On September 30, 2021, the Massachusetts Legislature adopted an elective pass-through entity (PTE) excise tax in response to the $10,000 cap on the federal state and local tax (SALT) deduction added in the (federal) Tax Cuts and Jobs Act of 2017. This change may be advantageous to many of our clients.
Income Tax deductions for Pass-Through LLC, Sub-S (S Corps) and Partnerships
If a pass-through entity pays the Massachusetts income taxes that the partner/member or owner will normally have to pay, then that entity receives a federal tax deduction, and the partner/member or owner receives a 90% credit for the amount paid.
Example:
Sub S owner made $100,000
Massachusetts income taxes due is $5,000
If the Sub S pays the $5,000 then the income from the Sub S changes to $95,000 for federal but $100,000 for Massachusetts.
Now the owner has a Massachusetts tax liability of $5,000 ($100,000 of income times 5% or $5,000). However, the owner now receives a credit of 90% of the amount paid or $4,500 ($5,000 taxes paid times 90%).
The result is that the owner receives a federal tax deduction of $5,000 which prior to this law enactment, the owner would not receive since there was a limitation of the State and Local Income Tax.
Who should use this method?
- Those pass-through entities that are LLC, Sub-S or Partnerships
- Those owners that have more than $10,000 of State and Local Income Tax
- Those owners that use itemize deductions, not the standard deduction
If you would like us to review your specific situation, please let contact us here https://lynchmarini.com/contact or Tony Marini (508) 650-0018 or Rob Lynch (781) 871-5850.