FY99H1A Tax Expenditures Part III

Fiscal Affairs Division

The Tax Expenditure Budget

Part III: The Corporate Excise and Other Business Excises

In 1780, the Massachusetts Constitution gave to the General Court the power to levy "reasonable duties and excises upon any produce, wares, merchandise and commodities brought into, produced, manufactured, or being within the Commonwealth."

The corporate excise was enacted in 1919, replacing a corporate franchise tax which was levied on the value of capital stock. Initially, the corporate excise was imposed on corporate excess (similar to net worth) and on net income.

In 1962, the corporate excess measure was repealed. The tax is now levied on tangible property or net worth (depending on the mix of property held by the corporation) and on net income.

Revenues from the corporate excise represented 7% of total tax revenues for Fiscal Year 1997. The tax ranked third in Fiscal Year 1997, after the individual income tax and sales and use tax, in amounts collected.

Corporate Excise: Basic Structure

Tax Base: Generally, corporations doing business in Massachusetts are subject to a tax based on net income and on either tangible property or net worth. Together, these two measures of tax constitute the corporate excise.

The net income measure of the tax is based on gross income for federal tax purposes with certain additions such as interest earned on state obligations, and less certain deductions, most of which are allowable under the provisions of the Internal Revenue Code. Many of these deductions are considered to be part of the basic structure. For example, in providing for depreciation deductions, the basic structure would allow the cost of property to be written off over its useful life. However, rules which allow accelerated depreciation deductions are listed as tax expenditures.

Corporations whose qualifying tangible assets in Massachusetts equal or exceed 10% of their qualifying total assets in Massachusetts apportioned according to the income apportionment percentage are taxed on the value of their tangible property. Other corporations are taxed on a net worth basis.

Banks, security corporations, utility corporations, and insurance companies are taxed in a different manner, and are generally not included in this budget. Tax expenditures for these separately taxed corporations are included, however, where they enjoy the benefit of federal and state tax expenditures catalogued in this section, because the taxes to which they are subject are based at least in part on net income.

Taxable Unit: A corporation is a taxpayer separate and distinct from its shareholders.

Rate Structure: The effective excise rate on corporations is 9.5% of net income apportioned to Massachusetts, and $2.60 per $1,000 of the value of Massachusetts tangible property or net worth allocable to Massachusetts. The minimum tax is $456.

Taxable Period: The taxable period for corporations is either the calendar year or the corporation's fiscal year. Estimated payments are made every three months during the taxable year. Federal accounting periods and methods have been adopted. Net operating loss carry-forwards are allowed. Qualifying losses may be carried forward for no more than five years.

Interstate and International Aspects: All domestic corporations are subject to the corporate excise by reason of corporate existence at any time during the taxable year. Foreign corporations doing business within the state or owning property in the state are also subject to the excise. Corporations doing business both within and without Massachusetts are entitled to apportion net income if they have income from business activity which is taxable in another jurisdiction using a formula based on the proportions of corporate real and tangible personal property, payroll, and sales that are located in Massachusetts. Under certain circumstances, taxpayers may petition for, or the Commissioner may impose, alternate methods of accounting to reflect more fairly a taxpayer's income from business operations in Massachusetts.

Computation of Massachusetts Business Corporation Excise

Types of Tax Expenditures under the Corporate Excise

As with the personal income tax, the basic structure of the corporate excise is subject to several different types of modifications that can produce tax expenditures.

Exclusions from Gross Income: Gross income is the starting point in calculation of the income component of the corporate excise. In the absence of tax expenditures, it would include all income received from all sources. Items of income that are excluded from gross income escape taxation permanently.

Deferrals of Gross Income: Where an item of income is not included in gross income in the year when it is actually received, but is instead included in a later year, the result is a tax expenditure in the form of an interest-free loan from the state to the taxpayer in the amount of the tax payment that is postponed.

