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Tax Expenditure Appendix A
Fiscal Year 2016 Tax Expenditure Budget
Appendix A – Recent Law Changes Affecting Tax Expenditures
The following tax expenditures have been revised or created due to recent law changes:
The Personal Income Tax:
Circuit Breaker Tax Credit Increased (TE item 1.609) A credit is allowed to an owner or renter of residential property located in Massachusetts equal to the amount by which the real estate tax payment or 25% of the rent constituting real estate tax payment exceeds 10% of the taxpayer’s total income, not to exceed $1,050. The amount of the credit is subject to limitations based on the taxpayer’s total income and the assessed value of the real estate, which must not exceed $691,000. For tax year 2014, an eligible taxpayer’s total income cannot exceed $56,000 in the case of a single filer who is not a head of household filer, $70,000 for a head of household filer, and $84,000 for joint filers. In order to qualify for the credit, a taxpayer must be age 65 or older and must occupy the property as his or her principal residence. See TIR 14-12 for more information.
Qualifying Small Business Stock; Three-Year Holding Period (TE item 1.501) Starting with tax year 2014, gains from the sale of qualifying small business stock in certain Massachusetts- based start-up corporations are taxed at a rate of 3% (instead of tax rate on regular capital gains). See G.L. c. 62, sec. 4(c). In order to qualify for the lower rate, investments must have been made within 5 years of the corporation’s date of incorporation and must be in stock that generally satisfies the definition of “qualified small business stock” under IRC sec. 1202(c), without regard to the requirement that the corporation be a C corporation. In addition, the stock must be held for 3 years or more and the investments must be in a corporation which:
- is domiciled in Massachusetts
- is incorporated on or after January 1, 2011, and
- has less than $50 million in assets at the time of investment, and
- complies with certain of the “active business requirements” of sec. 1202 of the Code, i.e., sec. 1202(e)(1), (e)(2), (e)(5), and (e)(6). As a result of the required holding period of “three years or more” for small business stock, tax year 2014 is the first year that the 3% rate is operative. For other requirements pertaining to gain from the sale of qualifying small business stock, see TIR 10-15.
Conservation Land Tax Credit (TE Item 1.615) Increase in an existing credit: The amount of the credit that may be claimed by a taxpayer for each qualified donation of certified land to a public or private conservation agency made on or after August 13, 2014 may not exceed $75,000 (increased from $50,000 for qualified donations made prior to August 13, 2014). For further guidance, see the Department’s regulation 830 CMR 62.6.4, Conservation Land Tax Credit, and the regulation issued by the Executive Office of Energy and Environmental Affairs, 301 CMR 14.00, also entitled Conservation Land Tax Credit.
Community Investment Tax Credit (Item 1.617) Effective for tax years beginning on or after January 1, 2014, a credit is allowed for qualified investments (certain cash contributions made to a community development corporation, community support organization, or a community partnership fund) made on or after January 1, 2014. The credit is equal to 50% of the total qualified investment made by the taxpayer for the taxable year. No credit is allowed to a taxpayer that makes a qualified investment of less than $1,000. In any one taxable year, the total amount of the credit that may be claimed by a taxpayer that makes qualified investments cannot exceed $1,000,000. The credit is refundable, or, alternatively, may be carried forward 5 years. The credit is set to expire December 31, 2019. See the Department’s regulation 830 CMR 62.6M.1, Community Investment Tax Credit and the regulation issued by the Department of Housing and Community Development, 760 CMR 68.00, Community Investment Grant and Tax Credit Program, for further guidance.
Current Code Provisions As a general rule, Massachusetts will not adopt any federal tax law changes incorporated into the Internal Revenue Code (“Code”) after January 1, 2005. However, certain specific provisions of the personal income tax automatically adopt the current Code. Provisions of the Code adopted on a current Code basis are (i) Roth IRAs, (ii) IRAs, (iii) the exclusion for gain on the sale of a principal residence, (iv) trade or business expenses, (v) travel expenses, (vi) meals and entertainment expenses, (vii) the maximum deferral amount of government employees’ deferred compensation plans, (viii) the deduction for health insurance costs of self-employed, (ix) medical and dental expenses, (x) annuities, (xi) health savings accounts, and (xii) employer-provided health insurance coverage and amounts received by an employee under a health and accident plan. See TIRs 98-8, 02-11, 07-4, and 09-21 for further details on the Massachusetts personal income tax current Code provisions.
