Owners of pass-through entity businesses will get some state-level tax relief for 2021 that is aimed at neutralizing one of the most unpopular features of the federal Tax Cuts and Jobs Act (TCJA) of 2017.
The TCJA placed a $10,000 cap on the amount of state and local taxes (SALT) that individuals may deduct on their federal income tax returns. This hit taxpayers in states with high property values – like Massachusetts – particularly hard, and many states have come up with workarounds to enable taxpayers to deduct their state income and local taxes from their federal taxes.
Massachusetts joined the club in July with the enactment of the fiscal 2022 state budget, which includes a novel set of provisions that impose a small increase in state taxes on pass-through businesses, offset by a much larger tax credit.
The budget provision implements an entity-level tax on pass-through businesses, paired with a refundable tax credit. The state Department of Revenue estimated more than 55,000 filers in Massachusetts could benefit from the workaround, at a cost to the federal government of more than $1.1 billion. It would not apply to all residents with state and local taxes over $10,000 — just eligible owners of pass-through businesses.
The SALT workaround went through several iterations on Beacon Hill before being hammered out in a last-minute compromise. It puts Massachusetts on level footing with nearby states like Connecticut and Rhode Island, which have already created similar workarounds.
The Massachusetts workaround is designed to end in the event the federal SALT cap expires or is repealed. Like many provisions of the TCJA, the SALT cap is currently scheduled to sunset in 2026.
The DOR is expected to issue guidance this fall on compliance with the new tax provisions. We will keep you informed.
