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Tax Expenditure Budget
EXCLUSIONS FROM GROSS INCOME
Small Business Corporations
In general, corporations organized under, or subject to, Chapters 156, 156A, 156B, 156C, 156D or 180 of Massachusetts General Laws (M.G.L.) or have privileges, powers, rights or immunities not possessed by individuals or partnerships are subject to corporate excise. Certain corporations with no more than 100 shareholders may elect to be taxed, for both federal and state tax purposes, as "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 shareholders (whether or not they are distributed as dividends) and are taxed at the individual shareholder level, generally at the applicable personal income tax rate (5.85% in tax year 2000, 5.6% in tax year 2001, 5.3% in tax years 2002 and thereafter). 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 in the form of dividends, which are generally taxable at the applicable personal income tax rate.
Origin: IRC S. 1361-1363 and M.G.L. c. 62, IRC S. 17A and c. 63, IRC S. 32D,
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 S. 30(5)(a)
DEFERRALS OF GROSS INCOME
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. S. 1177 and IRC S. 7518
DEDUCTIONS FROM GROSS INCOME
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 S. 170
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 S. 172 and M.G.L. c. 63, S. 30 (b) and (ii)
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 S. 613 and 613A
Deduction for Certain Dividends of Cooperatives
Farmers' cooperatives and certain corporations acting as cooperatives may deduct patronage dividends and other amounts from 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, the corporation cannot deduct dividends paid to shareholders.
Origin: IRC S. 1381-1388
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, S. 38O
ACCELERATED DEDUCTIONS FROM GROSS INCOME
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 S. 168
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 S. 167(k)
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 S. 190
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 S. 195
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 S. 168
Deduction for Excess First-Year Depreciation
Taxpayers may elect to expense certain business assets purchased during the taxable year. The total deduction cannot exceed $125,000; for taxpayers whose investment in eligible assets exceeds $500,000 in the year, the $125,000 ceiling is reduced by $1 for each dollar of investment above $500,000. 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 S. 179
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 S. 168
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 S. 174
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 S. 193, 263(c), 616 and 617
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, S. 243
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 S. 169
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, S. 38H
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 S. 194
ADJUSTMENTS TO APPORTIONMENT FORMULA
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.
Origin: M.G.L. c. 63, S. 38 (c)
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.
EXCLUSIONS FROM PROPERTY COMPONENT
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, S. 38H(f)
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.
Origin: M.G.L. c. 63, S. 30(7)
For purposes of estimating revenue loss from this tax expenditure, the state's rate on property, $2.60 per $1,000, has been applied.
CREDITS AGAINST TAX
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.
Origin: M.G.L. c. 63, S. 31A
To be consistent with all other estimates in this document, this estimate is based on actual investment tax credit claims of corporations from the most recent Corporate Excise Returns Report, and does not take into account increased tax revenues resulted from greater economic activity induced by the investment tax credit (i.e., the estimate is "static", not "dynamic").
Vanpool Credit (VPC)
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, S. 31D, 31E, and 31F
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, S. 38M
Economic Opportunity Area Credit (EOAC)
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 the 5% credit, the property must be used exclusively in a certified project in an Economic Opportunity Area. To be certified, the Economic Assistance Coordinating Council must approve a project.
Origin: M.G.L. c. 63, S. 38N
Credit for Employing Former Full-Employment Program Participants
Employers who continue to employ former participants of the S.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, S. 110(m)
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, S. 38P
Effective for tax years beginning on or after January 1, 1999, taxpayers are allowed a credit for amounts expended to rehabilitate contaminated property owned or leased for business purposes and located within an economically distressed area. The amount of the credit varies according to the extent of the environmental remedy. If the taxpayer's permanent solution or remedy operation status includes an activity and use limitation, then the amount of the credit is 25% of the net response and removal costs incurred by the taxpayer. However, if there is no activity and use limitation, then the amount of the credit is 50% of the net response and removal costs. Chapter 123 of the Acts of 2006, extended the availability of the Brownfields credit to a nonprofit organization, made the credit transferable, and lengthened the time frame for eligibility for the credit. Prior to the Act, net response and removal costs that the taxpayer incurred between August 1, 1998 and August 5, 2005 were eligible for the credit provided that the taxpayer commenced and diligently pursued an environmental response action before August 5, 2005. The Act changed this cut-off date from August 5, 2005 to August 5, 2011, and extends the time for incurring eligible costs that qualify for the credit to January 1, 2012.
Origin: M.G.L. c. 63, S. 38Q, St. 2006, c. 123, S. 49 and 63
Low Income Housing Credit
Effective January 1, 2001, a credit against the corporate excise is provided for low-income housing projects. The Department of Housing and Community Development allocates the low income housing credit from a pool of available credits granted under section 42 of the Internal Revenue Code among qualified low-income housing projects. A taxpayer allocated a federal low-income housing credit may also be eligible for a state credit based on the credit amount allocated to a low-income housing project that the taxpayer owns. The credits may be sold or transferred to another taxpayer.
