On October 4, 2023, Governor Maura Healey signed House Bill 4104, “An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity.” This legislation provides significant tax relief for individuals and corporations, with changes beginning in 2023 and additional provisions effective January 1, 2025. The reform aims to enhance competitiveness, affordability, and equity while simplifying the tax process for businesses and individuals. By understanding the nuances of the new framework, taxpayers can better navigate these changes and capitalize on new opportunities. Below, we discuss the key elements of the reform, including the new apportionment system and other provisions to consider when filing your 2025 tax returns.
The New Single-Sales Factor Apportionment System
Previously, corporations operating in both Massachusetts and other states used a three-factor formula to apportion income: sales, property, and payroll. This formula applied to most businesses, though certain industries—such as manufacturing, qualifying defense contractors, and mutual fund service providers—were already required to use a single-sales factor apportionment method. Starting January 1, 2025, all corporate taxpayers must use the single-sales factor system, which bases taxable income solely on sales. As a result, businesses with significant property or employees in Massachusetts will no longer benefit from including these factors in their tax calculation.
Key Changes Under the New System:
- All corporate taxpayers and passthrough entities are now required to use a single-sales factor apportionment system for income earned or derived from both in-state and out-of-state sources.
- The sales factor will be the only determinant in calculating corporate taxable income in Massachusetts.
- Financial institutions and certain corporations with income both in and outside of Massachusetts must now use a receipts factor—distinct from the sales factor—to source receipts from investments and trading activities. While the sales factor generally applies to revenue from the sale of goods and services, the receipts factor specifically addresses income from financial activities such as investments and trading.
The new system is expected to favor companies with significant property and payroll in Massachusetts, as these factors will no longer affect their tax calculation. However, corporations with substantial sales but less property or payroll in the state, such as tech companies, e-commerce businesses, or service-based industries, may face higher tax liabilities. These businesses may seek to challenge the new apportionment method or explore strategies such as restructuring operations or negotiating alternative apportionment methods with state authorities.
Implications of the New Apportionment Formula
The shift to a single-sales factor apportionment has both advantages and drawbacks. Consider the following:
- The new method of apportionment favors companies with notable property and employees located in Massachusetts.
- If these factors previously impacted the calculation, and are no longer being used, businesses could increase the numbers without it impacting them on the apportionment.
- Businesses with significant sales activities may face higher taxes due to the new apportionment method.
- Businesses may seek to challenge the fairness of the system, pushing for alternative apportionment methods.
Additional Tax Relief and Updates for Individuals
The bill also introduced several changes that affect individual taxpayers. Since the changes began to roll out in 2023, most individuals have already made these changes. But if you haven’t, you should follow-up to ensure the proper information is considered. These changes include:
- Short-term capital gains tax: The tax rate has been reduced from 12% to 8.5%. This adjustment is aimed at encouraging investment within the state.
- Estate tax threshold: The Massachusetts estate tax exemption was increased to $2 million, up from the previous $1 million threshold. This change is particularly advantageous for middle-income individuals who may have been previously subject to estate tax obligations due to their assets.
- Child and Family Tax Credit: The credit has increased to $440 per qualifying child or dependent, up from $310 in the previous filing period. This provides greater relief to families raising children or dependents.
- For tax years beginning on or after January 1, 2024, married individuals filing jointly for federal tax purposes will also be required to file a joint Massachusetts tax return. Previously, married couples had the option to file separately, which could potentially help avoid the 4% surtax on taxable income over $1 million.
Looking Ahead
Businesses should analyze how the new apportionment system impacts their operations and explore tax optimization strategies, such as restructuring, to mitigate potential tax burdens or capitalize on opportunities. For individuals, the changes to the short-term capital gains tax and the increased estate tax exemption provide an ideal opportunity to review estate planning and investment strategies. Additionally, families can benefit from the increased Child and Family Tax Credit, which offers greater financial relief for dependents. Married couples should also evaluate the implications of the new joint filing requirement for Massachusetts tax returns, particularly if their combined income exceeds $1 million and may be subject to the 4% surtax. Whether you’re a business owner or an individual taxpayer, contact your tax advisor now to fully capitalize on these changes and ensure a smoother tax filing in 2025.
By Carmin Pacileo, Giuliana Intriago, and Malissa Mardorf