Parking, Combined Commuter Highway Vehicle Transportation and T-Pass Fringe Benefit – IRC sec. 132(f) (TE Item 1.030) Massachusetts follows IRC sec. 132(f) as amended and in effect under the January 1, 2005 Code. For tax year 2014 and 2015, the IRS has calculated, based on inflation adjustments contained in the January 1, 2005 Code, the 2014 and 2015 exclusion amounts for employer-provided parking and combined transit pass and commuter highway vehicle transportation benefits as $250 and $130 per month respectively. Massachusetts adopts these 2014 and 2015 tax year monthly exclusion amounts because they are based on the January 1, 2005 Code. For further discussion, see TIRs 14-2 and 14-15.
IRC Sec. 179 Election to Expense Certain Depreciable Business Assets (TE Item 1.305) As it is a trade or business deduction, IRC sec. 179 is adopted by Massachusetts on a current Code basis. Absent further federal legislation, the maximum IRC sec. 179 deduction is $25,000 for property placed in service in tax years beginning after 2013.
Federal Deduction — Not Allowed Federal “Bonus” Depreciation — IRC sec. 168(k) Under 2002 legislation, Massachusetts decoupled from bonus depreciation allowed under IRC sec. 168(k), as amended and in effect for the current year. Therefore, Massachusetts does not adopt this additional depreciation deduction. See TIRs 02-11 and 03-25 for further details.
Federal Deduction — Not Allowed Domestic Production Activity Deduction — IRC sec. 199 For federal income tax purposes, a business entity that pays wages to employees and conducts eligible domestic production activities is allowed a deduction for domestic production activities under IRC sec. 199. Generally, in the case of a non-corporate taxpayer, the deduction allows a business with qualified production activities to deduct 9% of its U.S. adjusted gross income. Under 2004 legislation, Massachusetts de-coupled from the production activity deduction allowed under IRC sec. 199, as amended and in effect for the current year. Therefore, Massachusetts does not adopt the federal domestic production activity deduction. See TIR 05-5.
The Corporate and Other Business Excise:
Market based sourcing. The most significant change for tax years beginning on or after January 1, 2014 is that in determining the sales factor of the corporate apportionment formula sales other than sales of tangible personal property are in Massachusetts if the corporation’s market for the sale is in the Commonwealth. A corporation’s market for the sale of a service is in Massachusetts if and to the extent the service is delivered to a location in Massachusetts. The rule governs the sale and license of intangible property, and applies to several other types of transactions.
This change is the result of a statutory change, at G.L. c. 63, § 38. The Department has re-promulgated the Apportionment of Income regulation, 830 CMR 63.38.1 (in particular section (9)(d) of the regulation), with specific rules for implementing these statutory changes.
Technical and Conforming Changes to G.L. c. 62C, Tax Administration, applicable to Corporations subject to Combined Reporting. There are several statutory technical corrections that have been enacted with respect to corporations that are required to file corporate excise returns as members of a combined group. The amendments make clear that the Department may treat the principal reporting corporation as the agent of the members and all corporations included in the return of a combined group for all aspects of the individual group members’ corporate excise liability, including the income measure, the non-income measure, and the minimum excise, as applicable to each taxpayer. The principal reporting corporation is the agent with respect to all notices, waivers and other actions authorized or required. However, the Department is not precluded from taking separate procedural actions or directing notices to any individual member(s) of the combined group that file or are required to file a combined report. By contrast, a combined report does not constitute a filing of a return for any business corporation that is part of a combined report but also files or is required to file its own return. The amendments can be found in St. 2014, c. 165, §§ 96 – 104. See also TIR 14-11.
Utility corporations. The public utility excise, formerly G.L. c. 63, sec. 52A, has been repealed, and corporations that were formerly subject to that excise now file under the general corporate excise provisions of G.L. c. 63. Because utility corporations were not allowed to carry forward net operating losses (NOL) under G.L. c. 63, § 52, such corporations cannot deduct any NOL for tax years beginning before January 1, 2014. However, a former utility corporation that becomes taxable as a business corporation under G.L. c. 63, § 39 will be allowed to carry forward a post-2013 NOL that it has incurred, subject to applicable limitations on business corporation loss carryovers.
