Newburg | CPA Tax Brief (11/09/2021)
The Massachusetts legislature has created an option for business owners to sidestep the $10,000 itemized deduction limitation on State and Local Tax (SALT) and property taxes originally issued in the 2017 Tax Cuts & Jobs Act.
Effective for the tax year beginning January 1, 2021 the new law allows eligible Pass-Through Entities (PTEs) to pay an elective excise tax at the entity level on qualified Massachusetts income. This results in the entity-based tax becoming a business expense fully deductible for federal income tax purposes reducing taxable income passed through to owners. An eligible PTE is an S corporation, partnership, or LLC taxed as a partnership. The tax rate for making the election at the entity level is 5% which also equates to the Massachusetts personal tax rate.
The eligible PTE can make the irrevocable election every year and all members of the entity are bound to the specific election. Any elective PTE tax will be due and payable on the eligible PTE’s original and timely filed entity tax return (due March 15, 2022). Form 63D-ELT is to be filed electronically with the Department of Revenue to calculate the tax to be paid at the entity level.
A qualified member can be an individual, estate or trust and may be a resident, non-resident or a part-year resident. Any qualified member of an electing eligible PTE will be allowed a refundable credit against any Massachusetts income tax based on 90% of the qualified member’s proportionate share of tax due and paid by the eligible PTE. The credit will cease to exist if there no longer a Federal cap on state and local (SALT) deductions or once the law expires in 2025.
It is anticipated that the Department of Revenue will address the application of the elective credit along with the requirements for estimated tax payments in the coming weeks. We will continue to monitor any associated PTE developments as well as any Federal legislation that may potentially curtail or invalidate this new opportunity. Feel free to contact us at (781) 884-4100 to speak with one of our team members. You can also visit our website at www.newburg.com for additional insights and information. You can also refer to the Massachusetts Department of Revenue frequently asked questions which is updated often regarding this new election adopted by the Massachusetts legislator at https://www.mass.gov/service-details/elective-pass-through-entity-excise.