Massachusetts—Amendments Clarify Single Sales Factor Enactment, Married Filer Exemptions
On January 3, Massachusetts amended regulations 830 CMR 62.5A.1(6) and 830 CMR 62.5A.1(11) to clarify the proper apportionment for pass-through entities for tax years beginning on or after January 1, 2025. The apportionment amendment comes on the heels of H.B. 5077, which was enacted on December 4, 2024 to provide an alternative methodology for companies with no sales factor or one which is inapplicable. In addition, certain individual income tax exemptions from joint filings for married couples took effect for tax years beginning on or after January 1, 2024.
Background.
In 2023, Massachussetts enacted a tax relief package that changed state apportionment rules from a three-factor formula, including property and payroll, to a single sales factor effective for tax years beginning on or after January 1, 2025. These rules were intended to apply to corporations and pass-through entities, but the application to pass-through entities was not explicit and began to raise questions amongst both taxpayers and practitioners. The new rules appeared to have a disparate impact on like-kind companies; as a result, Massachusetts began issuing clarifying amendments.
Alternative apportionment.
Pursuant to H.B. 5077, companies with an “inapplicable” sales factor are required to use property and payroll for apportioning income. A sales factor is inapplicable when both its numerator and denominator are zero; the denominator is less than 10% of one third (3.33%) of taxable net income; or it is otherwise determined by the Massachusetts Department of Revenue (DOR) to be insignificant in producing income.
A sales factor with a zero numerator is not necessarily inapplicable; both the numerator and denominator need to be zero to automatically be inapplicable. If a sales factor with a zero numerator also meets the one-third test or is insignificant in producing income, then it could be deemed inapplicable and the alternative apportionment required. The DOR recently amended the above-mentioned regulations clarifying the apportionment method for taxpayers with an inapplicable sales factor.
Pass-through entity apportionment—single sales factor.
Another amendment under these regulations clarifies that pass-through entities are subject to the single sales factor rules. Based on this clarification, all multistate pass-through entities and corporations are required to use single sales factor apportionment, unless the inapplicable rules under H.B. 5077 apply, as discussed above.
Individual returns—exemptions for couples filing jointly.
Effective for tax years beginning on or after January 1, 2024, married individuals who file a joint federal return are required to file a Massachusetts joint return. The intent of the rule is to prevent federal joint filers from avoiding the $1 million surtax. The recent rule amendment provides exceptions that may be beneficial to certain individuals, especially those subject to the surtax:
- ▪ The married individuals’ tax years do not begin on the same day;
- ▪ The married individuals’ tax years do not end on the same day except where such tax years end on different days solely because of the death of either or both;
- ▪ Either married individual is not required to file a return [generally, Massachusetts source income is less than $8,000 under G.L. c. 62C, section 6(a)]; or
- ▪ One or both married individuals is a nonresident and has items of income, exemptions, or deductions unrelated to their Massachusetts income, and:
- ▪ If only one of the married individuals is a nonresident, the sum of the resident married individual’s Massachusetts gross income and the nonresident married individual’s Massachusetts source income does not exceed the threshold [generally, $1 million under G.L. c. 62C, section 4(d)]; or
- ▪ If both of the married individuals are nonresidents, the married individuals’ combined Massachusetts source income does not exceed the threshold [generally, $1 million under G.L. c. 62C, section 4(d)].
These exemptions are effective for tax years beginning on or after January 1, 2024; therefore, taxpayers and practitioners should consider the various filing options before remitting extensions. Note that if married individuals do not file a joint return, each individual should assess their own Massachusetts reporting obligations pursuant to these amended regulations and file accordingly.
The shift to a single sales factor apportionment formula will have a significant impact on many taxpayers. Both pass-through entities and corporations need to be cognizant of these apportionment changes as they file estimates for the 2025 tax year. Taxpayers and CPAs should review the recently amended regulations that provide guidance for alternative apportionment. Proper determination of the in-state sales factor is even more important now that it has become the sole methodology in apportioning income for Massachusetts tax purposes without the inclusion of payroll or property unless the new inapplicable sales factor rules apply.
New Jersey—QSSS Filing Procedures Updated
Effective for privilege periods ending on and after July 31, 2024, the filing procedures for Qualified Subchapter S Subsidiaries (QSSS) have changed. In prior years, each QSSS would have been required to be independently registered with the Division of Taxation (DOT) and file their own separate New Jersey CBT-100S return, even if it was only to file the minimum tax. Starting with the 2024 tax year, the S corporation parent entity now files their CBT-100S with their QSSS entities. Thus, each QSSS no longer needs to file their own CBT-100S. The DOT has created a new Schedule Q, which is attached to the CBT-100S return of the S corporation parent. Because of this change, there may be overpayments made under the QSSS accounts that now need to be moved to the S corporation parent account. DOT allows for these payments to be moved. S corporations must request a transfer of these funds before filing their tax return by providing a written request to the DOT that includes a spreadsheet listing out the QSSS’s name and identification number, the amount of overpayment from previously filed return to be applied to the combined account, and payments to be transferred. Include the date and amount of each payment that was made. The amount and the date on which the payment was submitted must be an exact match in order for the DOT to transfer the funds from the QSSS to the S corporation’s account.
This information must be sent to the DOT by one of the following methods:
- ▪ Mail—New Jersey Division of Taxation, QSSS payments, PO Box 266, Trenton, NJ 08695-0266
- ▪ Fax—609-633-6444
- ▪ Email—NewJerseyBusinessTax@treas.nj.gov.
It is important that CPAs stay on top of these state tax developments in order to properly advise taxpayers doing business in multiple states.
