Stone & Company Fourth Quarter Check-in: Legislative Updates

On September 30, 2021, the Massachusetts legislature enacted an elective pass-through entity (PTE) tax that is intended to be a workaround for the State and Local Tax (SALT) $10K deduction limit enacted by the 2017 Tax Cut and Jobs Act (TCJA). By doing so, Massachusetts joined a growing list of States that are taking advantage of favorable IRS guidance under Notice 2020-75 approving the passthrough taxes that would provide a deduction above the $10K SALT limit at the Federal level and create federal tax savings.

Under the provision, eligible passthrough entities (S-Corporations, Partnerships, LLCs taxed as passthrough entities and certain trusts) would elect to pay a 5% state tax on distributive income at the entity level. This tax is deductible on the entity’s tax return and would reduce the taxable income allocable to the shareholder. In addition, the eligible electing owners can claim a refundable credit of the taxes paid at the entity level against their Massachusetts personal income tax. The available credit would be limited to 90% of allocable entity level tax paid.

The PTE tax election would be available for tax years beginning on or after January 1, 2021, and the election and payment must be made by the filing due date of the entity original return. The election must be made on an annual basis and once made, it is irrevocable for that tax year and binding on all qualified PTE members. The election is only available for the tax years during which the federal SALT deduction limit is in effect.

Other states that have adopted the PTE tax workaround include Arizona, California, Colorado, Minnesota, New York, and Oregon.

Other Recent Legislative Developments

Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) applies to wages paid by most eligible employers before October 1, 2021. Only recovery startup businesses are eligible to claim the credit in the fourth quarter of 2021. Other eligible employers cannot claim the ERTC after September 30, 2021.

Taxpayers Affected by Disasters

There will be a mandatory and automatic 60-day deadline extension for qualified taxpayers who are impacted by federally declared disasters.

Digital Assets (Virtual Currency)

Various informational reporting requirements will be in effect for brokers with regard to digital asset transactions. Brokers will be required to furnish statements with certain information when the new rules take effect. This new law will be effective for returns required to be filed after December 31, 2023.

Your Stone and Company tax team will continue to monitor developments and guidance at the federal level, as well as from the various states, as we analyze each client’s tax situation and optimize tax strategy.

Caroline Waweru, CPA and Don Zidik, CPA, contributed to this Update. Stone & Company, LLC is a CPA firm based in Lexington, Massachusetts – Always passionate about driving growth. Contact us at info@stonecpas.com