January 6, 1981
You inquire whether Massachusetts has adopted the federal limitation on the deduction of interest on investment indebtedness.
Internal Revenue Code Section 163 permits a deduction of interest paid or accrued. Section 163(d) limits the deduction of interest incurred in the production of investment income. Investment income is defined as interest, dividends, rents, royalties, net short-term capital gain attributable to the disposition of property held for investment, and amounts treated as ordinary income under Code Sections 1245, 1250 and 1254, to the extent that such income, gain, and amounts are not derived from the conduct of a trade or business.
Massachusetts General Laws Chapter 62, Section 2(d) adopts most of the federal deductions allowable under Code Section 62. Code Section 62 permits the deduction of expenses which are attributable to trade, business, rents and royalties. These expenses include the interest expense in Code Section 163.
For Massachusetts income tax purposes there is no deduction for interest and other expenses which are incurred in the production of investment income other than rents and royalties. However, interest on business indebtedness is fully deductible. Interest attributable to rents and royalties is deductible against rent and royalty income for purposes of Massachusetts income tax to the extent that it is deductible federally. This deduction is already reflected in the net income figure entered on Massachusetts Form 1, Schedule E, Part II, Line 1 which is taken from the federal Schedule E, Line 9. Similarly, a partner's distributive share of partnership income entered on Form 1, Schedule E, Part III, Line 1 is also net of any permissible interest deductions.
Very truly yours,
/s/L. Joyce Hampers
L. Joyce Hampers
Commissioner of Revenue
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LR 81-6