Massachusetts Chapter 63E: How Does the 2026 Surtax PTET Work Above $1,107,750?

Massachusetts chapter 63E lets an S corporation or partnership elect to pay a 4 percent excise on the portion of each owner's allocated income that exceeds the 4 percent surtax threshold ($1,107,750 for 2026 in the Department of Revenue's withholding tables), for taxable years beginning on or after January 1, 2026. Each qualifying owner gets a refundable credit against personal income tax equal to that owner's share of the excise multiplied by 0.9. The reason to elect is federal: an entity-level payment may be deductible outside the owner's SALT cap, though I have seen no IRS guidance that names chapter 63E. The 0.9 credit means the election costs something at the state level. This post is for CPAs and EAs with Massachusetts pass-through clients whose allocation from a single entity is large enough to reach the surtax.

Chapter 63E came in through section 21 of Chapter 101 of the Acts of 2026, approved June 12, 2026. I covered that act's OBBBA decoupling in what Chapter 101 changes for 2025 returns. This post goes deeper on the entity-level piece. 2026 is the first year the election can apply, it is made year by year, and the federal payoff depends on when the entity pays. That makes it a year-end decision.

What Does Massachusetts Chapter 63E Actually Tax?

Massachusetts chapter 63E taxes only the excess of each qualified member's allocated share over the surtax threshold, not the entity's income as a whole. Three definitions in the session law do the work.

An eligible pass-through entity is an S corporation under section 1361, a partnership under section 7701, or an LLC treated as either. A qualified member is a shareholder or partner "that is a natural person or trust or estate subject to tax under section 10 of chapter 62," and "a qualified member may be a resident, nonresident or a part-year resident." The definition excludes any owner "whose allocable share of income included in their Massachusetts taxable income under said chapter 62 does not exceed the surtax threshold."

Qualified income taxable in Massachusetts is the base, limited "to the sum of the amounts by which the amount allocated to each qualified member exceeds the surtax threshold."

Read together, those clauses compare what this entity allocates to the member against the threshold, not the member's total Massachusetts income. On my reading, an owner with $700,000 from each of two partnerships owes the surtax on the amount by which the combined $1,400,000 exceeds the threshold, yet neither partnership can elect to cover any of it, because neither allocation clears the threshold alone. The act does not address aggregation, and I have seen no Department of Revenue guidance on it.

The threshold comes from chapter 62, section 4(d): $1,000,000, which each year "shall be subject to the cost-of-living adjustment as provided by subsection (f) of section 1 of the Code." For 2026, the Department of Revenue's Circular M, its withholding guide effective January 1, 2026, sets 9 percent withholding, matching the 5 percent rate plus the 4 percent surtax, on annualized wages above $1,107,750. The Department's 2025 Schedule 4% Surtax used $1,083,150. Confirm the 2026 figure on the 2026 Schedule 4% Surtax when the Department publishes it, before you file.

How Does the Chapter 63E Election and Credit Work?

Section 2 sets the rate in one sentence: "An eligible pass-through entity may elect to pay an excise on its qualified income taxable in Massachusetts at a rate of 4 per cent." A qualified member "shall be allowed a refundable credit against the tax imposed under chapter 62," in an amount proportionate to the member's share of the tax due and paid, "multiplied by 0.9." The credit belongs to "the member's taxable year in which the electing eligible pass-through entity's taxable year ends."

The mechanics sit in sections 4 and 6:

• The election is made "on an annual basis in a manner determined by the commissioner."
• "All members of the electing eligible pass-through entity shall be bound by the election."
• "Once an election is made for a particular year, the election shall not be revoked."
• The excise is "due and payable on the eligible pass-through entity's original, timely filed return."
• It is "in addition to, and not in lieu of, any other Massachusetts tax required to be paid, including tax imposed by chapter 62 or chapter 63."

Section 7 tells the commissioner to issue regulations or guidance, which "may" extend the credit through tiered entities and "may" require estimated payments. Neither is mandatory, and the manner of election is left to the commissioner, so look for a form before promising a client a filing position.

Why Would an Owner Pay 4 Percent to Get 3.6 Percent Back?

At the state level, the election costs money. Take a member whose allocation from one S corporation exceeds the threshold by $500,000.

Without the election, the member owes the 4 percent surtax on that $500,000, or $20,000. With it, the entity pays $20,000 of excise and the member gets an $18,000 credit. Because the excise is in addition to chapter 62 tax, the member still owes the $20,000 surtax, less the $18,000 credit. Massachusetts collects $22,000 instead of $20,000.

