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Corporate Excise Tax Description
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 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In 1962, the corporate excess measure was repealed.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 7.4% of total Department of Revenue tax collections for Fiscal Year 2010. The tax ranked third in Fiscal Year 2010 in terms of total taxes collected, after the individual income tax and the sales and use tax.
Corporate Excise: Basic Structure
Tax Base: Since January 1, 2009, Massachusetts has required certain corporations to be engaged in a unitary business to calculate their income on a combined basis. A corporation is subject to this requirement if it is subject to a tax on its income under Massachusetts General Law (M.G.L). c. 63, § 2, 2B, 32D, 39 or 52A and it is engaged in a unitary business with one or more other corporations under common control, whether or not the other corporations are taxable in Massachusetts. Generally, corporations doing business in Massachusetts are subject to a tax based on net income and on either tangible property or net worth. These two measures of tax constitute the corporate excise. Here, the combined reporting does not apply to the non-income measure of corporate excise.
The income measure of the tax is based on net 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: Since January 2010, the rates have been scheduled to decline for corporate and business taxpayers (see Appendix A for further details). The minimum tax remains unchanged as $456. Corporate tax expenditure items take into account of these tax rate changes. The current (TY2011) excise rate on C-corporations is 8.25% 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 excise rate on S-corporations is 2.95% for the companies with the range of gross sales greater than $9M, and 1.97% for the companies with the range of gross sales between $6M and $9M, and the tax on tangible property is the same as for C-corporations.
Taxable Period and Net Operating Loss Carryforward: The taxable period for corporations is either calendar year or fiscal year. Estimated payments are made every three months during the taxable period. Federal accounting periods and methods also have been adopted for our estimation. Net operating loss carry-forwards are allowed for future deductions. Before January 2010, qualifying losses may have been carried forward up to five years. However, since then, there has been a statutory expansion of the general NOL carry-forward period from 5 to 20 years for business corporations. Refer to Appendix A for details.
Interstate and International Aspects: All domestic corporations with a nexus in Massachusetts are subject to the corporate excise tax by the reason and privilege 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 tax. Corporations are required to apportion their net incomes if they have incomes 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, alternative methods of accounting to reflect more fairly a taxpayer's income from business operations in Massachusetts.
|Individual Corporation Level:|
|Gross Receipts or Sales|
|Cost of Goods Sold|
|Federal Net Income|
|Is the corporation a part of a combined group?|
|Federal Net Incomes of unitary businesses||Individual Corporation Level:|
|Massachusetts Modifications applicable to combined group income||Massachusetts Modifications|
|Net Operating Loss Subject to Apportionment||Income that is not part of Combined Reporting|
|Income Apportionment Percentage||Net Operating Loss|
|Massachusetts Apportioned Income (A)||Net Income (B)|
|Combine (A) and (B). Either may be zero.||Individual Corporation Level:|
|Individual Corporation Level:||Taxable Massachusetts Tangible Property or Net Worth|
|Tax Rate (Applicable corp. S-corp rates) *||Tax Rate of 0.26%|
|Income Excise||Non-Income Excise|
|Amount of Investment Tax Credit Recapture|
|Excise Tax Due|
|Total Corporation Excise|
|* See Appendix A for further details|
Types of Tax Expenditures under the Corporate Excise
As with the personal income tax, the basic structure of the corporate excise tax 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 the calculation of corporate excise. When the standard formula is adjusted to reduce the apportionment ratios for certain businesses, tax expenditures result. The practical effect is to exclude certain portions of those business incomes from taxation.
Exclusions from Property Component: In addition to the excise based on income, corporations pay the excise tax 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 has computed its basic tax liability, 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 entities may be completely exempt from taxation. To the extent businesses or investment incomes go untaxed, tax expenditures result.
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