Massachusetts enacts significant tax changes in supplemental budget legislation

On June 12, 2026, Massachusetts Governor Healey signed supplemental budget bill HB 5470 (the Legislation), which includes significant tax changes. Among these changes is the delayed adoption of certain key provisions of the federal tax reform commonly referred to as the One Big Beautiful Bill Act (OBBBA). Specifically:

OBBBA decoupling

Historically, Massachusetts has followed rolling conformity for corporate excise tax purposes, automatically adopting federal tax law changes as they occurred. For Massachusetts income tax purposes, the state generally follows the Internal Revenue Code (IRC) as of Jan. 1, 2024; however, in certain instances, including deductions for trade or business expenses, Massachusetts adopts the IRC as in effect for the current year. Despite this conformity approach, the Legislation explicitly decouples from certain OBBBA provisions for specified periods, including:

IRC Sections 163(j), 168(n), 179

The Legislation delays conformity with specific OBBBA provisions and provides that for taxable years beginning in 2025 and 2026 the following deductions will be disallowed:

• IRC Sec. 168(n) - the deduction for the special depreciation allowance for qualified production property;
• IRC Sec. 179(b) – the increased Dollar Thresholds for Deductible Amounts when expensing certain business assets under IRC Sec. 179;
• IRC Sec. 163(j) -the changes enacted by OBBBA pertaining to the limitation on business interest expense deduction under IRC Sec. 179.

For the above provisions, taxpayers will have to recalculate such deductions without regard to the changes made by OBBBA during the 2025 and 2026 tax years.

IRC section 174A

The Legislation also delays conformity to the OBBBA provisions under section 174A until taxable years beginning on or after Jan. 1, 2026. As a result, taxpayers must apply section 174 as it was in effect on July 3, 2025. Because the decoupling provisions apply to tax years beginning on or after Jan. 1, 2022, they effectively preserve the Tax Cuts and Jobs Act (TCJA) rules for deducting and capitalizing research and experimental expenses for the 2025 tax year.

Additional decoupling considerations:

a. Interest and penalty relief

The Legislation provides relief for taxpayers that filed a 2025 return prior to the enactment of the Legislation and applied the provisions of OBBBA described above. Interest and penalties shall not be imposed on an underpayment of late payment of tax for taxable years beginning in 2025 when an amended return is filed within 90 days of the enactment of the Legislation reporting adjustments resulting from the decoupling provisions described above.

b. Ballot measure

Notably, the delayed adoption of the OBBBA provisions described above (i.e. sections 163(j), 168(n), 179 and 174A) would have been disallowed for all future years if the 2026 ballot initiative to reduce the personal income tax passed. However, the Massachusetts Supreme Judicial Court, rejected the ballot initiative and as such, the measure will not be on the ballot for the November election.

Conformity to future IRC amendments

Applicable to tax years beginning on or after Jan. 1, 2026, the Legislation provides that new IRC amendments will not apply to Massachusetts income tax and corporate excise tax for any year that begins in the calendar year in which the amendment is enacted; or any taxable year that precedes the calendar year in which the amendment is enacted. An exception is provided if the commissioner determines within 90 days after such amendment is enacted that the impact to tax revenue is estimated to be less than $20 million in lost or gained revenue based on a rolling three-year average adjusted for inflation.

As a result, the Legislation automatically decouples Massachusetts from future IRC changes that significantly impact the state's revenue.

Additional PTET election for high earners

Massachusetts previously enacted a pass-through entity tax (PTET) regime allowing pass-through entities (PTEs) to elect to pay tax at the entity level at a rate of 5% of an eligible PTE’s Massachusetts qualified taxable income. In turn, a qualifying member of an electing PTE may claim a credit against its Massachusetts personal income tax liability, limited to 90% of the member’s share of the tax due and paid by the PTE.

Beginning Jan. 1, 2023, Massachusetts imposes an additional 4% surtax on Chapter 62 annual income over $1 million, adjusted for inflation (the “Surcharge”). In response, the Legislation created a second PTET election under Chapter 63E, allowing eligible PTEs that make the election to pay the Surcharge on qualified income taxable in Massachusetts at a 4% rate. Under the Legislation, a “qualified member” does not include any shareholder, partner, or member whose allocable share of income included in Massachusetts taxable income under Chapter 62 is below the surtax threshold. A qualified member of a PTE that makes this election is entitled to a refundable credit limited to 90%. This additional election is available for taxable years beginning on or after Jan. 1, 2026.

Massachusetts issued guidance

In response to the Legislation, the Massachusetts Department of Revenue (the Department) issued a working draft TIR providing guidance on the OBBBA decoupling provisions and other changes enacted by the Legislation. The Department also issued TIR 26-4, which includes a detailed chart identifying the OBBBA provisions adopted for Massachusetts income and corporate excise tax purposes.

What’s next?

Massachusetts taxpayers should assess how the OBBBA decoupling changes affect their Massachusetts estimated payments and any 2025 returns already filed to determine whether an amended return is warranted. Pass-through entities should also evaluate the newly enacted second PTE election to determine whether making the election would be beneficial.

Please reach out to your Baker Tilly state tax team with any questions.