Origin: M.G.L. c. 63, S. 31H
Historic Buildings Rehabilitation Credit
If a structure is listed on the National Historic Register and has been substantially rehabilitated in keeping with its historical character, it may qualify for this credit. To qualify, the project must be certified by the Massachusetts Historical Commission, which determines the amount of qualifying expenditures. The start date for the credit is January 1, 2005, with an end date of December 31, 2009. Filers may claim up to 20% of their qualified rehabilitation expenditures. Credits may be carried forward for up to 5 years. The expenditure for this item (combined with the Historic Rehabilitation Credit for individual filers, item 1.610) was originally capped at $15 million per year, with a start date for the credit of January 1, 2005 and an end date of December 31, 2009. Chapter 123 of the Acts of 2006 extended the availability of the credit for an additional two years, to December 31, 2011, and increased the annual $15 million cap amount to $50 million. The credits may be sold or transferred to another taxpayer. The Department of Revenue estimates that in fiscal year 2007, in addition to $8.7 million that was claimed by corporations, approximately $21.8 million in historic buildings rehabilitation credits were claimed by financial institutions and insurance companies, which are not included in this tax expenditure budget. The Department estimates that in each of the fiscal years 2008 and 2009 approximately $42.0 million in historic rehabilitation credits will be claimed by financial institutions and insurance companies in addition to the amount shown for corporations in this tax expenditure.
Origin: M.G.L. c. 63, S. 38R, St. 2006, c. 123, S. 51 and 65
Jobs Incentive Payment for Biotechnology and Medical Device Companies
A biotechnology or medical device manufacturing company that creates 10 or more eligible jobs in the commonwealth during a single calendar year shall be entitled to a jobs incentive payment if its weighted average employment for such year reflects a net increase of at least 10 jobs over the company's weighted average employment for the prior calendar year. The jobs incentive payment shall be equal to 50% multiplied by the applicable Massachusetts income tax rate for the salary paid to the persons who perform the newly created eligible jobs for the calendar year in question. Effective for tax years beginning on or after January 1, 2006, Chapter 123 of the Acts of 2006 expands the job incentive payment program to include marine science technology companies.
Origin: M.G.L. c. 62C, S. 67D, St. 2006, c. 123, S. 56, 57 and 58
Solar Heat Credit
Massachusetts allows a credit of up to $300 for the installation of a solar hot water heating system in a commercial building between November 1, 2005 and March 31, 2006.
Origin: M.G.L. c. 63, S. 38T. For further information, see TIR 05-18. St. 2005, c. 140, S. 9 amending M.G.L. c. 63 by inserting new section 38T
Home Energy Efficiency Credit
The owner of residential property located in Massachusetts was allowed a credit for certain energy efficient items purchased between November 1, 2005 and March 31, 2006 for installation in residential property. Qualifying purchases included home insulation, new window insulation, advanced programmable thermostats, solar hot water systems, fuel-efficient furnaces, boilers, oil, gas, propane or electric heating systems, certain weather sealing and other approved purchases.
Origin: For further information, see TIR 05-18 and "Act Relative to Heating Energy Assistance and Tax Relief", St. 2005, c. 140, signed into law on November 22, 2005; M.G.L. c. 63
Film (or Motion Picture) Credit
Corporations engaged in the making of a motion picture are allowed two credits:
Origin: See "An Act Providing Incentives to the Motion Picture Industry", St. 2005, c. 158, signed into law on November 23, 2005 and "An Act Providing Incentives to the Motion Picture Industry", St. 2007, c. 63; M.G.L. c. 63
Medical Device User Fee Credit
For taxable years beginning on or after January 1, 2006, the Medical Device Credit is equal to 100% of the user fees actually paid to the United States Food and Drug Administration (USFDA) by a medical device company during the taxable year for which the tax is due for pre-market submissions (e.g., applications, supplements, or 510(k) submissions) to market new technologies or upgrades, changes, or enhancements to existing technologies, developed or manufactured in Massachusetts.
Origin: M.G.L. c. 63, S. 31L, TIR 06-22, The Chapters 144 and 145 of the Acts of 2006
Devens Refundable Tax Credit
Effective July 21, 2006, the Economic Opportunity Area credit is made refundable for certain projects. Notwithstanding subsections (b) to (d), inclusive, of section 38N of chapter 63 of the General Laws, in the event that a credit allowed under said section 38N of said chapter 63 exceeds the tax otherwise due under said chapter 63, the balance of that credit shall be refundable to the taxpayer in the taxable year in which qualified property giving rise to that credit is placed in service. This applies to credits generated by projects in the biotechnology industry, certified on or after June 1, 2006 and before June 1, 2008. "Project" means the design, planning, permitting, site preparation, construction, development, and operation of infrastructure and other improvements, including demolition of existing structures and design and construction of necessary replacement structures on adjacent or proximate land, and upgrades to the existing electric and gas utility systems serving the Devens Regional Enterprise Zone, as established by chapter 498 of the acts of 1993, to support the operation of a large scale biologics pharmaceutical manufacturing facility, or reasonably required to facilitate complete development, construction, and operation of such a facility. (See item 2.605)
Origin: M.G.L. c. 63, S. 38N, The Chapter 173 of the Acts of 2006
ENTITY EXEMPT FROM TAXATION
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.
Origin: IRC S. 501(c)(14)(A) and M.G.L. c. 63, S. 30(1)
The estimate applies to state-chartered credit unions only.
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 non-taxation of their net income and property creates a tax expenditure.
Origin: IRC S. 501 and M.G.L. c. 63, S. 30(1)
Exemption for Regulated Investment Companies
Corporate Regulated Investment Companies are exempt from the corporate excise. The non-taxation of their net income and property creates tax expenditure.
Origin: M.G.L. c. 63, S. 30 and 38B
IRC Federal Internal Revenue Code (26 U.S.C.)
M.G.L. Massachusetts General Laws
U.S.C. United States Code
All estimates are in $ millions.
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