19 June 2026 Massachusetts delays conformity to certain federal tax changes made by the OBBBA, creates an elective PTET for surtax on high-income earners
On June 12, 2026, Massachusetts Governor Maura Healey signed into law a supplemental budget bill, HB 5470, which phases-in conformity to certain "One Big Beautiful Bill Act" (OBBBA) provisions, while tying future decoupling from certain OBBBA provisions to the outcome of a proposed ballot measure that would lower the state's personal income tax. On June 18, 2026, however, the Massachusetts Supreme Judicial Court (Court) rejected the 2026 ballot initiative, "25-18 Initiative Petition for a Law Relative to Reducing the State Personal Income Tax Rate from 5% to 4%," and enjoined the Secretary of State from placing the measure on the ballot for the November statewide election. In addition, the budget bill automatically decouples from federal tax changes under certain conditions and creates an elective pass-through entity tax (PTET) that applies to the surtax on high-income earners. Massachusetts generally incorporates federal tax law changes (known as "rolling" conformity)1 for purposes of the state's corporate excise tax. As such, the state automatically adopted many of the corporate tax changes made by the OBBBA, upon its enactment. While recognizing the benefits to Massachusetts and its businesses of conforming to the OBBBA, the new law temporarily decouples, in-part, from several provisions over a two-year period. The law disallows the deductions for domestic research and experimentation (R&E) expenditures created by OBBBA Section 70302(f), applicable to tax years beginning on or after January 1, 2022. Consequently, 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. Instead, taxpayers may deduct any R&E expenditures paid or incurred as allowed under IRC Section 174 as in effect on July 3, 2025. Consequently, 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. The disallowance provision is repealed for tax years beginning on or after January 1, 2026. Massachusetts decouples from the OBBBA changes to the following code sections for tax years 2025 and 2026:
For tax years beginning in 2025 or 2026, taxpayers may apply IRC Section 1400Z-2 as in effect for tax years beginning before January 1, 2026. The new law also defines a "qualified opportunity zone" as "an area located entirely within the commonwealth that is designated as a qualified opportunity zone under [IRC Section 1400Z-2]." This change applies to tax years beginning on or after January 1, 2026. 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. The law automatically decouples from certain amendments to the IRC that otherwise would apply under chapter 62 (income tax) or chapter 63 (corporate excise tax) if such amendments affect the determination of Massachusetts gross income or deductions under chapter 62 or gross income or net income under chapter 63 Section 30 paragraphs 3 and 4, respectively. Specifically, 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. This decoupling does not apply to any IRC amendments that the Commissioner of the Massachusetts Department of Revenue timely determines will have an estimated income and corporate excise tax revenue impact of less than $20 million in lost or gained revenue based on a rolling three-year average for the fiscal year that begins during the calendar year in which the amendment is enacted or any fiscal year that precedes the calendar year in which the amendment is enacted. Under the existing PTET program, eligible pass-through entities (PTEs) (i.e., S corporations, partnerships, or limited liability companies treated as either) may 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). The new law creates a state elective PTET for the 4% surtax on high-income earners. The PTET is intended to enable Massachusetts taxpayers who are PTE owners to deduct, for federal income tax purposes, state and local taxes (SALT) that exceed the annual federal SALT deduction limitation. 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 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. Massachusetts joins numerous other states in decoupling from OBBBA provisions retroactive to the 2025 tax year. Prospectively, the state also joins Maryland in automatically decoupling from future federal tax law changes that would have a significant impact on state revenue.
Document ID: 2026-1331 | ||||||||
