In a bid to rehabilitate the Brownfields Tax Credit ("BTC") application and approval process, the Massachusetts Department of Revenue ("DOR") has issued final regulations (830 CMR 63.38Q.1) and new administrative procedures (AP 636) governing credit applications received on or after July 9, 2021. These are expected to be promulgated and become official on July 23, 2021. They bring to a close a lengthy review process that began with a working draft in Spring 2020, followed by proposed regulations in January 2021. The Massachusetts BTC is a non-refundable tax credit allowed to “Eligible Persons,”[1] as defined under the Massachusetts Oil and Hazardous Material Release Prevention and Response Act (Mass. Gen. Laws Ch. 21E), for a percentage of costs incurred in achieving a permanent solution (or remedy operation status) in remediating contaminated property that is owned or leased for business purposes and also is located in an economically distressed area. A credit is available for 25% of costs for sites cleaned up with an activity and use limitation (AUL) and 50% for sites without an AUL. To be eligible for the credit, the costs (less any reimbursements received) must total at least 15 percent of the assessed value of the property before remediation. The regulations go to great length to distinguish costs that are incurred to achieve a permanent solution (and thus are BTC eligible) from those related to other activities, such as building construction, that may occur in connection with an environmental remediation and which DOR considers ineligible. DOR’s characterization of costs has previously led to disputes over availability of the credit and assertions that it is second guessing the environmental experts. The final regulations continue the draft regulations’ robust description of eligible and non-eligible costs, along with examples. While DOR retains discretion to make determinations that vary from the examples, the regulations provide needed clarity as to what costs are eligible for the BTC. Additionally, the final regulations and procedures contain several significant changes from the January 2021 proposed regulations. For example: Application Timelines. The finalized procedures provide timelines governing the BTC application and approval process, including 60-day status updates on a BTC application from DOR. Asbestos Removal. A BTC is now allowed for costs incurred for the removal and disposal of asbestos from a building that is being demolished to remove contaminated soil underneath the building, provided the BTC applicant knew of the soil contamination prior to demolition. Historic Fill. The final regulations indicate that DOR will not consider as eligible those costs incurred for excavation and off-site disposal of historic fill consistent with anthropogenic background where a permanent solution can be achieved without removal of the fill. Costs for Multiple Releases. For purposes of meeting the 15% assessed value threshold requirement, the final regulations and procedures allow aggregation of costs associated with permanent solutions relating to multiple releases on a property, provided the permanent solutions were achieved within a three-year period. The draft regulations had limited the period to one year. Appeal Process. There are notable changes to the appeal process, including a requirement that DOR provide an applicant with an explanation as to why an application was denied in whole or in part.  Moreover, during an appeal, DOR is limited to reviewing only the amounts of the credit that were denied. Thus, by appealing a partial denial, an applicant will not risk opening up the entire application (including parts already approved) for further review. Although disagreement may remain over where DOR has drawn the line between eligible and ineligible costs, the final regulations and procedures promise to standardize and speed up the BTC process. * * * * * * * * * * [1] Eligible Persons under Chapter 21E include certain “innocent” owners and operators of a contaminated site who did not cause or contribute to the release of contaminants and did not own or operate the site at the time of the release.

