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Tax Alert- Massachusetts Enacts Elective Pass-Through Entity Excise

On September 30, 2021, the Massachusetts legislature joined several other states in adopting an elective pass-through entity (PTE) excise tax. This is in response to the $10,000 cap on the federal state and local tax (SALT) deduction which was included in the 2017 federal Tax Cuts and Jobs Act.

For any tax year that begins on or after January 1, 2021, entities taxed as S corporations and partnerships, and certain trusts, may elect annually to be subject to the PTE excise at a rate of 5%. This law will expire if the federal SALT deduction limitation expires or is repealed.

A qualified member is a member of an eligible PTE, who is a natural person, trust, or estate, and may be a resident, nonresident, or part-year resident. Included in House Bill 4009, a credit is now available to qualified members in an amount proportionate to each qualified member’s share of the tax due and paid under this chapter by the eligible pass-through entity multiplied by 0.9.

At this time there are several questions that we are awaiting guidance on, but we wanted to keep you informed. The FAQs below provide an initial overview of the Pass-Through Entity Tax Election. We will continue to share updates as they become available.

Frequently Asked Questions:

How and when does an eligible PTE make an election to pay the PTE Excise?

The election is made annually by a PTE on its timely filed Form 3, Form 355S or Form 2, and is confirmed by submitting new Form 63D-ELT. The election may not be made on an amended return. Form 63D-ELT must be filed on or before the due date of the PTE’s tax return, considering valid extensions. Once the election is made, it is irrevocable. Qualified members cannot opt out of an election.

Is Form 63D-ELT required to be filed electronically?

Yes. A PTE that elects to pay the PTE Excise is required to first make the election on its Form 3, Form 355S or Form 2, then file Form 63D-ELT and make tax payments electronically. The filing of Form 63D-ELT and payment of the associated tax may be done through MassTaxConnect. Taxpayers may also file Form 63D-ELT and make payments due with a return using third party software.

When is Form 63D-ELT due?

The due date depends on the type of PTE that has made the election to pay the PTE Excise. Form 63D-ELT is due at the same time the PTE’s Form 3, Form 355S or Form 2 is due. The Department’s general rules regarding extensions apply to the PTE Excise.

Are estimated payments required for the PTE Excise?

Yes. As with other taxpayers, an electing eligible PTE must make estimated tax payments if the PTE’s required annual payment is $400 or greater. Estimated payments are due for a taxable year even though the chapter 63D election for the taxable year cannot be made until the return is filed. In general, estimated payments for calendar year filers are due on April 15, June 15, September 15, and January 15 (the due dates for fiscal year filers are adjusted based upon their fiscal year). However, given the recent enactment of the PTE legislation, for the taxable year beginning on January 1, 2021 the total amount of all estimated payments for the 2021 taxable year must be made by January 15, 2022.

For future years, a PTE’s required estimated payments will be equal to the lesser of:

  • 80% of the PTE Excise ultimately determined to be due on the PTE’s current year Massachusetts Form 63D-ELT; or
  • 100% of the PTE Excise shown on the PTE’s prior year Massachusetts Form 63D-ELT, if the PTE made the PTE election for the prior year and filed a prior year return that covered a 12-month period.

Can a trust that files Form 2 be an eligible PTE?

Yes, a trust filing Form 2 can be an eligible PTE and make the chapter 63D election if it has income that flows through to its beneficiaries that is reported on MA Schedule 2K-1 for Massachusetts personal income tax purposes.

Once the election is made, how is the PTE Excise calculated under chapter 63D?

Several factors must be considered as illustrated by the following simplified example:

  • Partnership ABCD does business in MA with 50% apportionment
  • Partnership net income for 2021 is $1,000
  • Partners A and B are Massachusetts resident individuals
  • Partner C is a nonresident individual
  • Partner D is a resident partnership
  • Each partner is a 25% owner

The PTE Excise would be calculated as follows:

  1. Determine the partners subject to tax in Massachusetts under chapter 62. Here it would be partners A, B and C.
  2. Determine the amount of taxable income allocable to each partner. Partners A and B each have $250 of income ($1,000 x 25%). Partner C has $125 of income. ($1,000 x 25% x 50% apportionment). Total income subject to tax under chapter 62 = $250+$250+$125 = $625. Partner D is not a qualified member, and its share of income is not taken into account under the PTE Excise.

Apply 5% PTE Excise rate to such income ($625 x 5% = $31.25).

*Note that in this example no PTE Excise is allocable to Partner D—the upper-tier PTE—regardless of the identity of the partners of Partner D. Its un-apportioned 25% of the $1,000 income flows up to its own Form 3 return. Partner D may make its own election to be subject to the PTE Excise.

If a PTE makes an election to pay the PTE Excise, the entity’s income is taxed at a rate of 5%, regardless of whether the income is Part A, B or C income under the Massachusetts personal income tax statute. The statutory rates that apply to each class of income must nevertheless, as relevant, be applied on the return of each qualified member.

Can a disregarded entity be an eligible PTE?

No. A disregarded entity cannot be an eligible PTE because it is not a partnership, an S corporation, or a trust for Massachusetts tax purposes.

Is a disregarded entity eligible to receive the PTE credit?

No. A disregarded entity cannot receive the PTE credit because a disregarded entity is not a qualified member subject to tax under chapter 62.

Can a single member LLC that is a disregarded entity for federal purposes be an eligible PTE?

No. A disregarded entity cannot be an eligible PTE because it is not a partnership, an S corporation, or a trust for Massachusetts tax purposes.

We will continue to keep you informed as we receive additional guidance. Contact us with any current or anticipated needs.

Sources:

Commonwealth of Massachusetts

Deloitte