Practical implications of Massachusetts’ adoption of single-sales factor apportionment for corporate filers

In brief

What happened?

For tax years beginning on or after January 1, 2025, all corporations, financial institutions, individuals, trusts, and estates doing business in Massachusetts and at least one other state must apportion their net income and, in the case of corporations, determine their non-income measure tax liability, using a single-sales factor apportionment formula. 

In addition, recently enacted H.5077 prescribes an alternative apportionment method for those taxpayers whose sales factor is inapplicable that could apply an evenly-weighted formula using a taxpayer’s property and payroll factors to apportion. 

Why is it relevant? 

The change to single sales factor may have a significant impact on the calculation of Massachusetts taxable income and Massachusetts non-income measure tax liability.   

Actions to consider 

Affected taxpayers should consider modeling the impact of this change to ensure that their quarterly estimated tax payments are sufficient. Note that a corporation’s required first quarter estimated tax payment is 40% of the lesser of (1) 90% of its current year tax liability or (2) 100% of its prior year tax liability. Affected taxpayers also should consider the impact of this change on their future Massachusetts taxable income/tax liability and their utilization of tax attributes for provision purposes.

Estimated tax payments 

A corporation that reasonably expects that its Massachusetts tax will exceed $1,000 for the tax year is required to make four estimated tax payments of its required annual payment. The corporation’s Massachusetts tax for this purpose is the sum of its income and non-income measures of its tax liability, or in the case of a combined group, the sum of the income and non-income measures of the tax liabilities of its taxable members. 

Generally, the required annual payment is the lesser of (1) 90% of the corporation’s current year tax liability or (2) 100% of the corporation’s prior year tax liability. However, the prior year tax liability exception is only available to large corporations, as such term is defined by IRC Section 6655(g)(2), for their first quarter estimated tax payment and only then if any reduction in the first installment payment caused by the use of this exception is made up by increasing the amount of the next installment by the amount of the reduction. 

Massachusetts’ estimated tax payment rules require corporations to pay 40% of their required annual payment in the first installment, followed by 25% in the second and third installments, and 10% in the fourth installment. Because the estimated tax payments are front-loaded, with 40% of the required annual payment due with the first installment, it is important for corporations to be aware of the tax consequences arising from Massachusetts’ adoption of a single-sales factor formula to avoid any underpayment of estimated tax penalties. 

Observation: Because Massachusetts treats overpayments applied to the next tax year as a payment made on the date that a return is made, which is one month later than the due date for the first installment for estimated taxes, corporations cannot rely on applied overpayments as a means to meet their first installment payment obligation.