On Friday, July 9, the Massachusetts Legislature voted in favor of the Conference Committee’s revised fiscal year 2022 (FY22) budget bill, House No. 4002[1] (budget bill). The Governor has until Monday, July 19 to either approve or veto the budget. As a part of that process, the Governor may veto or reduce specific line items, veto outside sections, or submit proposed amendments for further consideration by the Legislature. Though the budget bill does not propose any broad tax increases, it includes several notable tax provisions, including among others:  converting the child care tax deduction into a refundable credit;[2] creating a new employment tax credit for employers that hire disabled workers;[3] eliminating the income tax deduction for charitable contributions through 2022;[4] eliminating the sunset date of the film tax credit while requiring production companies to expend additional time and resources in Massachusetts;[5] and extending the historic rehabilitation tax credit.[6] We focus here on the budget bill’s passthrough entity (PTE) tax and credit provisions. These provisions essentially offer federal income tax relief to the owners of certain businesses, giving them a “workaround” to the $10,000 federal limitation on deducting state and local taxes (SALT) under the Tax Cuts and Jobs Act (TCJA).[7] We also note the absence of any provision in the budget bill that would exclude certain federal COVID-related relief from individual taxable income for 2021. The PTE Workaround The Pending Legislation Pursuant to new Chapter 63D in the pending legislation, and effective for tax years beginning on or after January 1, 2021, eligible PTEs, including S corporations, partnerships, and certain limited liability companies, may elect to pay an excise on their "qualified income taxable in Massachusetts" at a rate of 5%.[8] A qualified member of an electing PTE is allowed an offsetting credit against 90% of the personal income tax imposed on such member’s share of such excise paid by the PTE.[9] Qualified income taxable in Massachusetts includes the income of the eligible PTE determined under the personal income tax allocable to the PTE’s qualified members and included in such members’ Massachusetts personal income tax.[10] Qualified members include S corporation shareholders and partners who are natural persons, as well as trusts and estates subject to tax under G.L. c. 62, § 10.[11] Under the pending legislation, PTEs may irrevocably elect (thereby binding all members) into the regime on an annual basis.[12] The entity-level PTE tax is due and payable on the eligible PTE’s original, timely-filed return, and a return that reports the PTE tax is due when a Massachusetts partnership information or corporate excise return is due for the PTE.[13] The Commissioner is authorized to promulgate regulations to, among other things, make the credit available to qualified members of tiered partnership structures, provide rules governing the application of the new PTE tax and credit legislation to qualified members that are eligible trusts and estates, and require estimated payments of the PTE tax in a manner consistent with G.L. c. 62B.[14] The pending PTE tax and credit regime would not apply to any taxable years for which the federal SALT deduction limitation has expired or is otherwise not in effect.[15] Presumably, the regime will persist if Congress increases but does not eliminate the federal cap on SALT deductions. While the PTE tax will in fact raise revenue for the Commonwealth, implementing the new tax regime and providing an on-ramp for PTEs will be a significant project for the Massachusetts Department of Revenue (DOR).  For example, defining the contours of "qualified income taxable in Massachusetts" may require substantive decision‑making. The Pending PTE Legislation Does Not Provide a Full Credit, in Contrast to the Governor’s Earlier Proposal Analyzed in DOR’s SALT Cap Report As we mentioned in a previous client alert, on March 1, 2021, DOR published a Report to the Legislature evaluating the revenue and administrative impact of implementing a PTE tax coupled with a refundable credit at the individual level.[16] The report provided a framework for evaluating the PTE tax and credit provisions in Governor Baker’s budget proposal of January 27, 2021.[17] There is a significant difference between the Governor’s proposal and the budget bill. The Governor’s proposed legislation would have granted qualified members a credit for 100% of the personal income tax imposed on the members’ share of the excise paid by a PTE, making the PTE tax revenue neutral for the Commonwealth.[18] The budget bill, by contrast, allows qualified members a credit for only 90% of the personal income tax imposed on the members’ share of the excise paid by the PTE.[19] This reduction in the credit is expected to generate $90 million of additional revenue in FY22.[20] In a sense, the $90 million represents the Legislature’s way of sharing in taxpayers’ federal tax benefits. Governor Baker’s proposal would have offered the same federal income tax benefits as a free public service. The budget bill also differs from the Governor’s proposal in explicitly including trusts and estates as qualified members eligible for the 90% credit.[21] Other States’ PTE Workaround Regimes Assuming that Governor Baker signs the budget bill into law, Massachusetts will join the growing roster of approximately 16 states that have already enacted a PTE tax workaround. Other states that have passed similar measures include Alabama, Arizona, Arkansas, Connecticut, Colorado, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina, and Wisconsin.