to pay an entity level state tax on income. Qualified taxpayers receive a credit for their share of the entity level tax, thus reducing their Massachusetts personal income tax and making the $10,000 cap more palatable.

Here’s how the pass-through entity excise tax works:

  • To qualify for the PTE a pass-through entity must be taxed as a Partnership or S corporation (certain trusts also qualify)
  • The entity may elect annually to be subject to the pass-through entity excise (PTE Excise) at a rate of 5%
  • An annual election is made on an original, timely filed tax return (includes extensions); once the election is made it is irrevocable for that year and is binding on all partners, shareholders, and members of the PTE, regardless of their home state residency 
  • To confirm the election, a PTE must electronically file Form 63D-ELT either through the MA Tax Connect website, or with a return using a third-party software
  • Qualified members of an electing PTE are eligible for a credit equal to 90% of a member’s distributive share of PTE Excise paid
  • A qualified taxpayer can be an individual, fiduciary, estate, or trust subject to Massachusetts personal income, tax that is a partner, member, or shareholder of an electing qualifying entity
  • The electing eligible PTE must report on Schedule K-1 the amount of each qualified member’s distributive share of the PTE Excise paid whether the member is a resident or nonresident of the Commonwealth
  • PTE estimated payments should be made on a quarterly basis, and the total amount of all estimated payments for accrual taxpayers for the 2022 taxable year must be made by January 17, 2023 
  • Cash basis taxpayers should also pay quarterly, while keeping in mind all MA PTE excise payments must be made on or before December 31, 2022 to claim a deduction in 2022 
  • Entities can register and make payments on MassTaxConnect
  • The law will expire when the federal SALT deduction limitation expires or if it is repealed

The PTE excise option is complicated and may not be the right option for everyone. Individuals should consult their tax advisors to determine whether they might benefit from the election. More details are available on the Massachusetts Department of Revenue website. For additional information please call Gray, Gray & Gray at (781) 407-0300. 

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