Massachusetts Overhauls Business Apportionment, Capital Gains Taxes and More

February 16, 2024
downtown Boston Massachusetts

Key Takeaways

  • Starting January 1, 2025, all industries in Massachusetts will adopt a single sales factor formula for income allocation. This method benefits businesses with significant property and payroll holdings in the state.
  • Financial institutions will have new sourcing rules for income derived from trading and investment assets through a fractional method. This will enhance clarity and fairness in tax calculations.
  • Other changes in HB 4104 include reducing the short-term capital gains tax rate, doubling the estate tax exemption, and implementing a joint filing requirement for married couples.

Massachusetts’ tax code has undergone significant changes, affecting businesses and individuals. The state’s recent implementation of House Bill 4104 (HB 4104) marks a pivotal shift in apportionment and sourcing for businesses, capital gains taxation, and several other critical areas.

HB 4104:

  • Shifts to a single sales factor apportionment method.
  • Implements sourcing provisions for income earned by financial institutions.
  • Lowers short-term capital gains tax rate to 8.5%.
  • Doubles the estate tax exemption.
  • Imposes a joint filing requirement on married couples filing a joint federal return.

Single Sales Factor Apportionment Method

Under the current Massachusetts tax code, businesses (excluding manufacturing companies, qualifying defense contractors, and qualifying mutual fund service corporations) must allocate their net income based on a three-factor formula. This formula includes:

  • Property
  • Payroll
  • Sales
Starting January 1, 2025, Massachusetts will transition all industries to adopt the single sales factor formula, widely favored across states. This change particularly benefits those with substantial property and payroll holdings in the state.

Sourcing Rules for Financial Institutions

Massachusetts has also implemented new sourcing rules for financial institutions. This rule pertains to sourcing interest, dividends, net gains, and other income derived from trading and investment assets, effective January 1, 2025.

Currently, taxpayers source receipts from such income to their regular place of business. However, under HB 4104, taxpayers must now source these receipts using a fractional method. The numerator will comprise Massachusetts-sourced receipts from financial activities, and the denominator will be total receipts, excluding income generated from investment and trading assets and investment and trading activities.

Other Items in HB 4104

Reduced Tax Rate on Short-Term Capital Gains

Massachusetts lowered the tax rate on short-term capital gains (income from capital assets held one year or less) from 12% to 8.5%. This took effect on January 1, 2023.

Doubled Estate Tax Exemption

The estate tax exemption doubled from $1 million to $2 million for individuals passing away on or after January 1, 2023. This change ensures a more favorable scenario for estate planning and distribution.

Joint Filing Requirement for Married Couples

Starting January 1, 2024, married couples filing a joint federal income tax return will be required to file a joint Massachusetts income tax return.

The Road Ahead for HB 4104 in Massachusetts

Following these changes enacted by HB 4104, Massachusetts issued a draft Technical Information Release. The guidance provides a brief list of changes, explaining the adjustments made to financial institution apportionment and sourcing methodologies.

Ultimately, the revisions introduced through HB 4104 redefine Massachusetts’ tax structure, impacting both businesses and individuals operating within the state's jurisdiction. Taxpayers should familiarize themselves with these changes and seek guidance from a State and Local Tax professional to understand the implications and proactively strategize tax planning.

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About the Author(s)

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Melissa Menter

Senior Manager
Melissa has over 20 years of experience helping clients with a broad range of tax issues. She has both Big Four and in-house Fortune 500 corporate tax experience, which gives her the perspective of being able to see a problem and its possible solutions from multiple angles. Melissa is a creative thinker and enjoys crafting customized, practical solutions to complex tax problems.
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Becca Stadtner

Senior Associate

Becca brings a fresh new approach to state and local tax. Specializing in income/franchise state tax, she looks at any issue from all angles and is methodical in identifying practical solutions for her clients. She concentrates in tax controversy, tax policy