Navigating Complex Apportionment & Filing Changes in Massachusetts

Navigating Complex Apportionment & Filing Changes in Massachusetts

October 30, 2023

Recent tax law changes in Massachusetts have introduced new complexities around apportionment and filing for both businesses and individuals. Corporations will soon shift to single sales factor apportionment, while financial institutions face revised sourcing rules for investment receipts. Individuals are impacted by adjustments to estate tax, short-term capital gains, and millionaire surtaxes. In this article, we’ll walk through these key updates to help you understand the new landscape.

Adopting Single Sales Factor for Corporations

Effective for tax years beginning on and after January 1, 2025, Massachusetts corporate taxpayers will be required to apportion net income using a single sales factor. That is a departure from current law, which requires corporations (other than qualifying manufacturers) to use a three-factor formula of property, payroll, and a double-weighted sales factor. Affected taxpayers should model the impact of this change, particularly if applying economic nexus or other state nexus positions to avoid Massachusetts sales factor throwback and/or throw out.

Changing Sourcing for Financial Institutions’ Investment Receipts

Also effective for tax years beginning in 2025, recent legislation repeals the current sourcing of financial institution receipts from investment and trading assets and activities, which generally sources those receipts to the taxpayer’s regular place of business (where day-to-day investment and trading decisions are made). Beginning in 2025, those receipts — interest, dividends, net gains, and other income from investment assets and activities and income from trading assets — will be sourced using a fraction. The numerator will be the financial institution’s Massachusetts-sourced receipts from financial activities, such as lending, credit card receivables, leasing, and the denominator will be total receipts, excluding income from investment assets and activities.

Reducing Short-Term Capital Gains Rate for Individuals

For Massachusetts personal income tax purposes, recent legislation reduces the short-term capital gains rate to 8.5%, retroactive to January 1, 2023. Previously, Massachusetts taxed any gain from the sale or exchange of capital assets held for no more than one year at a rate of 12%.

New “Wealth” Taxes on Estates, Millionaires, and PTEs

The legislation increases the state estate tax threshold to $2 million for decedents dying on or after January 1, 2023. It also alleviates the so-called cliff effect of the Massachusetts estate tax, whereby estates valued at over $1 million were subject to tax on their entire value. The legislation grants a state estate tax credit of up to $99,600 as relief and changes how the tax on out-of-state real estate and tangible personal property is calculated.
Effective January 1, 2023, Massachusetts enacted the millionaires’ surtax, an additional 4% state income tax on the portion of a taxpayer’s annual income that exceeds $1 million. For income earned on or after January 1, 2024, recent legislation requires married couples to file Massachusetts joint income tax returns for any year in which they file federal joint income tax returns.
The legislation also requires the Department of Revenue to study the effect of an additional surtax of up to 4% on pass-through entities (PTEs) that have made the Massachusetts PTE tax election. Like requiring married joint filing when a federal joint return is filed, a 4% surtax on electing PTEs is intended to address avoidance of the millionaires’ surtax that went into effect earlier this year.

Insights for Tax Planning & Compliance

The recent Massachusetts tax changes create new intricacies to navigate for both businesses and high net-worth individuals. However, with the right expertise and foresight, you can optimize your tax liability despite the shifting laws. The tax professionals at REDW stay abreast of the latest tax reforms in Massachusetts and all states. Our state and local tax team can advise you on apportionment strategies, filing obligations, estate tax planning, and more. We take a proactive approach to wrestling with complexity on your behalf, aiming to minimize obligations while remaining compliant. Contact us today to learn more about how our experts can guide you through new state tax laws and drive value for your bottom line.

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