Extension of Brownfields Credit (TE Item 2.608). The Brownfields Credit, previously scheduled to expire on August 5, 2013, is extended for five additional years. To qualify for a Brownfields Credit, the taxpayer must “commence and diligently pursue” the relevant environmental response action(s) on or before August 5, 2018. The net response and removal costs must be incurred between August 1, 1998 and January 1, 2019.
Community Investment Tax Credit (TE Item 2.621). A Community Investment Tax Credit is allowed for tax years beginning on or after January 1, 2014 for qualified investments (certain cash contributions made to a community development corporation, community support organization, or a community partnership fund) made on or after January 1, 2014. The Community Investment Tax Credit is equal to 50% of the total qualified investment made by the taxpayer for the taxable year. No credit is allowed to a taxpayer that makes a qualified investment of less than $1,000. In any one taxable year, the total amount of the credit that may be claimed by a taxpayer that makes qualified investments cannot exceed $1,000,000. The credit is refundable, or, alternatively, may be carried forward 5 years. The credit is set to expire December 31, 2019.
As the part B personal income tax rate has been reduced, tax rates for S corporations are changed accordingly. See below.
|Income Measure Tax|
|Tax Year||Non-income Measure Tax||Rate on C Corps' income and S Corps' Qualified and Passive Income||S Corp. Rate (Gross Sales $6M-$9M)||S Corp. Rate (Gross Sales > $9M)|
|S Corporations:||Rate is equal to:|
|Large S Corp (Gross Sales > $9M)||C Corp rate minus Part B individual income tax rate|
|Medium S Corp ($6M < Gross Sales < $9M)||2/3 of Large S Corp rate|
|Small S Corp (Gross Sales < $6M)||0%|
|* Based on tax
revenue growth projection, the part B personal
income tax rate is assumed to further decline to
5.10% effective January 1, 2016. The tax rates for
S corporations are therefore assumed to change
The Sales and Use Tax:
In June 2009 legislation was enacted that amended G.L. c. 64H (sales tax) and G.L. c. 64I (use tax), changing the rate of tax for sales and use of tangible personal property and telecommunications services from 5% to 6.25%. See Stat. 2009, c. 27, sections 53, 55-57, 59. In addition, the new legislation repealed the exemption for alcoholic beverages, including beer, wine, and liquor, sold at retail by amending G.L. c. 64H, s. 6(g) to omit reference to c. 138. These changes were effective on and after August 1, 2009. See TIR 09-11 for further details.
As the result of a referendum question on the November 2, 2010 ballot, the law extending the Massachusetts sales and use tax to alcoholic beverages sold at package stores and liquor stores for off-premises consumption, which was enacted on August 1, 2009, has been repealed, effective for sales on or after January 1, 2011. See TIR 10-24 for further details.
Effective July 1, 2011, physician-prescribed, medically necessary breast pumps are exempt from sales and use tax. See St. 2011, c. 68, s. 72.
In July 2012 legislation was enacted stating explicitly that “sales that do not involve tangible personal property shall not result in tax expenditures”. See St 2012, c.165, s.112. Pursuant to this legislation, from fiscal year 2014 on, we remove some items from our tax expenditure estimates, which we regularly reported in prior years. But to facilitate comparison to tax expenditure estimates in prior years, these items (3.203, 3.422, 3.501, 3.502, 3.503 and 3.504) have been listed in appendix D.
On September 27, 2013, the Governor signed a bill that repealed the expansion of the sales tax on computer software and systems design services that had been enacted by the Legislature on July 24, 2013, retroactive to its effective date, July 31, 2013.
Section 66 of St. 2014, c. 287 added subsection (d) to G.L. c. 63, s. 42B. Effective August 13, 2014, solely for the purpose of claiming the sales tax exemption available to research and development corporations under chapters 64H and 64I, sections 6(r) and 6(s), this change allows a limited partnership that is not a business corporation, but that would otherwise qualify as a research and development corporation under s. 42B, to be considered a research and development corporation when all partners are corporations. See also TIR 14-13.
The estimates for tax expenditure items for sales and use tax reflect these tax law changes.
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