31 January 2025

Massachusetts Governor's proposed budget includes tax changes

Massachusetts Governor Maura Healey presented her FY 2026 Budget (proposed budget), on January 22, 2025. The proposed budget, which has been filed as HB 1, includes several tax changes, such as revoking the special status of securities corporations for corporate excise purposes, modifying the state's combined reporting regime, and caps on certain personal income tax deductions, among others.

In the coming months, both chambers of the Legislature will put forth their proposals, which may include some of the governor's. Typically, Massachusetts finalizes its budget in the second half of the year.

Corporate excise tax

Under existing law (G.L. c. 63 Section 38B), a financial institution or business corporation that qualifies as a security corporation is not subject to the corporate excise under G.L. c. 63 Sections 2, 2B, 32D or 39, but is instead taxed on gross income at a rate of 1.32%. The rate is reduced to 0.33% if the security corporation is a bank holding company. In addition, security corporations are not subject to the non-income measure of the corporate excise. Effective for tax years beginning on or after January 1, 2025,1 the governor's proposal would repeal G.L. c.63 Section 38B as well as references to Section 38B in other code sections, thereby subjecting financial institutions or business corporations that currently qualify as security corporations to the same corporate excise rules applicable to other financial institutions and business corporations. (Bill Sections 34, 35, 37, 39 and 40).

The governor's budget also proposes expanding the list of entities subject to combined reporting2 to include affiliated captive insurance companies, effective for tax years beginning on or after January 1, 2025. Insurance companies subject to combined reporting would not be subject to tax under G.L. c. 63 Sections 20 to 29E. (Bill Section 36). Currently, companies that qualify for treatment as a life insurance company as defined in IRC Section 816 or an insurance company subject to tax imposed under IRC Section 831 are excluded from combined reporting.

The proposed budget would also change the income tax treatment of gains from the sale of a trade or business conducted by a pass-through entity (PTE) for nonresidents. The proposal would treat the business of the PTE as the business of its nonresident individual owners and, as a result, any gain would be allocated or apportioned. For corporate taxpayers, the gain would be allocated or apportioned even if the corporation and the PTE are not engaged in a unitary business. Apportionment would be based on the business attributes of the PTE directly doing business in the state. The Commissioner would be required to adopt regulations implementing this change and may adopt regulations requiring a PTE to withhold tax owed on gain from the sale of such interest. This change would take effect on January 1, 2026. (Bill Sections 33 and 38).

For tax years beginning on or after January 1, 2025, the proposed budget, for corporate excise and individual income tax purposes, would clarify that for purposes of IRC Section 1400Z, the term "qualified opportunity zone" means an area located in Massachusetts that is designated as such under IRC Section 1400Z-2.3 This change would limit state tax benefits to investments in federal opportunity zones to those located in the state. (Bill Sections 31 and 35).

Income tax

The proposed budget would cap the charitable donation deduction for individual income tax purposes at: (1) $5,000 for taxpayers filing single, married filing separate and head of household, and (2) $10,000 for married taxpayers filing a joint return. (Bill Section 32).

Other taxes and penalties

Effective August 1, 2025, the proposed budget would do the following:

  • Eliminate the sales and use tax exemption for candy and confectionery (Bill Sections 46 and 47)
  • Impose the room occupancy excise tax on the fair market value of hotel rooms offered on a complimentary or discounted basis (Bill Section 45)
  • Impose deeds excise tax on transfers or acquisitions of a controlling interest in an entity with an interest in real property4
  • Subject products containing synthetic nicotine to the same excise tax imposed on tobacco products (Bill Section 42)
  • Modify the estate tax by aligning the tax treatment of out-of-state property of resident and nonresident decedents (Bill Section 48)

The proposed budget would also impose a penalty on drug manufacturers whose drug price increases are deemed excessive. The penalty would equal 80% of the excessive price increase for each unit of a drug ultimately dispensed or administered in Massachusetts. The penalty would apply in any calendar quarter in which the manufacturer's total sales of all products for distribution in Massachusetts exceed $100,000 in the prior 12-month period. The drug manufacturer would pay the penalty with the return required to be filed with the revenue commissioner. If the drug manufacturer fails to pay the penalty, a related party that directly or indirectly distributes the drugs in Massachusetts would be jointly and severally liable for the penalty due. No penalty would be assessed until the calendar quarter beginning October 1, 2025. (Bill Section 41).

Implications

While it is early in the budget process, affected taxpayers should review these proposed changes and determine how they would impact their Massachusetts tax obligations.

For those taxpayers that currently have securities corporations in place, it may be worthwhile considering whether it makes sense to continue to maintain them should their special status be repealed.

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Endnotes

1 Under G.L. c. 63 Section 38B, a business corporation or financial institution may be classified as a security corporation if it is engaged exclusively in buying, selling, dealing in, or holding securities on its own behalf and not as a broker.

2 G.L. c. 63 Section 32B.

3 This change would be made to the definitions of "Code" under G.L. c.62 Section 1(c) and to "gross income" under G.L. c. 63 Section 30(3).

4 The proposed budget would define "transfer or acquisition of a controlling interest" and "interest in real property."

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Tax

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor

Document ID: 2025-0382