After the Tax Cuts and Jobs Act capped the federal state and local tax (SALT) deduction at $10,000, states have been enacting workarounds to mitigate the impact of the lost tax savings on pass-through entities and their owners.
Massachusetts recently joined New York, New Jersey and other states that allow S corporations and partnerships (and limited liability companies taxed as either) to elect a pass-through entity tax (PTET). Previously vetoed by the governor, the Massachusetts legislature overrode that decision to pass the new law.
Under the legislation, an electing pass-through entity would be subject to a 5% excise tax at the entity level. The entity’s owners are then entitled to a refundable credit on their Massachusetts individual tax return equal to 90% of their share of the PTET paid by the business. Eligible owners include individuals, trusts and estates.
The PTET election, which must be made annually, is effective for tax years beginning on or after January 1, 2021 and is effective until the SALT deduction limitation expires or is repealed. The PTET is due and payable on the entity’s original timely-filed return.
Grassi’s tax advisors are monitoring this development and will keep you informed when more guidance is released on forms, estimated taxes, election deadlines and more.