Deductions from Gross Income: Certain amounts are subtracted from gross income to arrive at taxable income. Many of these deducted amounts reflect the costs of producing income (business expenses) and are not included in the corporate excise's measure of income; such deductions are not tax expenditures. Other deductions, which do not reflect business expenses, constitute tax expenditures, which permit corresponding amounts of income to escape taxation permanently.

Accelerated Deductions from Gross Income: In a number of cases, corporations are allowed to deduct business expenses from gross income at a time earlier than such expenses would ordinarily be recognized under accepted accounting principles. The total amount of the permissible deduction is not increased but it can be utilized more quickly to reduce taxable income. The result is to defer taxes, thus in effect occasioning an interest-free loan from the state to the taxpayer.

Adjustments to Apportionment Formula: In the case of a business that earns income both inside and outside the Commonwealth, an apportionment formula is used to determine what portion of the total business income to allocate to Massachusetts for calculation of the corporate excise. When the standard formula is adjusted to reduce the apportionment factor for certain businesses, a tax expenditure results. The practical effect is to exclude a portion of those businesses' income from taxation.

Exclusions from Property Component: In addition to the excise based on income, corporations pay a component of the excise based on the value of their property in the state. To the extent that certain classes of property are not included in the excise's property measure, tax expenditures result.

Credits Against Tax: After a corporation's basic tax liability has been computed, it may subtract certain credit amounts in determining the actual amount of taxes due. It is important to note that, whereas a one dollar exclusion or deduction results in a tax savings of only a few cents (one dollar times the applicable tax rate), a one dollar credit results in a one dollar tax savings.

Entity Exempt from Taxation: In some cases, a business or other entity may be completely exempt from taxation. To the extent business or investment income goes untaxed, tax expenditures result.

List of Corporate Excise Tax Expenditures


2.000	EXCLUSIONS FROM GROSS INCOME

2.001	Small Business Corporations
	Certain corporations with no more than 35 shareholders may elect to be taxed, for both federal and state tax purposes, as "small business corporations" or "S corporations." The earnings of an S corporation with total receipts of less than $6 million are not generally subject to taxation at the corporate level. S corporations with total receipts of $6 million or more are subject to a reduced corporate excise; 3% if receipts are $6 million or more but less than $9 million and 4.5% if receipts are $9 million or more. In addition, S corporation net earnings (and losses) are attributed directly to the shareholders (whether or not they are distributed as dividends) and are taxed at the individual shareholder level, generally at a 5.95% rate. By contrast, ordinary corporate earnings are taxed twice, once when earned by the corporation at a 9.5% rate, and once when distributed to shareholders, generally at a 12% rate.The difference between the manner in which income is taxed to a C corporation and its shareholders and an S corporation and its shareholders constitutes a tax expenditure. Massachusetts first adopted this preferential treatment for closely-held corporations in 1986. Origin: IRC § 1361-1363 and M.G.L. c. 62, IRC § 17A and c. 63, IRC § 32D Estimate: $5.0

2.002	Exemption of Income from the Sale, Lease or Transfer of Certain Patents
	Income from the sale, lease or other transfer of approved patents for energy conservation, and royalties and income from the sale, lease or other transfer of property subject to such patents are excluded from gross income for a period of five years. Origin: M.G.L. c. 63, IRC § 30(5)(a) Estimate: N.A.

2.100	DEFERRALS OF GROSS INCOME

2.101	Deferral of Tax on Certain Shipping Companies
	Certain shipping companies receive up to a 25-year deferral of tax on that portion of their net income which is set aside for construction, modernization and major repair of ships. Origin: 46 U.S.C. § 1177 and IRC § 7518 Estimate: $0.1

2.200	DEDUCTIONS FROM GROSS INCOME

2.201	Charitable Deduction
	In computing net income, corporations may deduct charitable donations up to 10% of taxable income computed without the deductions. There is a carryover of excess contributions available for five succeeding taxable years. Origin: IRC § 170 Estimate: $7.0

2.202	Additional Deduction for Certain Businesses in a Poverty Area (UJIP)
	In determining net income, corporations certified by the Urban Job Incentive Bureau of the Executive Office of Economic Affairs as operating in a poverty area may deduct an additional 25% of a portion of compensation paid to their employees who live in a poverty area. The effect of the provision is to allow businesses to deduct 125% of the wages of these employees. Origin: M.G.L. c. 63, § 38F Estimate: $0.2

2.203	Net Operating Loss Carry-Over
	Taxpayers may carry-over for no more than five years (but not carry back) net operating losses (NOL) as defined under section 172 of the Internal Revenue Code. Origin: IRC § 172 and M.G.L. c. 63, § 305(b) and (ii) Estimate: $143.8

2.204	Excess Natural Resource Depletion Allowance
	Taxpayers in extractive industries (mining or drilling for natural resources) may deduct a percentage of gross mining income as a depletion allowance ("percentage depletion") even if the cost basis of the property has been reduced to zero. The deduction may not exceed 50% (in some cases, 65%) of net income from the property. In the case of oil and gas, percentage depletion is available only to domestic oil and gas sold by "independent producers" (nonintegrated companies). The excess of the deduction available using the percentage of gross income method of depletion over a depletion deduction based on cost is a tax expenditure. Origin: IRC §§ 613 and 613A Estimate: $0.1

2.205	Deduction for Certain Dividends of Cooperatives
	Farmers' cooperatives and certain corporations acting as cooperatives may deduct patronage dividends and other amounts out of gross income. Cooperatives meeting certain requirements may deduct dividends on capital stock and certain payments to patrons such as investment income. Under generally accepted rules for taxing corporations, dividends paid to shareholders cannot be deducted by the corporation. Origin: IRC §§ 1381-1388 Estimate: N.A.

2.206	Abandoned Building Renovation Deduction
	Businesses renovating eligible buildings in Economic Opportunity Areas may deduct 10% of the cost of renovation from gross income. This deduction may be in addition to any other deduction for which the cost of renovation may qualify. To be eligible for this deduction, renovation costs must relate to buildings designated as abandoned by the Economic Assistance Coordinating Council. Origin: M.G.L. c. 63, § 38O Estimate: $1.3

2.300	ACCELERATED DEDUCTIONS FROM GROSS INCOME

2.301	Accelerated Depreciation on Rental Housing
	Landlords and investors in rental housing may use accelerated methods of depreciation for new and used rental housing. Rental housing placed in service after 1986 is depreciated on a straight-line basis over a 27.5 year period. Rental housing placed in service before 1987 was depreciable over shorter periods (generally 19 or 20 years), and, instead of straight-line depreciation, the 175% declining balance method was permitted. Straight-line depreciation over the property's expected useful life is the generally accepted method for recovering the cost of buildings. The excess of allowable depreciation over such generally accepted depreciation is a tax expenditure, resulting in a deferral of tax or an interest-free loan. Origin: IRC § 168 Estimate: $7.3

2.302	Accelerated Depreciation for Rehabilitation of Low-Income Housing
	Expenditures made for the rehabilitation of low-income rental housing may be depreciated over a five-year period, using the straight-line method of depreciation and ignoring salvage value, if the expenditures are made under a binding contract in existence before 1987. Generally, the aggregate expenditures qualifying for the deduction cannot exceed $20,000 per unit, though they must equal at least $3,000 per unit over two consecutive years. Any remaining cost may be depreciated under the accelerated methods described in item 2.301. The accelerated recovery of costs which otherwise would be depreciable over a longer period amounts to a deferral of tax or an interest-free loan. Origin: IRC § 167(k) Estimate: N.A.

2.303	Expensing for Removal of Barriers to the Handicapped
	Taxpayers may elect to deduct up to $35,000 of the costs of removing architectural or transportation barriers to the handicapped in the year these costs are incurred. The immediate deduction of these expenditures which would otherwise have to be capitalized and depreciated over a longer period results in a deferral of tax or an interest-free loan. Origin: IRC § 190 Estimate: $0.3

2.304	Five-Year Amortization of Start-Up Costs
	Taxpayers may elect to treat certain capital costs of starting a business as deferred expenses and amortize them over five years. Without the election, only costs for particular assets could be recovered through depreciation deductions. Other costs would be part of the basis in the business and generally could not be recovered until the business was sold or discontinued. The election to amortize these costs allows for a deferral of tax or an interest-free loan. Origin: IRC § 195 Estimate: $0.3

2.305	The Accelerated Cost Recovery System (ACRS) for Equipment
	For depreciable tangible personal property placed in service after 1980, capital costs must be recovered using the federal Accelerated Cost Recovery System (ACRS) which applies accelerated methods of depreciation over set periods. For property placed in service after 1986, the Federal Tax Reform Act of 1986 prescribes revised ACRS depreciation schedules, generally using double-declining balance depreciation over specified periods that are substantially shorter than actual useful lives. The excess of accelerated depreciation over what is considered to be normal depreciation for tangible personal property (double-declining balance over expected useful lifetimes) is a tax expenditure. Origin: IRC § 168 Estimate: $176.1

2.306	Deduction for Excess First-Year Depreciation
	Taxpayers may elect to expense certain business assets purchased during the taxable year. The total deduction cannot exceed $17,500; for taxpayers whose investment in eligible assets exceeds $200,000 in the year, the $17,500 ceiling is reduced by $1 for each dollar of investment above $200,000. Any remaining cost may be depreciated according to ACRS as described in item 2.305. The immediate deduction results in a deferral of tax or an interest-free loan. Origin: IRC § 179 Estimate: $4.6

2.307	Accelerated Depreciation on Buildings (other than Rental Housing)
	Construction may be depreciated under methods which produce faster depreciation than economic depreciation. The precise rules have been changed repeatedly in recent years by revisions of the federal tax code. For structures (other than housing) placed in service after 1986, federal law requires straight-line depreciation over a 31.5 year life. The excess of accelerated depreciation over economic depreciation is a tax expenditure. For a more detailed description of accelerated depreciation, see item 2.301 above. Origin: IRC § 168 Estimate: $13.5

2.308	Expensing Research and Development Expenditures in One Year
	Taxpayers may elect to treat research or experimental expenditures incurred in connection with a trade or business as immediately deductible expenses. Under generally accepted accounting principles, at least some of these costs would otherwise be treated as capital expenditures and depreciated or amortized over a period of years. Their immediate deduction results in a deferral of tax or an interest-free loan. Origin: IRC § 174 Estimate: $46.0

2.309	Expensing Exploration and Development Costs
	Certain capital costs incurred in bringing a known mineral deposit into production are deductible in the year incurred. A portion of domestic mining exploration costs can also be expensed, although they will be recaptured if the mine reaches the production stage. Certain intangible drilling and development costs of domestic oil, gas, and geothermal wells are deductible when made, but to a certain extent may be recaptured upon disposition of oil, gas, or geothermal property to which they are properly chargeable. The immediate expensing of these costs, which would otherwise be capitalized and recovered through depreciation or through depletion as the natural resource is removed from the ground, results in a deferral of tax or an interest-free loan. Origin: IRC §§ 193, 263(c), 616 and 617 Estimate: $0.1

2.310	Five-Year Amortization of Certain Operating Rights
	Certain bus, trucking and shipping companies may amortize over a five-year period the cost of bus route, freight forwarding and certain other operating rights that have lost their economic value due to federal deregulation of these industries. The five-year amortization of these costs, which would otherwise be capitalized and recovered upon the sale of the business, results in a deferral of tax or an interest-free loan. Origin: Tax Reform Act of 1986, § 243 Estimate: N.A.

