Key Points
- Massachusetts is creating an additional elective pass-through entity tax for tax years beginning in 2026 that may preserve a federal deduction for state and local taxes above the SALT cap.
- Taxpayers with major 2026 transactions or significant Massachusetts pass-through income should review how these changes may affect both current filings and forward-looking planning.
For clients with major 2026 transactions or substantial Massachusetts income earned through a pass-through entity, this is an important update.
Massachusetts recently enacted legislation that enhances the elective pass-through entity tax to allow for the 4% surtax on high-income earners.
Effective for tax years beginning on or after January 1, 2026, eligible pass-through entities may annually elect to pay an excise tax at a 9% rate on qualified taxable income. Qualified members of an electing entity are allowed a refundable credit, limited to 90% of the tax paid. The election is irrevocable for the year made, applies to all members of the entity, and does not apply for any tax year in which the federal SALT limitation has expired or is otherwise no longer in effect.
This change may be especially meaningful for owners of S corporations, partnerships, and limited liability companies taxed as pass-through entities who expect high levels of Massachusetts income in 2026. Where beneficial, the election may improve the overall federal tax result by shifting certain state tax payments to the entity level.
What practical steps should affected taxpayers take now?
- Identify affected entities and owners, especially where significant 2026 income or major transactions are expected.
- Evaluate the potential benefit based on entity income, owner tax profile, and whether the federal SALT limitation remains in effect.
- Consider the election as part of 2026 transaction planning, including sales, liquidity events, or large distributions.
- Coordinate at the entity level, since the election is annual, applies to all members, and cannot be reversed for the year.
FAQs
- When does the new Massachusetts PTE election take effect? The elective pass-through entity tax applies to tax years beginning on or after January 1, 2026.
- Who is eligible to make the election? Eligible pass-through entities generally include partnerships, S corporations, and certain trusts. In practice, this can also include LLCs that are treated as partnerships or S corporations for tax purposes. Whether the election makes sense will depend on the entity’s structure, its Massachusetts-source income, and the tax profile of its owners.
- Does the new PTE election apply if the federal SALT limitation expires?
The election does not apply for any tax year in which the federal SALT limitation has expired or is otherwise no longer in effect. - Is the election automatic, and can it be changed later? Eligible pass-through entities must make the election annually. The election is irrevocable for the year in which it is made and applies to all members of the electing entity.
- Will every pass-through entity benefit from making the election? Not necessarily. The benefit will depend on the entity’s income, the owners’ overall tax situation, and whether the federal SALT limitation remains in effect.