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Technical Information Release TIR 22-6: Pass-through Entity Excise
Table of Contents
This Technical Information Release (TIR) explains the elective excise on pass-through entities (PTEs) set out in new chapter 63D of the Massachusetts General Laws, as enacted in the Fiscal Year 2022 Budget (FY22 Budget). Chapter 63D allows partnerships, S corporations and certain trusts (referenced herein as “eligible pass-through entities” or “eligible PTEs”) to make an annual election to pay the new excise (the PTE Excise) at the entity level. The excise is imposed at a rate of 5% of the amount of the PTE’s income that is subject to the Massachusetts personal income tax at the individual partner, shareholder or beneficiary level. Qualified members are allowed a personal income tax credit for 90% of their pro rata share of the PTE Excise paid by the PTE.
The PTE Excise was enacted in response to the federal limitation on the state and local tax (SALT) deduction imposed on individuals by the Internal Revenue Code (Code) for tax years beginning on or after January 1, 2018 and ending on or before December 31, 2025. Pursuant to the statute, chapter 63D will not apply to any taxable year for which the federal limitation on the state and local tax deduction, imposed under Code § 164(b)(6) as amended and in effect for the applicable year, has expired or is otherwise not in effect. G.L. c. 63D, § 3.
This TIR explains the PTE Excise election, computation of the excise, and the filing and payment requirements. It also explains the computation of the PTE Excise credit that is available to qualified members of a PTE that has validly made the election.
II. The PTE Excise Election
General Laws chapter 63D, § 2 allows eligible PTEs to elect to be subject to the PTE Excise. As provided by chapter 63D, § 4, the PTE Excise election must be made by an eligible PTE on its timely filed original return, including an original return filed on extension. The election cannot be made on an amended return or on a return that is filed late. The election is made on an annual basis and it is irrevocable. Accordingly, once the election is made, all qualified members of the eligible PTE are bound by the election for the applicable taxable year. Individual qualified members cannot opt out of an election.
An election is made by checking the appropriate box and signing where required on the applicable return (Form 3 for partnerships, Form 355S - Schedule S for S corporations, and Form 2 for trusts). S corporations subject to tax as financial institutions can make the election on Form 63 FI – Schedule S. If a PTE makes the election, it must also file Form 63D-ELT to report and pay the PTE Excise.
Once the election is made, the PTE will be subject to interest and penalties if it fails to file Form 63D-ELT and correctly pay the PTE Excise in a timely manner. Penalties will be imposed under the rules provided in chapter 62C, § 25 for any failure to pay or any underpayment of tax due where an election has been made by the PTE.
III. Eligible PTEs
General Laws chapter 63D, § 1, defines an eligible PTE as “an S corporation under § 1361 of the Code, a partnership under § 7701 of the Code or a limited liability company that is treated as an S corporation or partnership under § 1361 of the Code or § 7701 of the Code.” Chapter 63D, § 7 authorizes the Massachusetts Department of Revenue (the “Department”) to promulgate regulations or other guidance that explain the application of the PTE Excise and the credit to trusts and estates.
Accordingly, the Department will treat the following entities as eligible PTEs if they do business in Massachusetts or derive income that is subject to personal income tax on the member level in Massachusetts:
• Partnerships, including limited liability companies that are treated as partnerships for federal income tax purposes;
• S corporations, including limited liability companies that are treated as S corporations for federal income tax purposes; and
• Trusts, to the extent that they have income that is taken into account by beneficiaries for Massachusetts personal income tax purposes.
Eligible PTEs may elect to be subject to the PTE Excise even if they are not otherwise required to file a Massachusetts return. An eligible PTE that makes the election will be considered to have voluntarily submitted to Massachusetts tax jurisdiction. To make the election, a PTE must file Form 355S if it is an S corporation, Form 3 if it is a partnership or Form 2 if it is a trust even if it would not otherwise be required to do so.
Sole proprietorships and single-member limited liability companies, including grantor trusts, that are disregarded for federal income tax purposes do not qualify as eligible entities and cannot elect to pay the 63D Excise. However, if a disregarded entity owns an interest in a PTE, the disregarded entity will be disregarded for purposes of determining whether its owner is a qualified member of the PTE.
IV. Computation of the PTE Excise
The PTE Excise is imposed on the total amount of an entity’s income that passes through to qualified members and that is subject to tax under chapter 62, as reported by the entity to its members on the entity’s Massachusetts Schedule K-1s, including guaranteed payments.
The income amount to be included on Form 63D-ELT must be based on information reported on the Massachusetts Schedule K-1. If an eligible PTE has a member that is not a qualified member, such as a corporation or certain partnerships, the PTE must determine the portion of its income attributable to the non-qualified member and report the income accordingly on its K-1s. This income is not subject to the PTE Excise. If the PTE has qualified members that are nonresidents, it must determine its Massachusetts apportionment percentage. Income attributable to nonresidents is subject to the PTE Excise only to the extent that it is apportioned or otherwise sourced to Massachusetts. The entity’s K-1s must be completed accordingly.
