By Ryan McDonell, CPA, MSA, MSLT,
Tax Director
Massachusetts enacted H.5470, the 2026 Supplemental Budget, on June 12, 2026. While the law covers a wide range of items, several provisions affect conformity of federal and Massachusetts state tax law. This article summarizes key tax changes that may impact Massachusetts businesses and individuals.
R&E expenses: Massachusetts delays conformity to federal changes
One of the most significant business tax changes involves research and experimental expenditures, often called R&E expenses. Recent federal law changes generally allow full expensing of certain domestic R&E costs. Massachusetts, however, is not immediately following that federal treatment and continues to require capitalization and amortization of R&E expenses. Under the Supplemental Budget, Massachusetts delays conformity to the federal full-expensing rules for domestic R&E costs until tax years beginning on or after January 1, 2026.
In practical terms, businesses with R&E spending should not assume that the Massachusetts deduction will match the federal deduction for prior years. Companies that have already filed returns using the newer federal treatment may need to review whether Massachusetts adjustments or amended filings are required.
Business interest limitation: conformity delayed until 2027
The law also affects the Massachusetts treatment of the federal business interest expense limitation. The federal tax rules generally limit a taxpayer’s deduction of interest to business interest income plus 30% of adjusted taxable income, unless an exception applies. Federal rules were recently changed to allow a more favorable calculation of adjusted taxable income by adding back depreciation and amortization, ultimately allowing for larger interest deductions. Massachusetts will not conform to that modified calculation until tax years beginning on or after January 1, 2027.
For 2025 and 2026, this means some Massachusetts businesses may have a smaller interest deduction than they have for federal purposes. Businesses with significant debt or capital-intensive operations should review their Massachusetts tax projections for this item.
Additional pass-through entity excise
In response to the federal state and local tax (SALT) itemized deduction cap, Massachusetts implemented a passthrough entity-level tax (PTET) regime several years ago. The PTET allowed passthrough entities to pay state tax at the entity level, in effect providing for a federal deduction unaffected by the SALT cap. Passthrough owners participating in the PTET were also allocated a state credit equal to 90% of the tax paid by the entity. However, the PTET could only be paid at the standard 5% personal income tax rate and could not factor in the recent 4% millionaire surcharge tax.
Beginning with tax years starting on or after January 1, 2026, certain pass-through entities may make a new election to pay an additional 4% Massachusetts excise. The tax applies only to qualifying Massachusetts income allocated to members above the state’s individual income tax inflation-adjusted millionaire surtax threshold. Qualified members generally continue to receive a refundable Massachusetts credit equal to 90% of their share of the entity-level tax paid. This election is relevant for owners of partnerships, S corporations, and certain LLCs with higher income.
PFML allocations shift in 2026
Effective January 1, 2026, the allocation of Massachusetts Paid Family and Medical Leave contributions changes. Employers may withhold 100% of the medical leave contribution from employees, compared with 40% under prior rules. At the same time, employers may withhold only 40% of the family leave contribution from employees, compared with 100% previously. Employers with 25 or more employees must pay the remaining 60% of family leave contribution from their own funds.
For employers, this may require payroll system updates and employee communication. For employees, they will be able to exclude the full amount of medical leave benefits from their Massachusetts gross income.
Other changes
The Supplemental Budget also includes several other tax provisions worth noting:
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- Bonus depreciation: Massachusetts delays conformity to the federal 100% depreciation deduction for “qualified production property” until tax years beginning on or after January 1, 2027.
- Small business expensing Section 179: Massachusetts delays adopting recent higher federal expensing limits until tax years beginning on or after January 1, 2027.
- Qualified Opportunity Zones: Massachusetts delays conformity to the federal changes until January 1, 2027. Beginning January 1, 2026, Massachusetts will generally recognize only Qualified Opportunity Zones located entirely within Massachusetts.
- New sales tax exemption, effective January 1, 2027, for materials, tools, and fuel used in certified multifamily housing projects.
- New refundable, non-transferable credit for farm businesses that donate food to nonprofits for certain tax years ending between December 31, 2026, and January 1, 2029.
- New non-refundable credit for sustainable aviation fuel purchases for aircraft departing Massachusetts airports.
- Future conformity: Massachusetts adopted a new approach to future federal tax law changes. In general, future Internal Revenue Code amendments will not automatically apply to the current or prior tax years unless the Commissioner determines the change has a state revenue impact below a stated threshold.
Businesses and individuals affected by these provisions should consult their tax advisors before filing or making elections, particularly where Massachusetts and federal tax treatment now differ. Talk to the business advisory team at GT Reilly & Company for state tax strategies for businesses and individuals.
See Next: Depreciation Changes in Federal Tax Law