That extra $2,000, or 0.4 percent of the excess, is the price of moving $20,000 of state tax onto the entity's books. The election pays only if the federal deduction for that $20,000 is worth more than $2,000. At a 37 percent marginal rate, assumed for illustration, a full $20,000 deduction is worth $7,400. The real answer turns on the owner's rate, the owner's SALT cap position, and whether the deduction holds up at all.

Does Notice 2020-75 Cover the Chapter 63E Excise?

I have found no IRS guidance that names chapter 63E, so the federal treatment is analysis, not a ruling. The authority practitioners rely on for entity-level taxes is Notice 2020-75, which says that "Prior to the issuance of the proposed regulations, taxpayers may rely on the provisions of this notice."

The notice defines a Specified Income Tax Payment as "any amount paid by a partnership or an S corporation to a State, a political subdivision of a State, or the District of Columbia (Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation." That holds whether or not the liability "is the result of an election by the entity" and whether or not owners get "a partial or full deduction, exclusion, credit, or other tax benefit." The entity deducts the payment "in computing its taxable income for the taxable year in which the payment is made," and the payment "is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation."

My reading is that the 63E excise fits. It is imposed on the entity, measured by income and triggered by an entity election, and the owner credit is the kind of benefit the notice says does not matter. Two features keep me short of certain. Massachusetts calls it an excise, while the notice's definition "solely includes income taxes described in section 164(b)(2)." And the 63E base is computed member by member. The notice addresses neither, so document your reading in the file.

Timing matters for 2026. The excise is due with the original return, which for a calendar-year 2026 entity is filed in 2027. Under the notice's payment-year rule, that payment is a 2027 deduction unless the entity pays during 2026, and that depends on the commissioner opening an estimated-payment or other payment channel under section 7.

For seven-figure earners, the federal cap is also smaller than the headline. I work through the phasedown in the OBBBA SALT cap at $40,000.

When Does Chapter 63E Switch Itself Off?

Section 3 is the off switch: "This chapter shall not apply to any taxable year for which the federal limitation on the state and local tax deduction imposed by section 164(b)(6) of the Internal Revenue Code, as amended and in effect for the applicable year, has expired or is otherwise not in effect."

Section 70120(a)(1) of Pub. L. 119-21 struck "and before January 1, 2026" from section 164(b)(6), so the federal limitation no longer lapses on its own. As the Code reads now, section 3 bites only if Congress repeals or suspends the limitation.

The effective date is clean. Section 45 applies sections 7, 13 through 15, 21, 25 and 26 "for taxable years beginning on or after January 1, 2026," with no condition. The ballot-question contingency in section 47 attaches only to sections 9 and 17, which strike the 174A disallowance added by sections 8 and 16. Nothing in the act ties section 21 to the ballot result.

How Does Chapter 63E Sit Next to the Chapter 63D Election?

Chapter 63D, effective for tax years beginning on or after January 1, 2021, is the template. Its section 2 lets an entity elect an excise on qualified income taxable in Massachusetts "at a rate of 5 per cent," with a refundable member credit based on the member's share of the tax "multiplied by 0.9." The Department of Revenue's 2025 Form 63D-ELT instructions describe the same 5 percent rate and 90 percent refundable credit, with an annual election that is irrevocable for the year and binding on all qualified members. Chapter 63D's section 3 carries the same 164(b)(6) switch-off.

Chapter 63E copies that structure almost word for word, changing the rate to 4 percent and the base to the excess over the surtax threshold. Neither source says how the two interact. Chapter 101 does not mention a 63D election, and the 2025 instructions do not mention chapter 63E. I have found nothing on whether an entity may make both elections for one year, or how income already in a 63D base would be treated under 63E. Wait for the commissioner's guidance before modeling both.

What Should Be on the Year-End Chapter 63E Checklist?

This is my practice list for each Massachusetts entity with a large owner, not a statutory requirement.

1. Screen by entity, not by owner. List each qualified member whose allocation from this entity alone should exceed the threshold, including trusts and estates taxed under chapter 62, section 10.
2. Use the 2026 threshold. Project with $1,107,750, the figure in the Department's 2026 Circular M, not the 2025 number, and confirm it against the 2026 Schedule 4% Surtax once published.
3. Model the 10 percent haircut. Weigh the extra 0.4 percent of the excess against the federal value of the entity deduction at each owner's rate and SALT cap position, including knock-on effects on other income-based items.
4. Decide the payment year. A 2026 federal deduction needs a way to pay during 2026. Otherwise it moves to 2027.
5. Settle who bears the cost. The election binds every member, but only qualified members generate excise. Check the operating or shareholder agreement first.
6. Write down the Notice 2020-75 position, including the excise label and the member-by-member base.

I built Tax Orator partly because statutes like this reach practitioners as summaries first, and a summary can drop the clause that decides whether a client qualifies. Read chapter 63E itself before the entity elects.