Elective MA Pass-Through Entity Tax (PTE): Recent Changes & Updates
Updated: Sep 25
By Kevin Rogers, CPA, MST | Tax Director, E.J. Callahan & Associates
Massachusetts recently alerted Taxpayers to updates that it made to its pass-through entity (PTE) tax regime beginning with tax year 2026. By and large, the changes are welcome news and should be factored into 4th quarter and year-end tax planning considerations. For tax years beginning on or after January 1, 2026, the elective PTE excise tax will include both the existing Chapter 63D excise and a new Chapter 63E excise.
To provide historical context, Massachusetts enacted an elective entity-level income based tax (chapter 63D PTE excise tax) back in 2021 in response to the Federal state & local tax (SALT) deduction cap, which was $10,000 at the time. Essentially, the MA PTE election allows eligible entities to pay the resulting state income tax imposed on its qualified members’ share of distributive income at the entity level, by passing the federal SALT deduction cap for individuals. This allows the entity to fully deduct the state income tax on its federal return, reducing the members’ federal taxable income.
The chapter 63D PTE excise tax is elective and is equal to 5% of a pass-through entity’s income that is attributable to qualified members. The tax is paid at the entity level by eligible PTEs on behalf of its qualified members subject to the MA personal income tax. Qualified members are eligible for a personal income tax credit equal to 90% of the tax paid by the PTE that is attributable to them. The remaining 10% must be paid personally.
The new chapter 63E PTE excise tax is also elective and is equal to 4% of a pass-through entity’s distributive income attributable to qualified members that is in excess of the surtax threshold, which is set at $1,107,750 for tax year 2026. Similar to the chapter 63D PTE excise tax, qualified members are eligible for a personal income tax credit equal to 90% of the tax paid by the PTE that is attributable to them.
Beginning with tax year 2023, certain personal income taxpayers have been required to pay an additional 4% surtax to MA, (referred to widely as the “MA millionaire’s tax”) on taxable income over the surtax threshold. The MA millionaire’s surtax threshold for tax year 2026 is the same $1,107,750 referenced above. Similar to the chapter 63D PTE election, this new chapter 63E PTE excise tax allows the taxpayer to elect to pay this surtax at the entity level, creating a state income tax deduction on the entity’s federal return while reducing the members’ federal taxable income. In general, this federal tax deduction would otherwise be unavailable to personal income taxpayers.
To illustrate the new chapter 63E PTE election, assume that an S-corporation has 1 shareholder. The S-corporation’s distributive income for tax year beginning on or after January 1, 2026 was $5 million. The 100% shareholder’s excess income above the surtax threshold is $3,892,250. ($5 million less $1,107,750 threshold = $3,892,250). The chapter 63E PTE excise tax is 4% of excess income, which equals $155,690. ($3,892,250 x 4% = $155,690). The S-corporation would pay the tax at the entity level and would fully deduct the $155,690 on its federal income tax return, reducing the shareholder’s federal taxable income on his/her federal tax return. The shareholder would receive a credit on his/her MA personal return equal to 90% of the tax paid, or $140,121. ($155,690 x 90% = $140,121).
The calculation can get more complicated when pass-through entities have multiple owners with varying ownership percentages. Using the same $5 million of distributive income but with one stockholder owning 80% of the shares and the other owning 20%, the calculation would be as follows: Shareholder 1’s 80% allocable share of taxable income would be $4 million. After subtracting the $1,107,750 threshold, the taxable base subject to payment of Chapter 63E Pass Through Entity tax would be $2,892,250. At the 4% tax rate, the company would be responsible for making a payment of $115,690, and Shareholder 1 would receive a credit for 90% of that amount or. Shareholder 2’s 20% allocable share would equate to $1 million. After reducing the amount by the $1,107,750 millionaire threshold, there would be no balance remaining on which the company could make the 4% payment. This is true even if the shareholder is well into the Millionaire tax bracket through wages or other personal sources of income.
The pass-through entity (PTE) can elect to pay the chapter 63D PTE excise or the chapter 63E PTE excise, or both. Both elections are made by the pass-through entity with the filing of its annual corporate income tax return. Both PTE excises will expire if the federal SALT deduction limitation expires or is repealed. Payments of the tax must be made electronically through Mass Tax Connect. While remittance of both the Chapter 63D and Chapter 63E tax liability can be made through one payment, the 63D and 63E components of the payment are supposed to be identified.
More information on both the Chapter 63D and Chapter 63E elections can be found on the mass.gov website here. Of course, should you have questions on these changes, feel free to reach out to an EJC partner at any time.
About the Author:
Kevin Rogers, CPA, MST
Tax Director | E.J. Callahan & Associates
Kevin has over 20 years of experience specializing in tax planning, tax research & compliance, IRS & State Exam Representation, Mergers & Acquisitions, international tax, and multi-state tax, with a focus in the construction, real estate, professional services, high-tech, hospitality, manufacturing & distribution and non-profit industries. From start-up companies to large companies, he helps businesses adopt the most tax efficient accounting methods available to them and identifies all tax credit and incentives to which they may be entitled.
Prior to joining EJC, Kevin has served as a Tax Director at national and regional firms. He holds a Bachelor of Science Degree in Accounting and Management from Merrimack College, and a Master of Science Degree in Taxation from Bentley University. Kevin is an active member of the New England Society of Certified Public Accountants (NECPA), and the American Institute of Certified Public Accountants (AICPA). Outside of work, Kevin has coached Peabody West Little League for the past 5 years.
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