Governor Charles D. Baker's Budget Recommendation - House 2 Fiscal Year 2017

Tax Expenditure Appendix A - Recent Law Changes Affecting Tax Expenditures


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 $1,070 (for tax year 2015). 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 $693,000 (for tax year 2015). For tax year 2015, an eligible taxpayer’s total income cannot exceed $57,000 in the case of a single filer who is not a head of household filer, $71,000 for a head of household filer, and $85,000 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 15-11 for more information.

Farming and Fisheries Personal Income Tax Credit (TE item 1.618): A new credit applies to personal income taxpayers who are primarily engaged in agriculture, farming or commercial fishing. G.L. c. 62, s. 6(s). The credit is 3% of the cost or other basis for federal income tax purposes of qualifying property acquired, constructed or erected during the tax year.  Qualifying property is defined as tangible personal property and other tangible property including buildings and structural components that are located in Massachusetts, used solely for farming, agriculture or fishing, and are depreciable with a useful life of at least four years. The credit applies to lessees calculated as follows: 3% of a lessor’s adjusted basis in qualifying property for federal income tax purposes at the beginning of the lease term, multiplied by a fraction, the numerator of which is the number of days of the tax year during which the lessee leases the qualifying property and the denominator of which is the number of days in the useful life of the property. Where the lessee is eligible for the credit, the lessor is generally not eligible, with the exception of “equine-based businesses where care and boarding of horses is a function of the agricultural activity.”

New Gambling Loss Deduction: For tax years beginning on or after January 1, 2015 a deduction is allowed from Part B income for gambling losses incurred at certain licensed gaming establishments or “racing meeting licensee or simulcasting licensee” establishments but only to the extent of winnings from such establishments included in gross income for the calendar year. See TIR 15-14 and Schedule Y, line 17 for more information.  The new gambling loss deduction is the only deduction for gambling losses allowed for a Massachusetts taxpayer, unless the gambling activities constitute a trade or business. See DD 03-3. Massachusetts does not adopt the federal deduction under IRC s. 165(d) for gambling losses.

Expansion of Economic Development Incentive Program (“EDIP”) Provisions to Include Certified Job Creation Project: For tax years beginning on or after January 1, 2015, The EDIP credit provisions were expanded to include “certified job creation projects” as defined in section 3A and 3F of chapter 23A. The amount of the credit awarded may be up to $1,000 per job created (up to $5,000 in a Gateway Municipality as defined in section 3A of chapter 23A or within a city or town whose average seasonally adjusted unemployment rate, as reported by the Executive Office of Labor and Workforce Development, is higher than the average seasonally adjusted unemployment rate of the Commonwealth). The total award per project may not exceed $1,000,000. The credit for a certified job creation project is allowed only for the year subsequent to that in which the jobs are created. See TIR 14-13.

Changes to the Certified Housing Development Tax Credit Cap: Effective January 1, 2015, the $5 million annual cap on the amount of credit that may be awarded for certain qualified rehabilitation expenditures with respect to a certified housing development project has been increased from $5 million to $10 million. The annual cap for the certified housing development tax credit is part of an over-all cap imposed on the Economic Development Incentive Program credit authorized pursuant to G.L. c. 62, 6(g). The annual cap will be reduced from $10 million back to $5 million effective January 1, 2019. See TIR 14-13.

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 2016, the IRS has calculated, based on inflation adjustments contained in the January 1, 2005 Code, the 2016 exclusion amounts for employer-provided parking and combined transit pass and commuter highway vehicle transportation benefits as $255 and $130 per month respectively.  Massachusetts adopts these 2016 tax year monthly exclusion amounts because they are based on the January 1, 2005 Code. For further discussion, see TIRs 15-16.

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:

Changes to the Research and Development Credit.: Sections 54 and 123 of the Act (St. 2014, c. 287) re-wrote G.L. c. 63, 38M. Effective for tax years beginning on or after January 1, 2015, a business corporation may elect to calculate its research credit using one of two methods. The first method revises the existing research credit by changing two definitions that affect the calculation of the credit, i.e., the definitions of "base amount" and "fixed base rate”.  The amount of the credit is equal to the sum of 10% of the excess, if any, of the qualified research expenses for the taxable year over the base amount plus 15% of the basic research expenses determined under I.R.C. s. 41(e)(1)(A). The second method, which a taxpayer may elect to use in lieu of the method described above, provides for an alternative simplified research credit, which generally conforms to the methodology of the federal alternative simplified credit provided by I.R.C. s. 41(c)(5), as amended and in effect on January 1, 2014. The Massachusetts alternative simplified credit, the second method, will be phased in over a seven year period. Refer to TIR 14-13 for details.

