Massachusetts Allows Credit for Small Businesses Paying Connecticut Tax

Massachusetts wants to allow state residents subject to Connecticut’s pass-through entity tax to claim a credit for their share of the tax.

That state’s Department of Revenue issued a working draft directive August 21 allowing residents to claim the credit for their share of the Connecticut PET — if they add back their share of the tax paid to the distributive share income reported on Massachusetts returns.

Connecticut adopted the 6.99% PET in 2018. It was designed to allow owners and partners of partnerships, S corporations, and LLCs treated as partnerships to circumvent the $10,000 federal cap on state and local tax deductions.

Connecticut’s PET is paid at the business level rather than the personal level and is fully deductible from federal income taxes as a business expense.

It is offset by a personal income tax credit that negates the impact of the federal cap. (Connecticut lawmakers reduced that credit to 87% in the 2019 session, effectively hiking small business taxes by $53 million.)

Tax Credit

The change Massachusetts proposes only applies to what are known as “Chapter 62 taxpayers” who are Massachusetts residents and members of a pass-through entity subject to the Connecticut PET.

These residents are eligible for an income tax credit under chapter 62, section 6(a) of Massachusetts general laws for their distributive share of the entity’s tax payment.

For residents who claim the credit in connection with Connecticut’s PET, the Massachusetts directive requires eligible taxpayers to add back their pro rata share of the tax paid to the amount of distributive share income subject to tax in Massachusetts.

Connecticut’s PET is paid at the business level rather than the personal level and is fully deductible from federal income taxes.

Under the proposed directive, a member’s distributive share income and portion of the paid PET must be reported on the respective schedule for partnerships or S corporations.

Members must also include the PET amount in income reported on their Massachusetts tax return.

The Massachusetts Department of Revenue is accepting public comments on the draft until Sept. 13.

---

For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede