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 certain deductions, most of which are allowable under the provisions of the Internal Revenue Code. Many of the 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 evenly over its useful life (so-called “straight-line depreciation”). However, rules that allow accelerated depreciation deductions are listed as tax expenditures.
Corporations with qualifying tangible assets in Massachusetts that equal or exceed 10% of their qualifying total assets in Massachusetts (apportioned according to their 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.
|Gross Receipts or Sales|
|Cost of Goods Sold|
|Federal Taxable Income|
|Income (Loss) Subject to Apportionment|
|Income Apportionment Percentage|
|Massachusetts Apportioned Income|
|Additional Massachusetts Deductions|
|Massachusetts Taxable Income||Taxable Massachusetts Tangible Property or Net Worth|
|Tax Rate (9.5% or respective S-corp rates)||Tax Rate of 0.26%|
|Income Excise||Non-Income Excise|
|Excise Tax Due|
|Amount of Investment Tax Credit Recapture|
|Total Corporation 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 the 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, but permit income to escape taxation permanently, do constitute tax expenditures.
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 one-dollar exclusion or deduction results in tax savings of only a few cents (one dollar times the applicable tax rate), one-dollar credit results in 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.