The Massachusetts Legislature recently enacted an elective pass-through entity (PTE) tax. The legislation allows partnerships, certain limited liability companies and S corporations to elect to pay an excise tax of 5% on the entity income allocated to individuals, trusts or estates. The eligible owners would be allowed a Massachusetts tax credit against his/her/its income tax equal to 90% of the tax paid by the entity.
The effective date of this provision is tax years beginning on or after January 1, 2021. The provision remains in existence until the federal government’s limitation on the SALT deduction is repealed, expires or becomes ineffective. The federal government’s SALT provision limits the individual’s SALT deduction to $10,000 ($5,000 if married filing separately). Making the entity tax election removes the state tax payment from this limitation.
The House Ways and Means Committee signed the Build Back Better Act (BBBA) providing relief from the SALT limitation by increasing the $10,000 SALT deduction cap to $80,000 ($40,000 for married couples filing separately, estate and trusts). The Senate is expected to modify the BBBA provision regarding the SALT limitation.
The election is made annually and is irrevocable for that year. The election is made on a timely filed tax return of the eligible entity and is confirmed by filing Form 63D-ELT electronically through MassTaxConnect or third party software.
The 2021 pass through entity level tax is due January 15, 2022.
For more information please contact your tax professional or Pat Thompson at 401-831-0200.