Massachusetts Tax Updates - November 2022
Chapter 62F Refunds
On November 1st, the Massachusetts Department of Revenue began distributing tax refunds to approximately 3 million taxpayers, both residents and non-residents of the state. In accordance with Chapter 62F, Massachusetts law requires the return of tax revenues received in excess of an annual cap. As such, nearly $3 billion in tax refunds will be issued to taxpayers in proportion to the Massachusetts income tax liability reported on their 2021 income returns. The refund will be equal to 14% of the Massachusetts income tax liability and is not impacted by refunds previously requested with the tax return filings.
To determine your income tax liability for Tax Year 2021:
Residents: The amount on line 32 of Form 1 for Tax Year 2021 minus the sum of lines 43 through 47 on Form 1 for Tax Year 2021.
Non-residents or part-year residents: The amount on line 36 of Form 1-NR/PY for Tax Year 2021 minus the sum of lines 47 through 51 of Form 1-NR/PY for Tax Year 2021.
Refunds will be issued via direct deposit or mailed as a check and should be fully distributed by the middle of December.
Fair Share Amendment – “Millionaires Tax”
As part of the mid-term elections, Massachusetts taxpayers voted yes to Question 1 by a 52%-48% margin. In doing so, a constitutional amendment will create a 4% surtax that will be imposed on income in excess of $1 million that is scheduled to go into effect on January 1, 2023. The surtax is estimated to raise between $1.3 billion and $1.9 billion in revenue, which would be earmarked for education and transportation improvements. A previously written article summarizing the perceived pros and cons may be found here.
Taxpayers that anticipate being impacted by this new surtax may look to accelerate income into 2022 before the higher rate goes into effect.
Pass-Through Entity Tax
While Massachusetts’ version of the Pass-Through Entity (“PTE”) Tax would not fall into the category of a new development, its introduction with several questions unanswered around this time last year led to many taxpayers not taking full advantage. This is especially true for the taxpayers that had already paid three quarters of estimates at that point.
The PTE regime shifts the burden of an owner’s personal Massachusetts tax liability to the company. By paying the tax at the entity level, companies are able to deduct the state tax payments against federal ordinary income. This is significant because since 2018, following the passing of the Tax Cuts and Jobs Act, taxpayers have seen their state and local tax deduction capped at $10,000.
Mechanically, the same income reported on the PTE Tax return will be reported on the owners’ personal income tax return along with a refundable credit equal to 90% of the tax paid at the entity level. While there is a slight haircut in the form of this 10% spread between tax paid and credit received, the tax benefit of the federal deduction generally results in an overall benefit of approximately 1% of flow-through income.
The only real drawback is the administrative burden of having to make more annual and quarterly tax payments than if you were just paying personally. For example, a Massachusetts taxpayer that owns 5 profitable PTEs may wish to make quarterly estimated tax payments for each of the 5 PTEs and the owner(s) to cover the 10% shortfall.
Only entities that file S-Corporation, Partnership, and/or Trust tax returns may take advantage of the PTE regime. This leaves single owner limited liability companies out of the mix. If the annual profit level warrants it, consideration could perhaps be given to incorporating or adding a de minimis partner to eliminate disregarded entity status and make eligible for the PTE program. As analysis and time is needed to implement such a strategy, it is best to identify the opportunities sooner than later.
About the Author:
Jeffrey T. Rogers, CPA, MST
Jeff has over 16 years of experience specializing in tax planning, tax research & compliance, IRS & State Exam Representation, Mergers & Acquisitions, and Business succession & ownership transitions with a focus in the construction, real estate, non-profit, restaurant, manufacturing & distribution industries. 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. In recent years, Jeff has developed a deep understanding of the Employee Retention Credit program and has presented on the topic for multiple trade associations, Chambers of Commerce, and at other business events. He was published in the Boston Business Journal and the Cape and Plymouth Times on the subject matter.
Prior to joining E.J. Callahan & Associates, Jeff has served as both a Partner and Director at regional and national CPA firms. He holds a Bachelor of Science Degree in Accounting from Merrimack College and a Master of Science degree in Taxation from Bentley University. Jeff is an active member of the American Institute of Certified Public Accountants (AICPA), the Massachusetts Society of Certified Public Accountants (MSCPA), and the CFMA. Jeff is also on the MSCPA Taxation Committee, a Board Member for the Danvers American Little League and has volunteered in the Danvers Youth Soccer program.
Check out Jeff's work:
"Employee Retention Credit Benefits for Contractors"
Boston Business Journal - July 1, 2021
"Don't Leave Bread on the Table: How Restaurants Can Benefit From The Employee Retention Credit"
Cape & Plymouth Business Media - December 2021 Issue, pg. 19
"Connecticut Sales Tax for Construction Contractors" Webcast
"Accounting Methods for Contractors" Webcast
"Tax Implications of Distributions from S-Corporations" Webcast
"Massachusetts Sales & Use Tax for the Construction Industry" Webcast
"Tax Planning & Incentives for Contractors" Webcast