PTE Electives Workaround to SALT Cap

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Massachusetts enacted HB 4009 on September 30, 2021, becoming another state to give pass-through entities (PTEs) the option to be taxed at the entity level, in response to the federal $10,000 cap on the federal state and local tax (SALT) deduction added in the 2017 Federal Tax Cuts and Jobs Act. Massachusetts’ new PTE excise is applicable to tax years beginning on or after January 2021.

Impact on PTEs Making the Election

S-corporations, partnerships, and certain trusts may elect annually to be subject to the PTE Excise at a rate of 5%. The PTE Excise is not mandatory, however; once the election is made by a PTE for a particular tax year it is irrevocable for that year and binding on all qualified members of the electing PTE. The election is made annually by a PTE on its timely filed return (including extensions) by checking the appropriate box and by filing Form 63D-ELT with the return. Qualified members of an electing PTE are eligible for a credit equal to 90% of a member’s distributive share of PTE Excise paid. The remaining 10% is retained by the MA DOR and is not creditable or refundable.

A qualified member is a 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. A PTE must report the amount of PTE Excise paid at the entity level and the amount of such excise that is allocated to each of its qualified members on Schedule K-1. Qualified members must use the amounts shown on the K-1 in determining their credit, which is their distributive share of the PTE Excise paid. A qualified member may claim the PTE Excise credit against the member’s personal income tax due for the taxable year in which the electing eligible PTE’s taxable year ends. The PTE Excise credit is refundable if it is claimed against the personal income tax. Any excess credit is treated as overpayment.

As with other taxpayers, an electing eligible PTE must make estimated tax payments if the PTE’s required annual payment is $400 or greater. In general, estimates payments for calendar year filers are due April 15, June 15, September 15, and January 15. 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.

Significant Guidance Still Needed

Although this new law is a welcome addition and will bring much needed relief to the very limited $10,000 deduction for state and local taxes paid, there are still many unanswered questions on how this credit will work, such as:

  • What benefit will it will provide to owners of entities whose income is apportioned to other states in addition to Massachusetts?
  • How will the credit for taxes paid to other jurisdictions affect the basis amount paid at the entity level?
  • What payments and when they can be credited to the individual level?
  • Whether residents of states other than Massachusetts be able to count the entity level taxes as a credit against their own resident state taxes, among other issues.

And of course no election would be made if the individuals do not benefit from the Federal deduction. Currently the Federal government has indicated in Notice 2020-75 that they will accept the taxes paid at the entity level as valid deductions on the entities federal return; however they have not issued regulations on when the payments will be deductible for cash and accrual basis taxpayers or whether taxes paid on investments will even be eligible (IRC Section 212 expenses) to be deducted at the entity level or remain a separately stated non-business expense.

Both the MA DOR and the IRS have promised additional guidance in the near future regarding these issues. We will continue to keep you updated. Should you have any questions, please don’t hesitate to reach out to your Tonneson + Co representative.

UPDATE – January 4, 2022 – The MA DOR has posted a WORKING DRAFT – TIR (Technical Information Release) regarding Pass-through Entity Excise.

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