Net capital losses cannot be used to offset items of ordinary (Part B) income in calculating the excise under chapter 63D and capital losses cannot be carried over to subsequent years. If a qualified member has capital gain or loss that gain or loss is taken into account on such member’s individual income tax return.
Ordinary (Part B) losses cannot be used to offset net capital gain in calculating the excise under chapter 63D and ordinary losses cannot be carried over to subsequent years. If a qualified member has ordinary gain or loss that gain or loss is taken into account on the qualified member’s individual income tax return.
If a PTE makes an election to pay the PTE Excise, the entity’s income subject to the excise is taxed at a rate of 5%, regardless of whether the income is Part A, B or C income. However, the statutory rates on each class of income must be applied on the income tax return filed by each qualified member of the PTE.
Accordingly, the PTE Excise is equal to 5% of:
• PTE income attributable to resident qualified members taxable under chapter 62 x 100%; plus
• PTE income attributable to nonresident qualified members taxable under chapter 62 multiplied by the PTE’s Massachusetts apportionment percentage for the PTE’s taxable year.
The computation is illustrated in the following example. Partnership ABCD does business in Massachusetts and its Massachusetts apportionment percentage is 50%. Partnership ABCD’s net income for 2021 is $1,000. Partners A and B are Massachusetts resident individuals, Partner C is a nonresident individual and Partner D is a partnership. Each partner is a 25% owner of Partnership ABCD.
The PTE Excise is calculated as follows:
- Determine which partners are subject to tax in Massachusetts under chapter 62. Here it would be Partners A, B and C.
- Determine the amount of taxable income attributable 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 in determining the PTE Excise due.
- Apply 5% PTE Excise rate to such income ($625 x .05 = $31.25).
- No PTE Excise is due with respect to Partner D’s interest. Its un-apportioned 25% of the $1,000 income flows to its own partnership return. Partner D may make its own PTE Excise election if eligible.
Note that a qualified member’s income includes the member’s distributive share of PTE items, without reduction for the member’s share of the PTE Excise paid. Thus, Partners A, B and C will be required to report the full amount of their distributive share of ABCD’s income. No deduction is allowed for PTE Excise paid by Partnership ABCD.
V. Filing Requirements and Payment of the PTE Excise
PTEs that make an election to pay the PTE Excise under chapter 63D must file Form 63D-ELT electronically by the same date the PTE is required to file its partnership, S corporation or trust return, taking into account any filing extension.
Qualified members of PTEs must report and pay tax on their distributive share of PTE income under the rules applicable to partners, S corporation shareholders and trust beneficiaries under chapter 62. No deduction from pass-through income is permitted for the amount of PTE Excise paid. Pass-through withholding requirements for electing PTEs and estimated personal income tax requirements for individuals and trusts that are members of electing PTEs continue to apply as provided under chapter 62B. Withholding and estimated tax payments may be determined taking into account the PTE credit.
Estimated payments of the PTE Excise are required from PTEs that have greater that $400 in income. Estimated payments are due for a taxable year even though the chapter 63D election for the taxable year cannot be made until the PTE 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 Excise, for the taxable year beginning on January 1, 2021, the total amount of all estimated payments for the 2021 taxable year were due 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 correctly 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.
Note that estimated tax paid by qualified members will not be recharacterized as payments of estimated PTE Excise.
VI. Personal Income Tax Credit for Qualified Members
If a PTE Excise election is made and the excise is paid, the PTE must report on Schedule K-1 the amount paid at the entity level and the amount of such excise that is allocated to each of its qualified members. Qualified members must use the amounts shown on the K-1 in determining their credit, which is their share of the PTE Excise paid, multiplied by 90%. The credit is allowed to each qualified member whether the member is a resident or nonresident of Massachusetts and must be taken on the Form 1 or Form 1-NR/PY return. To claim the credit, nonresident qualified members must file a Massachusetts personal income tax return or participate in a composite return.
A qualified member may claim the PTE Excise credit against his or her personal income tax due under chapter 62 for the taxable year in which the electing eligible PTE’s taxable year ends. For example, where the electing PTE has a fiscal year ending in March of 2022, the qualified member may claim the credit for the PTE Excise on his or her 2022 calendar year tax return. Note that the PTE Excise credit is claimed after the application of other credits to which qualified members are entitled.
VII. Interaction with PTE Withholding and Composite Return Requirements
The PTE withholding requirements set out in chapter 62B apply to PTEs and their members. However, payments of estimated PTE Excise that are attributable to members subject to PTE withholding will reduce the amount of PTE withholding required with respect to those members. Personal income tax withholding paid by a PTE on behalf of its members will not be re-characterized as PTE Excise payments.
Where an eligible electing PTE files a composite return on behalf of any of its members, the PTE should determine the PTE Excise and PTE credit in the manner described in this TIR. Pertinent items should be reported on the K-1 for each qualified member participating in the composite return in the same manner as for other members. The form for the composite return to be filed for 2021 will accommodate such reporting and will allow the PTE credit to be applied against the tax of each qualified member. Any excess of PTE Excise credit over the tax due may be refunded to the PTE or applied to the following tax year.
/s/Geoffrey E. Snyder
Geoffrey E. Snyder
Commissioner of Revenue
March 18, 2022