According to the Mass Dept of Revenue at: https://www.mass.gov/service-details/elective-pass-through-entity-excise: On September 30, 2021, the Massachusetts Legislature adopted an elective pass-through entity (PTE) excise in response to the $10,000 cap on the federal state and local tax (SALT) deduction added in the 2017 federal Tax Cuts and Jobs Act.
Massachusetts joins several other states in enacting an entity-level excise that responds to the SALT cap. Under the new legislation, for tax years beginning on or after January 1, 2021, entities taxed as S corporations and partnerships, and certain trusts, may elect annually to be subject to the pass-through entity excise (PTE Excise) at a rate of 5%. The law will expire if the federal SALT deduction limitation expires or is repealed.
Qualified members of an electing PTE are eligible for a credit equal to 90% of a member’s distributive share of PTE Excise paid. To elect the excise, a PTE must file electronically Form 63D-ELT, their income tax return, and all schedules. The PTE Excise must be paid electronically.
Eligible entities include S-Corps and Partnerships. According to Mass DOR, Sole proprietorships and single-member limited liability companies that are disregarded for federal income tax purposes cannot elect to be subject to the PTE Excise because they are not pass-through entities.
Why the Mass Entity Level Tax Saves Practice Owners Taxes
Under the new rules established back at the end of 2017, individuals and married couples are only allowed to deduct the first $10k of state income taxes and real estate taxes paid. Most practice owners significantly exceed that threshold so lose out on a sizeable tax deduction each year. This new Entity Level Tax (ELT) allows the practice to pay the Mass taxes due, which reduces the taxable profit of the practice that flows through on the K1 form to the owner’s personal tax return. Practice owners then claim 90% of the ELT on their Mass tax return as a tax credit.
How to Pay and This New Mass Tax
The ELT due for the year is 5% of the taxable profit reported by your S-Corp or Partnership. Paying this entity level tax is optional each year and is an election for practice owners to make annually as part of filing the entity’s tax return.
- To pay the ELT, practice owners will add this tax to their account at MassTaxConnect at https://mtc.dor.state.ma.us/mtc/_/.
- To report the ELT, practice owners will complete and submit a Form 63D-ELT with Mass Dor. This form is available at: https://www.mass.gov/doc/draft-2021-form-63d-elt-entity-level-tax/download.
Actual Tax Savings
We’ve calculated that individuals in the top tax bracket will realize a savings of about 1% of their K-1 income. Earn $100k of S-Corp and the shareholder will put about $1k in his or her pocket by electing to pay the ELT. On $500k of K1 income, the total tax savings is about $5k.
Beware of These Pitfalls
There appears to be a pitfall for S-Corp shareholders with suspended S-Corp losses being carried over from prior years. While these losses offset the income that the shareholder would report on his or her personal tax return, the suspended losses appear not to decrease the income subject to the 5% Mass tax.
Another pitfall applies to S-Corp shareholders and partners of partnerships that have already paid most of their estimated taxes for 2021 and will essentially double up on the taxes pre-paid for 2021. According to the FAQs: Estimated income tax payments for a given tax year, which are made by a qualified member, cannot be applied to the PTE Excise due from the PTE. The burden is on the PTE to pay the excise and such excise is separate from the personal income tax liabilities of its qualified members.
Should You Elect to Pay the New Entity Level Tax for 2021?
We’re recommending that the following practice owners consider paying the new Mass Entity Level tax:
- Businesses that will show K1 income of more than $100k (in excess of the owner’s W2 wages) for 2021,
- With Shareholders or the Partners in one of the top tax brackets, and
- With no suspended loss carryforwards at the personal level to offset this year’s K1 income, and
- With owners who don’t mind essentially doubling up their Mass estimated taxes and waiting until they file their 2021 tax returns to get those duplicate Mass payments refunded.
We plan to reach out to eligible practice owners soon about this tax savings opportunity. Our goal is to help those practice owners decide whether to move forward with the Entity Level Tax for 2021, get them set up to make those payments through Mass Tax Connect, and then initiate the tax payment prior to 12/31/21.
If you feel you are a candidate to elect to pay the Entity Level Tax this year, please email your Client Manager and/or email@example.com.