The Massachusetts Supplemental budget bill, HB 5470, was passed on June 12 and requires an addback for the 2025 tax year, phases in conformity with certain OBBBA provisions over a two-year period, and enacts a PTET for the 4% surcharge.
MA Decouples from Certain OBBBA Provisions
Section 174A R&E Expenditures
MA generally conforms to federal law changes, but now going forward, Massachusetts will not automatically conform to future amendments that apply to (1) any tax year that begins in the calendar year in which the amendment is enacted, or (2) any tax year that precedes the calendar year in which the amendment is enacted.
For both the Massachusetts personal income tax and general corporate excise (income), the bill decouples from IRC Section 174A for tax year 2025. Specifically, the law disallows the deductions for domestic R&E expenditures created by OBBBA Section 70302(f), applicable to tax years beginning on or after January 1, 2022. Thus, Massachusetts decouples from the federal provision allowing (1) qualifying small businesses to retroactively deduct domestic R&E expenditures for tax years beginning after December 31, 2021, and (2) all taxpayers to deduct the remaining unamortized balance of domestic R&E expenditures that were capitalized under IRC Section 174 for tax years beginning after December 31, 2021, and before January 1, 2025.
The law also disallows the deductions allowed by IRC Section 174A for tax years beginning on or after January 1, 2026. Taxpayers may deduct any R&E expenditures paid or incurred as allowed under IRC Section 174 as in effect on July 3, 2025. As a result, for the 2025 tax year, Massachusetts effectively adopts the federal rules related to the deduction and capitalization of R&E expenditures under the Tax Cuts and Jobs Act (TCJA). The decoupling provision applies to tax years beginning on or after January 1, 2022. These provisions have the effect of requiring a Section 174A modification for 2025 but not for 2026.
MA decouples from OBBBA for IRC Sec. 163(j) and 168(n)
For both the Massachusetts personal income tax and the general corporate excise (income), the bill disallows the following federal deduction for tax years beginning in 2025 and in 2026:
- IRC 163(j)
- IRC 168(n)
For all future years (from 2027 and on), Massachusetts should conform to these provisions.
Penalty and Interest Relief
The law includes penalty and interest relief for underpayments or late payments of tax for tax years beginning in 2025, where the taxpayer filed their return before these changes were enacted, provided that the taxpayer files an amended return that takes these changes into consideration.
PTET Enacted for 4% Surcharge
An elective pass-through entity tax (“PTET”) is created for the 4% surtax on high-income earners, applicable to tax years beginning on or after January 1, 2026.
- In 2021, Massachusetts enacted a PTET program, which allows eligible pass-through entities to annually elect to pay a 5% excise tax on their “qualified income taxable in Massachusetts” (which is the same as the regular commonwealth personal income tax rate).
- After the enactment of the PTET, MA imposed an additional 4% surtax on incomes over $1 million for tax years beginning after January 1, 2023. Thus, high earners are taxed at 9% but only get a 5% PTET benefit.
- The new law creates a separate PTET election for the 4% surtax on high-income earners. Applicable to tax years beginning on or after January 1, 2026, new chapter 63E allows eligible PTEs to make an annual election to pay an excise tax on its qualified taxable income at a 4% rate. Qualified members of a PTE making this election are allowed a refundable credit against the PTET; the credit is still limited to 90% of the PTET.
- All members of the electing PTE are bound by the election, which is irrevocable for the year made.
- The PTET election does not apply to any tax year for which the federal limitation on the SALT deduction has expired or otherwise is not in effect.
Connect with your Grassi advisor to discuss how the Massachusetts Supplemental Budget Bill may affect your business.
This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice.
