The Notice cites legislative history in support of its position. The Treasury concluded such excise taxes will not be taken into account in applying the SALT deduction limitation, even if partners or shareholders receive a state tax credit/refund for such excise taxes. In the Notice, the Treasury clarified that such excise taxes will be treated as “Specified Income Tax Payments” that are deductible for federal income tax purposes by partnerships and S corporations. The Treasury Department sanctioned such state law workarounds to the federal SALT deduction limitation in Notice 2020-75 issued on Novem. The net is an overall tax decrease for partners and subchapter S shareholders of $13,500. With the facts above, the Massachusetts law reduces an individual’s federal income taxes on allocable partnership or Subchapter S corporation income by $18,500 but increases the taxpayer’s Massachusetts income taxes by $5,000. Total Massachusetts and Federal Income Taxes Refundable Credit for Massachusetts Excise Taxįederal Deduction for State and Local Taxes on Partner’s Shareįederal Deduction for Massachusetts Excise Taxįederal Income (Net of State and Local Taxes) Massachusetts Income Tax on Partner’s Share What does this law mean for an individual, trust or estate taxpayer’s total income tax burden? Let us take the following assumptions: Massachusetts Income Tax Rateīelow is a comparison of income tax consequences for investors in partnerships or S corporations that do not adopt the excise tax vs. However, the new law provides individual, trust and estate partners/ subchapter S shareholders with a refundable credit equal to 90% of the partner’s/shareholder’s share of the new excise tax. This excise tax adds to a partner’s/shareholder’s current Massachusetts income tax on income from partnerships and S corporations. Section 39 of the new law adds new Chapter 63D to the Massachusetts General Laws (“Taxation of Pass-Through Entities”) which allows S corporations and partnerships to elect to pay an excise tax on qualified income taxable in Massachusetts at a rate of 5% (the Massachusetts individual income tax rate). The Massachusetts House and Senate included the above legislative change in their Fiscal Year 2022 budget (H. Investors in partnerships or S corporations that make the election described below will face a slight increase in Massachusetts income tax, however, on their associated business income. On July 16, 2021, Governor Baker enacted legislation that allows (a) individual, trust and estate taxpayers who are partners in partnerships (or limited liability companies taxed as partnerships) and (b) individual, trust and estate taxpayers who are shareholders in subchapter S corporations to avoid the $10,000 limitation on the federal income tax deduction for state and local income taxes (“SALT”) for income from such business entities.
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