[23] Each regime imposes a tax on the PTE directly, but while some states allow members an income tax credit for their share of the tax paid by the PTE, others allow members to deduct their share of the PTE’s income taxed at the entity level.[24] The budget bill follows the former approach. Other major differences between the various state PTE workaround regimes include:  (a) whether corporate members are eligible for a credit or deduction (they are not in the budget bill); (b) whether the PTE tax applies only to partnerships, or also to S corporations and other non-corporate entities (the budget bill takes the latter approach); (c) whether, under the credit regime, members may take a credit with respect to the entirety of the tax paid by the PTE or only a portion of the tax paid (the budget bill allows only a 90% credit); (d) whether, under the credit regime, excess credits are refundable (the budget bill does not address this issue); (e) whether the PTE tax regime is elective or mandatory (elective under the budget bill); and (f) whether PTE elections are revocable (irrevocable under the budget bill). No Accommodationsfor Federal COVID Relief Received after 2020 Absent from the budget bill is any provision that would exclude from individuals’ 2021 taxable income certain federal COVID-related relief amounts, such as Economic Injury Disaster Loan (EIDL) grants pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act,[25] Small Business Administration debt relief subsidies,[26] EIDL grants pursuant to the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,[27] or any Paycheck Protection Program (PPP) loan forgiveness occurring after 2020. For federal tax purposes, loan forgiveness ordinarily gives rise to taxable income. However, the CARES Act specifically excludes forgiven PPP loans from federal gross income.[28] Massachusetts conforms to this provision for purposes of G.L. c. 63 (i.e., with respect to corporate excise taxpayers), but it does not automatically conform with respect to individual taxpayers whose loans are forgiven.[29] This past spring, the Legislature enacted provisions allowing individuals to exclude from gross income PPP loan forgiveness granted in 2020, as well as the other amounts of relief individuals received in 2020 pursuant to the CARES Act and the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act as highlighted above.[30] In the absence of any further legislation, individuals whose PPP loans are forgiven after 2020, or who receive other federal COVID-related relief after 2020, must contend with the prospect of worse Massachusetts tax consequences than if they had received relief in 2020. * * * * * * * * * [1] House No. 4002, An Act Making Appropriations for Fiscal Year 2022, (July 8, 2021). [2] Id. at §§ 24, 29, 141, and 146 (effective for taxable years beginning on or after January 1, 2021). [3] Id. at §§ 29, 37, and 142 (available for qualified employees hired after July 1, 2021 and for the tax year beginning on January 1, 2023 and for subsequent tax years). [4] Id. at § 99 (disallowing the deduction for the taxable year beginning January 1, 2022). [5] Id. at §§ 25, 36, 68, 146, and 147 (effective for taxable years beginning on or after January 1, 2022). [6] Id. at §§ 31 and 35 (extending expiration from 2022 to 2027). [7] Id. at § 39. [8] Id. at §§ 39, 147. [9] Id. at § 39.2. [10] Id.at § 39.1. [11] Id. [12] Id. at § 39.6. [13] Id. at § 39.4. [14] Id. at § 39.7. [15] Id. at § 39.3.  We note that currently the federal SALT deduction limitation is set to expire on December 31, 2025, together with many of the individual tax changes in the TCJA.  There are ongoing conversations in Congress about whether to increase or eliminate the federal cap on SALT deductions.  Opponents argue that eliminating the cap would primarily benefit only the very wealthiest taxpayers. [16] See Commonwealth of Massachusetts Department of Revenue, “Report on the Administrative and Revenue Impact of a Proposal to Allow Owners of Certain Entities to Avoid the Federal Limitation on State and Local Tax Deductions” (Mar. 1, 2021). [17] See House No. 1, An Act Making Appropriations for Fiscal Year 2022, (Jan. 27, 2021), § 8. [18] See House No. 1, An Act Making Appropriations for Fiscal Year 2022, (Jan. 27, 2021), § 8.1. [19] See House No. 4002, An Act Making Appropriations for Fiscal Year 2022, (July 8, 2021), § 39.2. [20] See House No. 4002, An Act Making Appropriations for Fiscal Year 2022, (July 8, 2021), § 1A. [21] See Id.at § 39.1. [22] Or, if Governor Baker vetoes the bill, assuming that the Legislature overrides that veto by a 2/3 vote in both chambers. [23] As we write this advisory, the legislatures in several other states have proposed SALT deduction cap workarounds, including California, Illinois, and Oregon. [24] See Commonwealth of Massachusetts Department of Revenue, “Report on the Administrative and Revenue Impact of a Proposal to Allow Owners of Certain Entities to Avoid the Federal Limitation on State and Local Tax Deductions” (Mar. 1, 2021). [25] See CARES Act, Pub. L. No. 116-136, § 1110(e), 134 Stat. 307 (2020). [26] See CARES Act, Pub. L. No. 116-136, § 1112(c), 134 Stat. 309 (2020). [27] See Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (part of the Consolidated Appropriations Act, 2021), P.L. 116-260, § 331, 134 Stat. 2043-2044 (Dec. 27, 2020). [28]  See CARES Act, Pub. L. No. 116-136, § 1106(i), 134 Stat. 301 (2020). [29] See Massachusetts Department of Revenue, 2020 Personal Income and Corporate Excise Tax Law Changes, Massachusetts Tax Law and Federal Conformity (Feb. 11, 2021). [30] See St. 2021, c. 9, § 12; TIR 21-6, § IV (Apr. 30, 2021).  See also Massachusetts Department of Revenue, Tax Filing Season Frequently Asked Questions, Filing Season FAQs – New May 17 Deadline, PPP, and more, (Jun. 18, 2021).