2.311	Five-Year Amortization of Pollution Control Facilities
	Taxpayers may elect to amortize the cost of a certified pollution control facility over a five-year period, allowing for accelerated recovery of these costs. Accelerated recovery is only available for pollution control facilities subsequently added to plants that were in operation before 1976. The excess of accelerated recovery over depreciation deductions otherwise allowable results in a deferral of tax or an interest-free loan. Origin: IRC § 169 Estimate: N.A.

2.312	Expensing Certain Expenditures for Alternative Energy Sources
	In determining net income, a corporation may elect to take an immediate deduction for expenditures made for certain solar or wind powered systems or units located in Massachusetts and used exclusively in the business, in lieu of all other deductions and credits including the deduction for depreciation. Without this provision, such expenditures would have to be capitalized and depreciated. The immediate deduction results in a deferral of tax or an interest-free loan. Origin: M.G.L. c. 63, $ 38H Estimate: $0.6

2.313	Seven-Year Amortization for Reforestation
	Taxpayers may elect to amortize reforestation costs for qualified timber property over a seven-year period. In the absence of this special provision, these costs would be capitalized and depreciated over a longer period or recovered when the timber is sold. The accelerated cost recovery results in a deferral of tax or an interest-free loan. Origin: IRC § 194 Estimate: N.A.

2.400	ADJUSTMENTS TO APPORTIONMENT FORMULA

2.401	Unequal Weighting of Sales, Payroll, and Property in the Apportionment Formula
	Corporations with a presence in Massachusetts and other states allocate income to the Commonwealth using a three-factor apportionment formula. A corporation’s sales, payroll, and property in Massachusetts are compared to those outside Massachusetts. Exporters benefit from an apportionment formula that weights sales more heavily than the other factors. Effective January 1, 1996, eligible defense corporations are allowed a formula that weights sales 100%. For other manufacturers, a 100% sales weight is phased-in over five years. All other corporations will continue to use a formula that weights sales 50%.Effective January 1, 1997 mutual fund corporations are allowed to attribute mutual fund sales to Massachusetts based on the domicile of shareholders in the mutual funds. Effective July 1, 1997, mutual fund corporations are allowed to apportion their income to Massachusetts based solely on the percentage of sales attributed to Massachusetts. Comment: In listing this item, it is assumed that a standard apportionment formula gives equal weight to sales, property and payroll. The estimate is of the impact of departing from this standard formula. Origin: M.G.L. c. 63, § 38 (c) Estimate: $217.5

2.500	EXCLUSIONS FROM PROPERTY COMPONENT

2.501	Nontaxation of Certain Energy Property
	Tangible property qualifying for the deduction for expenditures for alternative energy described in item 2.312 above is not subject to taxation under the tangible property measure of the corporate excise. Origin: M.G.L. c. 63, § 38H(f) Estimate: N.A.

2.502	Exemption for Property Subject to Local Taxation
	In computing the state corporate excise on tangible property, property subject to tax at the local level is exempt. Generally, the state taxes only the machinery of manufacturing corporations and exempts business real estate and tangible personal property. Comment: For purposes of estimating revenue loss from this tax expenditure the state's rate on property, $2.60 per $1,000, has been applied. It should be noted that the tax burden on property taxed at the state level under the corporate excise is less than a fifth of the average burden on property taxed locally. Origin: M.G.L. c. 63, § 30(7) Estimate: $92.0

2.600	CREDITS AGAINST TAX

2.601	Tax Credit for Building in a Poverty Area (UJIP)
	A corporation operating an eligible business in a poverty area may take a credit against the corporate excise equal to the excess of the relevant local property tax rate over the average statewide property tax rate, multiplied by the assessed value of the corporation's real estate, and divided by $1,000. Origin: M.G.L. c. 63, § 38E Estimate: $0.1

