Massachusetts 2023 Tax Changes | Impact to Business and Personal Income Taxes

Published: Dec 12, 2023
By: Denisse Moderski
Topics: Tax
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On October 4, 2023, Massachusetts Governor Maura Healey signed into law Bill H.4104, which provides $1 billion in tax cuts creating savings for businesses, renters, and seniors, among others. Some notable changes impacting business entities and individual taxpayers are summarized below.

Business Income Taxes

Single-sales factor apportionment

Massachusetts shifts to single sales factor apportionment to calculate the taxable income for corporations.¹ Historically, the state applied a three-factor formula of property, payroll, and double-weighted sales. This change becomes effective January 1, 2025, applicable to all industries. While the bill does not explicitly extend the apportionment change to pass-through entities, generally, pass-through entities follow corporate rules for apportionment purposes. Notably, this move to single-sales factor formula greatly increases the impact of the state’s throwback rule (applicable to sales of tangible personal property) and throw-out rule (services revenue and other sales not related to tangible personal property).

Things to consider about the single-sales factor change:

If the corporation does not have income from a business activity that is taxable in another state, the whole of its taxable net income shall be allocated to the commonwealth.
If the sales factor is missing, the whole of the corporation’s net income shall be taxable net income allocated to the commonwealth. The sales factor shall be missing if both its numerator and denominator are zero, but it shall not be missing merely because the numerator is missing. This could result in 100% apportionment assessment by the state.
In the case of a sale or deemed sale of a business, “sales” shall not include receipts from the sale of the business “goodwill” or similar intangible value, including, without limitation, “going concern value” and “workforce in place.”
In the case of a business’ receipts from operating a gaming establishment or receipts from conducting a wagering business or activity, the income-producing activity shall be considered to be performed in the commonwealth to the extent that the location of wagering transactions/activities that generated the receipts are in the commonwealth.
Dividends included in federal gross income pursuant to IRC Secs. 951 or 951A shall not be considered sales for purposes of the receipts factor.

Financial institutions’ calculation of receipts from trading and investments

Effective in tax year 2025, H.4104 eliminates the sourcing of financial institutions where receipts from investment activities and assets are currently sourced to the taxpayer’s regular place of business (e.g., commercial domicile).² With the change of law, financial institutions (whose receipts generally include dividends, interest, net gains and other income from trading and investments activities) will be required to determine income from assets and activities attributable to Massachusetts and included in the numerator of the receipts factor by multiplying their income by a fraction. The numerator of this fraction is the total receipts assigned to Massachusetts derived from activities such as lending, leasing, and credit card activities. The total receipts which make up the denominator would exclude (1) interest, dividends, net gains (but not less than zero), (2) other income from investment assets and activities, and (3) other income from trading assets and activities. Finally, to the extent the financial institution cannot reasonably approximate its net income from business conducted in the commonwealth, the taxpayer may apply for an alternative method to determine its business receipts, or the commissioner may require the use of an alternative method.

Massachusetts Pass-Through Entity Tax (“MA PTET”)

Similar to many states, Massachusetts has an optional pass-through entity tax election available for partnerships and S corporations to be taxed at the entity level. This entity-level tax provides a federal tax deduction for the electing entity, which is not limited to the $10,000 SALT limitation at the individual level. The current tax rate for MA PTET is 5%; this is a refundable credit to eligible resident and nonresident members such as individuals, estates and trusts.³ The credit is limited to 90% to the qualified members. With the enactment of H.4104, the Department of Revenue shall analyze the potential impact of implementing an additional, elective entity-level tax of up to 4% on a portion of qualified taxable income in the commonwealth of eligible entities with a report due by February 1, 2024. The additional 4% tax is intended to cover the surtax applicable to individuals with income over $1 million. Thus, with the current law, the qualified members should still evaluate making additional quarterly estimates to the extent they are subject to the surtax.

Personal Income Taxes

Short-term capital gains

H.4104 changes the personal income tax rate from 12% to 8.5% effective on or after January 1, 2023. “Short-term” capital gains tax rate applies to capital assets held for one year or less.

Estate tax exemption

Estates of decedents dying on or after January 1, 2023, shall not be required to pay any tax if their federal taxable estate is less than $2,000,000. This is a change from the prior exemption of $1,000,000. For the estates of decedents dying on or after January 1, 2023, a credit shall be allowed against the tax imposed provided; however, the credit shall not exceed $99,600.

Married couples filing jointly mandate

A married couple shall file a joint return for any year in which they file a joint return for federal income tax purposes. In cases where one spouse or both are non-residents of the state and have income from states other than Massachusetts, the department shall provide, by regulation, for appropriate adjustments or for an exemption of the joint filing mandate. This change applies starting 2024.

Earned Income Tax Credit (“EITC”)

The law increases the credit from 30% to 40% of the federal credit.

Child and Family Tax Credit

The new law eliminates the two-dependent cap and increases credit from $180 per dependent child, disabled adult, or senior to $310 for 2023 and to $440 on a permanent basis, starting in 2024.