Massachusetts is the most recent state to adopt an elective pass-through entity (PTE) tax. Despite the legislation (HB4009) creating the new tax only being enacted on September 30, 2021, Massachusetts’ PTE Excise tax is effective for tax year 2021. A number of other states that enacted similar legislation in 2021, such Arizona, Colorado, and Georgia, have delayed the start date for their new PTE tax until tax year 2022.
Similar to other entity-level PTE taxes that have been created over the last couple of years, Massachusetts PTE Excise tax was enacted in response to the $10,000 cap on the federal income tax state and local tax deduction enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). That cap only applies to individuals. Thus, a PTE that elects to be subject to an entity-level tax, such as Massachusetts’ PTE Excise tax, will create an entity-level deduction that is not subject to $10,000 limitation. That deduction will in turn flow-up to the PTE owners as a reduction in their distributive share of the PTE’s income.
The Massachusetts Department of Revenue has acted relatively quickly in releasing guidance to taxpayers on the new PTE Excise election. The Department’s FAQ can be found at https://www.mass.gov/service-details/elective-pass-through-entity-excise, and has been updated as of December 1, 2021 to address many of the common questions pertaining to these newly-enacted PTE tax regimes. Some of the key aspects of Massachusetts’ PTE Excise tax are as follows:
- Beginning on or after January 1, 2021, entities taxed as S corporations and partnerships, and certain trusts, may elect annually to be subject to the pass-through entity excise (PTE Excise) at a rate of 5%.
- Qualified members of an electing PTE are eligible for a refundable credit equal to 90% of a member’s distributive share of PTE Excise paid.
- A qualified member is a resident or nonresident natural person, estate or trust that is subject to the Massachusetts personal income tax and that is a shareholder, partner or beneficiary of an electing PTE.
- The election is made annually by a PTE on its timely filed Form 3, Form 355S or Form 2, and is confirmed by submitting the newly-created Form 63D-ELT.
- The Form 63D-ELT must be filed electronically on or before the due date of the PTE’s tax return, taking into account valid extensions.
- PTE Excise payments must be made electronically through MassTaxConnect or with a return using third party software.
- Starting for tax year 2022, quarterly payment are required. However, the total amount of all estimated payments for the 2021 taxable year must be made by January 15, 2022
- Payments can be made now through MassTaxConnect to create a 2021 tax deduction.
- The payments for the PTE Excise Tax are not in addition to other tax payments (e.g., nonresident withholding).
- Thus, payments of estimated PTE Excise reduce the required amount of PTE nonresident withholding or a resident’s estimated taxes.
- However, for 2021, in order to create a desired federal deduction for a PTE, the PTE will have to pay the PTE Excise on income already taken into account in determining prior PTE withholding and members’ estimated tax payments. Any resulting overpayment will be refunded to members.
- However, the Department has indicated that a member’s estimated taxes for the fourth quarter of 2021 may be determined taking into account any PTE Excise previously paid for the 2021 tax year.
Other notable states with a PTE tax election available to pass-through entities starting in 2021 include California and New York. At last count, over the last three years, 20 states have enacted an entity-level PTE tax in response to the TCJA.
If you have questions about a state’s PTE tax regime, please contact your Aronson Tax Advisor or Michael L. Colavito, Jr. at 301-231-6200.