Deferral of FAS 109 Deduction: St. 2015, c. 46 (the Act) delays implementation of the corporate “FAS 109” deduction applicable to certain publicly held companies as part of a Massachusetts tax law change that, among other things, lowered the corporate tax rate in stages and adopted combined reporting for tax years beginning on or after January 1, 2009. In general, if the enactment of the combined reporting requirement for a unitary business resulted in an increase in the net deferred tax liability of certain combined groups for financial reporting purposes, such groups became eligible to claim a FAS 109 deduction. Under the Act implementation of the FAS 109 deduction will be delayed for five years (from 2016 to 2021) and the time over which a company can claim its overall deduction will be increased from seven to 30 years.

Changes to the Economic Development Incentive Program (EDIP) Annual Cap: Sections 56, 56A and 125 of the Act (St. 2014, c. 287) made the following changes to G.L. c. 63, s. 38N: The $25 million annual cap on the amount of credit that may be awarded was increased from $25 million to $30 million effective 1/1/2015. The $30 million annual cap on the amount of credit that may be awarded is scheduled to later decrease from $30 million to $25 million.  The decrease in the annual cap will take effect on 1/1/2019.

Expansion of Economic Development Incentive Program (“EDIP”) Provisions to Include Certified Job Creation Project: For tax years beginning on or after January 1, 2015, The EDIP credit provisions were expanded to include “certified job creation projects” as defined in section 3A and 3F of chapter 23A. The amount of the credit awarded may be up to $1,000 per job created (up to $5,000 in a Gateway Municipality as defined in section 3A of chapter 23A or within a city or town whose average seasonally adjusted unemployment rate, as reported by the Executive Office of Labor and Workforce Development, is higher than the average seasonally adjusted unemployment rate of the Commonwealth). The total award per project may not exceed $1,000,000. The credit for a certified job creation project is allowed only for the year subsequent to that in which the jobs are created. See TIR 14-13.

Changes to the Certified Housing Development Tax Credit Cap: Effective January 1, 2015, the $5 million annual cap on the amount of credit that may be awarded for certain qualified rehabilitation expenditures with respect to a certified housing development project has been increased from $5 million to $10 million. The annual cap for the certified housing development tax credit is part of an over-all cap imposed on the Economic Development Incentive Program credit authorized pursuant to G.L. c. 62, 6(g); G.L. c. 63, 38N. The annual cap will be reduced from $10 million back to $5 million effective January 1, 2019. See TIR 14-13.

As the part B personal income tax rate has been reduced, tax rates for S corporations have changed accordingly: See below.

Corporations
    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)
2011 0.26% 8.25% 1.97% 2.95%
2012 0.26% 8.00% 1.83% 2.75%
2013 0.26% 8.00% 1.83% 2.75%
2014 0.26% 8.00% 1.87% 2.80%
2015 0.26% 8.00% 1.90% 2.85%
2016 0.26% 8.00% 1.93% 2.90%
2017* 0.26% 8.00% 1.97% 2.95%
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 5.05% effective January 1, 2017. The tax rates for S corporations are therefore assumed to change accordingly.

 

Financial Institutions
    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)
2011 No 9.50% 2.80% 4.20%
2012 9.00% 2.50% 3.75%
2013 9.00% 2.50% 3.75%
2014 9.00% 2.53% 3.80%
2015 9.00% 2.57% 3.85%
2016 9.00% 2.60% 3.90%
2017* 9.00% 2.63% 3.95%
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 5.05% effective January 1, 2017. The tax rates for S corporations are therefore assumed to change accordingly.

 

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.

Chapter 369 of the Acts of 2012 legalized the sales of marijuana, products containing marijuana such as food, tinctures, aerosols, oils and ointments as well as related supplies or educational materials to qualifying patients or their personal caregivers in the Commonwealth by medical marijuana treatment centers. According to Directive 15-1 issued by the Department of Revenue, the sales tax exemption for medicine on prescription in G.L. c. 64H. s. 6(l) applies to sales of marijuana and products containing marijuana to a qualifying patient or the patient’s personal caregiver pursuant to a written certification by a licensed physician. Any other supplies, educational materials or other items sold by the medical marijuana treatment center are subject to tax unless another exemption applies.

The estimates for tax expenditure items for sales and use tax reflect these tax law changes.


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