Newburg Staff Writers (7/27/21)
This July, Governor Baker has signed legislation as part of the 2022 Fiscal Year Budget allowing certain owners of pass-through businesses such as S-Corporations or Partnerships to elect to have their pass-through business pay an excise tax on their behalf and receive a Massachusetts tax credit in turn. This election would be available for tax years beginning on or after January 1, 2021. The excise tax would be at 5%, or the current Massachusetts income tax rate on ordinary income for individuals, and allows individual, trust, and estate shareholders/partners to receive a tax credit for 90% of their allocable share.
While the election is made on an annual basis, once made at the pass-through entity level, the election is binding for the year, to all shareholders or partners.
With the integration of the excise tax and credit for shareholders and partners, the Massachusetts legislature has created an option for business owners to potentially sidestep the $10,000 State and Local Tax (SALT) limitation on tax expenses eligible for Itemized Deductions as issued in the 2017 Tax Cuts & Jobs Act. While the Massachusetts Tax credit available to pass-through owners is limited to only 90% of their allocated expense, the pro-rata share excise tax expense would be exempt from the SALT limitation on a pass-through business owner’s tax return under current tax guidance, potentially saving significantly more in Federal taxes for those owners at higher tax brackets than the additional Massachusetts state excise tax after the 90% limitation.