Beginning in 2026, eligible Massachusetts pass-through entities can elect the new Chapter 63E PTE excise. Business owners subject to the state's surtax should understand how the election works, its potential federal tax benefits, and related planning considerations.
Massachusetts pass-through businesses will gain a new option under the state’s pass-through entity tax regime in 2026, which may help owners navigate the federal SALT deduction limitation. For many closely held businesses, decisions made at the entity level can have a significant impact on owners’ overall tax position, making it important to understand new planning opportunities as they emerge.
Beginning in 2026, eligible pass-through entities (PTEs) may elect to pay an additional four percent Massachusetts tax at the entity level under the new Chapter 63E PTE excise. For business owners familiar with Massachusetts’ existing five percent Chapter 63D PTE excise, Chapter 63E introduces a new entity-level election applicable to income subject to the Massachusetts surtax.
Massachusetts has allowed eligible pass-through entities to elect the Chapter 63D PTE excise for several years. Under this regime, the business pays a five percent tax at the entity level on income attributable to qualified members and subject to Massachusetts personal income tax. Owners receive a Massachusetts tax credit equal to 90 percent of their share of the tax paid.
Chapter 63E extends this entity-level approach to income subject to the Massachusetts surtax. Beginning in 2026, eligible PTEs may elect to pay an additional four percent tax on the portion of each qualified member’s distributive income that exceeds the applicable surtax threshold. Like Chapter 63D, the election shifts payment of the state tax from the individual owner to the pass-through entity, and qualified members receive a credit equal to 90 percent of the Chapter 63E excise attributable to them.
Because Chapter 63E applies according to each qualified member’s distributive income, its potential value will depend on the circumstances of both the entity and its owners.
The federal SALT deduction limitation generally restricts the amount of state and local income and property taxes an individual may deduct on a federal return.
Since the limitation was introduced, many states, including Massachusetts, have adopted pass-through entity tax elections that allow certain state taxes to be paid at the entity level rather than by the individual owner. These elections are designed to help business owners preserve the federal deductibility of taxes that might otherwise be subject to the SALT limitation.
Federal tax rules provide an exception for certain state taxes paid by a pass-through entity instead of directly by its owners. An entity-level tax election may therefore convert individual state tax deductions that would otherwise be limited into deductible business expenses for federal income tax purposes. The size of that benefit will vary depending on the business’s income, ownership structure, and the tax circumstances of individual owners.
The 63E election is worth considering alongside the existing 63D election as part of 2026 tax planning.
The taxes require separate elections and apply to different income. Chapter 63D covers the regular five percent tax, while Chapter 63E applies only to the additional four percent surtax. Businesses seeking the full benefit would generally need to elect and pay both.
For businesses making both elections, the Massachusetts Department of Revenue (DOR) has streamlined the payment process. The business makes one payment through MassTaxConnect, then identifies how much is attributable to 63D and how much is attributable to 63E. This distinction is particularly important when determining estimated tax payments.
Estimated payments are one of the most important issues for businesses considering the 63E election in 2026. While the potential tax benefit may attract attention, businesses also need to understand how the election affects payment requirements throughout the year.
For 63D, an existing safe harbor generally allows a business to base its required estimated payments on 100 percent of its prior-year 63D liability instead of its potentially higher current-year liability.
For example, if a business paid $40,000 of 63D tax in 2025, it could generally make $40,000 of 2026 estimated payments and satisfy the prior-year safe harbor, even if its 2026 63D liability ultimately increases substantially.
The 63E election presents a different situation because 2026 is the first year of the new tax. There is no 2025 63E liability to use as a prior-year benchmark.
As a result, businesses evaluating the election should pay close attention to how estimated tax requirements apply during this transition year.
The 63E legislation was enacted in June 2026 but applies to tax years beginning January 1, 2026. DOR has provided transition guidance for taxpayers navigating the new election and payment requirements. For tax year 2026, Massachusetts will waive first- and second-quarter underpayment penalties for entities that elect the Chapter 63E PTE excise, whether they elect only Chapter 63E or both Chapter 63D and Chapter 63E. Penalties may still apply to other underpayments, and businesses should review the applicable guidance and filing requirements carefully.
The potential benefit will depend on several factors, including:
Because Chapter 63E is new, businesses should carefully evaluate both the potential tax benefits and administrative requirements associated with the election, including applicable filing requirements and estimated payment obligations.
The new Chapter 63E election gives Massachusetts pass-through businesses another potential way to manage the federal SALT limitation. Businesses that elect both Chapter 63D and Chapter 63E may maximize the available benefit by addressing the regular five percent tax and the additional four percent surtax at the entity level.
Because Chapter 63E applies only to surtax income, business owners should consider how it fits into their overall PTE tax strategy. If your business has owners approaching or exceeding the Massachusetts surtax threshold in 2026 ($1,107,750), consider revisiting your PTE tax strategy with your tax advisor.
AAFCPAs’ Entrepreneurial Tax practice helps closely held businesses, family-owned enterprises, and entrepreneurs navigate complex tax, accounting, and advisory matters. Our multidisciplinary team provides integrated business and personal tax planning, accounting, transaction advisory, and wealth planning services designed to help owners make informed decisions, manage risk, improve tax efficiency, and support long-term financial goals. Through a coordinated approach and access to a national and global network of CPA firms, we help business owners address today’s challenges while planning for future growth, succession, and wealth preservation.
These insights were contributed by Stacie Amaral Field, CPA, MBA, Tax Partner and Tyler Champagne, CPA, MSA, Tax Director.
Questions? Reach out to our authors directly or your AAFCPAs partner.
AAFCPAs offers a wealth of resources on tax planning and compliance. Subscribe to get alerts and insights in your inbox.
Author Bio
More Articles
California and Colorado will begin taxing many SaaS transactions on January 1, 2027. Software companies should start evaluating the sales tax implications now.
The systems and processes that helped your organization reach one stage of success are not always the ones that support the next.
Beginning in 2026, eligible Massachusetts pass-through entities can elect the new Chapter 63E PTE excise. Business owners subject to the state's surtax should understand how...
