Massachusetts PTE excise: 63D, the new 63E, and whether electing is worth it

Two elective excises, one election form

The Massachusetts Department of Revenue describes two elective pass-through entity (PTE) excises. The chapter 63D excise equals 5% of a PTE's income that is attributable to qualified members and subject to Massachusetts personal income tax. It has been in effect since 2021.

The chapter 63E excise is new. It was enacted by Chapter 101 of the Acts of 2026 and applies to tax years beginning on or after 1 January 2026. It equals 4% of each qualified member's share of the entity's distributive income that is subject to Massachusetts personal income tax and above the 4% surtax threshold. An entity can elect 63D, 63E, or both.

Why 63D did not need to be extended

The PTE excise exists because of the federal cap on the deduction for state and local taxes (SALT). In IRS Notice 2020-75, Treasury and the IRS said they intended to issue regulations clarifying that state income taxes imposed on and paid by an S corporation or partnership on its income are deductible by the entity. An individual's own Massachusetts income tax, by contrast, counts toward the individual SALT cap.

Chapter 63D was written to turn itself off only for a tax year in which the federal SALT limitation has expired or is otherwise not in effect (M.G.L. c. 63D, § 3). The 2025 federal tax law, Public Law 119-21, section 70120, removed the end date that would have lifted the cap after 2025. It raised the cap to $40,000 for 2025 and $40,400 for 2026, with 1% increases through 2029, and returns it to $10,000 from 2030. Because a cap stays in effect, 63D continues without any new Massachusetts legislation.

What 63E adds, and who it is for

Before 63E, the Department of Revenue's answer to whether a PTE could pay a higher excise to cover the 4% surtax was no: the 63D rate is fixed at 5% by statute. That answer is still correct for 63D. The legislature's response was a separate excise rather than a higher 63D rate.

Chapter 63E only reaches income above the surtax threshold, which is $1,107,750 for tax year 2026. For most owner-operated S corporations, 63E will never apply. It becomes relevant in a year with very high income, such as the year a business or a building is sold.

For tax year 2026 only, the Department of Revenue says it will waive underpayment penalties for the first and second estimated-payment quarters if the entity elects 63E (alone or with 63D). The waiver does not apply to an entity that elects only 63D.

Who can elect, and who cannot

Only an eligible pass-through entity can elect. The Department of Revenue lists these:

• S corporations, including LLCs taxed as S corporations
• Partnerships, including LLCs taxed as partnerships (publicly traded partnerships excluded)
• Trusts, for income taken into account by beneficiaries for Massachusetts personal income tax
• Not eligible: sole proprietorships and single-member LLCs that are disregarded for federal tax purposes, because they are not pass-through entities
• Credits go to qualified members: individuals, estates and trusts subject to Massachusetts personal income tax, whether resident, nonresident or part-year resident

How the election is made

The election is annual and has no effect on the following year. It is made on the entity's original, timely filed return and confirmed on Form 63-ELT.

1. 1.Decide, for the tax year, whether to elect 63D, 63E, both or neither.
2. 2.Make the election on the S corporation's timely filed Form 355S (Schedule S). It cannot be made on an amended return.
3. 3.File Form 63-ELT electronically, on or before the due date of the entity's return, taking valid extensions into account.
4. 4.Pay the excise electronically through MassTaxConnect. For 2026 and later, one payment covers both excises, with a breakdown between them.
5. 5.Report each qualified member's share of the excise on the member's K-1 so members can claim the 90% credit on electronically filed personal returns.

Once made for a year, the election is irrevocable for that year and binds every qualified member. A member cannot opt out.

Estimated payments come before the decision

The awkward part is timing. The Department of Revenue says an electing PTE must make estimated payments if its required annual payment is $400 or more, even though the election itself is not made until the return is filed. For calendar-year entities the installments are generally due 15 April, 15 June, 15 September and 15 January.

The required estimates are the lesser of 80% of the excise ultimately due for the current year, or 100% of the excise shown on the prior year's form if the entity elected in the prior year and filed a 12-month return. An entity considering the election for the first time therefore has to decide during the year whether to fund estimates for an election it has not yet made. Underpayment penalties are figured on Form M-2210.

An illustrative 63D calculation

The figures below are illustrative only, for an S corporation with one Massachusetts-resident owner and no other members.

The $1,000 difference is a real Massachusetts cost. The election only helps if the federal effect of the entity-level payment is larger, which depends on the owner's bracket and on whether the owner's own SALT deduction was already limited by the cap.

The questions that decide whether it is worth it

There is no general answer. These are the questions that settle it for a particular owner and year:

• Does the owner itemize federally, and is their state and local tax already above the $40,400 cap for 2026?
• Is the owner's income high enough that the cap is being reduced? For 2026 the cap is reduced by 30% of modified AGI above $505,000, but never below $10,000.
• What is the owner's federal marginal rate on the pass-through income?
• Do all owners benefit, since the election binds every qualified member?
• Can the business fund estimated payments during the year without straining cash?
• For 63E: is this a year with income above the $1,107,750 surtax threshold, such as a sale year?
• Will the extra filings and electronic-filing requirements for members cost more than the expected benefit?

Where we come in

We prepare S corporation and owner returns and can model the election with your actual figures before estimated payments fall due, so the decision is made on numbers rather than on a rule of thumb. The Department of Revenue itself suggests taxpayers consult their advisers about whether an election would help. We give you a scope and a price in writing before anything starts.