2.602	Investment Tax Credit
	Manufacturing corporations, research and development corporations and corporations engaged primarily in agriculture or commercial fishing are entitled to a credit against tax for investments in qualified tangible property. The amount of the credit is 3% of the cost or other basis of the property for federal income tax purposes. Total credits taken by a given corporation in a taxable year cannot exceed 50% of tax liability. Unused credits may be carried over to subsequent years. If property qualifying for the investment credit is disposed of or no longer in use, a corporation must repay in the year of disposition the portion of the credit allocable to the remaining useful life of the property. Comment: This estimate is "dynamic." That is, it includes estimates of increased economic activity and tax collections that result from this credit. Without these dynamic impacts, the tax expenditure would be $50 million. Origin: M.G.L. c. 63, § 31A Estimate: $31.0

2.603	Vanpool Credit
	A corporation may take a credit against excise due equal to 30% of the cost incurred during the taxable year for the purchase or lease of company shuttle vans used in the Commonwealth for employee transportation. Origin: M.G.L. c. 63, §§ 31D, 31E, and 31F Estimate: $ 1.5

2.604	Research Credit
	Corporations are entitled to a credit against tax for research and development expenditures. The amount of the credit is equal to the sum of 10% of qualified research expenses each year in excess of a base amount, and 15% of basic research payments, in excess of a base amount. The credit is limited to the first $25,000 of excise plus 75% of any excise in excess of $25,000. Unused credits may be carried over to subsequent years. Effective January 1, 1995, qualified defense corporations may calculate this credit separately for defense related research expenditures and non-defense related expenditures. Origin: M.G.L. c. 63, § 38M Estimate: $76.9

2.605	Economic Opportunity Area Credit
	Businesses investing in qualified property in an Economic Opportunity Area are entitled to a credit against tax of 5% of the cost of the property. To qualify for this credit, the property must be used exclusively in a certified project in an Economic Opportunity Area. To be certified, a project must be approved by the Economic Assistance Coordinating Council. Origin: M.G.L. c. 63, § 38N Estimate: $0.8

2.606	Credit for Employing Former Full-Employment Program Participants
	Employers who continue to employ former participants of the §110(1) full employment program in non-subsidized positions are eligible to receive a tax credit equal to $100 per month for each month of non-subsidized employment, up to a maximum of $1,200 per employee, per year. Origin: St. 1995, c. 5, § 110(m) Estimate: N.A.

2.607	Credit for Harbor Maintenance Taxes Paid
	Effective July 1, 1996, a credit against the corporate excise is provided for federal harbor maintenance taxes paid. Origin: M.G.L. c. 63, § 38P Estimate: $4.0

2.700	ENTITY EXEMPT FROM TAXATION

2.701	Exemption of Credit Union Income
	Credit unions, which are in effect mutual business organizations, are considered tax-exempt organizations for federal income tax purposes and therefore are exempt from the corporate excise as well. Comment: The estimate applies to state-chartered credit unions only. Origin: IRC § 501(c)(14)(A) and M.G.L. c. 63, § 30(1) Estimate: $4.2

2.702	Tax-Exempt Organizations
	Corporations considered to be tax-exempt under section 501 of the Internal Revenue Code (such as religious, scientific and educational organizations) are exempt from tax under the corporate excise. The nontaxation of their net income and property creates a tax expenditure. Origin: IRC § 501 and M.G.L. c. 63, § 30(1) Estimate: N.A.

2.703	Exemption for Regulated Investment Companies
	Corporate Regulated Investment Companies are exempt from the corporate excise. The nontaxation of their net income and property creates a tax expenditure. Origin: M.G.L. c. 63, §§ 30 and 38B Estimate: N.A.

KEY	ORIGIN	Federal Internal Revenue Code (26 U.S.C.)
	M.G.L.	Massachusetts General Laws
	U.S.C.	United States Code
	ESTIMATES
	All estimates are in $ millions.

Executive Office for Administration and Finance
Fiscal Affairs Division
State House, Room 272
Boston, MA 02133
(617) 727-2081

Last updated on January 21, 1998