Massachusetts Enacts Elective Pass-Through Entity Tax

October 2021

BY

Thomas LeonardoManaging Director, State & Local Tax

Matthew DymentPartner, State & Local Tax

On September 30, 2021, the Massachusetts legislature overrode Governor Charlie Baker’s veto of H.B. 4009, thereby enacting an entity-level pass-through entity (PTE) tax. The legislation mitigates the impacts of the federal $10,000 cap on state and local tax (SALT) deductions by creating a partial credit for members of electing PTEs on their share of state income tax. For tax years beginning on or after January 1, 2021, the new law allows eligible PTEs to pay an elective excise tax on qualified income taxable in Massachusetts. Eligible PTEs are S corporations, partnerships and LLCs treated as S corporations or partnerships. The tax rate for all electing PTEs is 5%.
 

Qualified Member’s Credit

A qualified member of an electing, eligible PTE is allowed a refundable credit against their Massachusetts income tax. The credit is equal to the qualified member’s proportionate share of tax due and paid by the eligible PTE, multiplied by 0.9. This credit is available for qualified members in the tax year that the electing eligible PTE’s tax year ends. A qualified member is a person, trust or estate that is a shareholder of an S corporation, partner in a partnership, or a member of an LLC treated as an S corporation or partnership. A qualified member can be a resident, nonresident or a part-year resident.
 

Election Process

Eligible PTEs must make the Massachusetts election on an annual basis, and all members are bound by the election. This election cannot be revoked for a tax year once made.
 
The new law is silent as to who can make the election on behalf of an eligible PTE. However, the law specifies that the election must be made in a manner determined by the Commissioner, which is yet to be announced.
 

Return Due Date

The elective PTE tax is due and payable on the eligible PTE’s original, timely-filed tax return and does not change the filing requirements for qualified members. The return that reports the elective PTE tax is due on the same day a partnership information return or corporate excise return is due for the entity.