As a general rule, in determining Massachusetts gross income for purposes of the Massachusetts personal income tax, Massachusetts will not adopt any federal tax law changes incorporated into the Internal Revenue Code (“Code” or “IRC”) after January 1, 2005, as Massachusetts personal income tax laws generally conform to the provisions of the Code as amended on January 1, 2005 and in effect for the taxable year. However, certain specific Massachusetts personal income tax provisions, as set forth in G.L. c. 62, § 1(c), automatically conform to the current Code.
Pursuant to the Tax Increase Prevention Act of 2014 (P.L. 113-295), also known as the Extender Act, (“Act”), the federal government extended for one year certain Code provisions that had expired either at the end of 2013 or during 2014. The Act was enacted on December 19, 2014, after the publication of the Instructions to the Massachusetts 2014 Form 1 and Form 1-NR/PY. This Notice updates these instructions, in particular the Major 2014 Tax Changes section of those instructions, and discusses those provisions of the Act that Massachusetts adopts on a current Code basis, has decoupled from, or does not adopt.
Employer-Provided Parking, Transit Pass, and Commuter Highway Vehicle Benefits - IRC § 132(f) - Adopted in Part
Massachusetts adopts IRC § 132(f) as amended and in effect on January 1, 2005, which excludes from an employee’s gross income (subject to a monthly maximum) employer-provided parking, transit pass, and commuter highway vehicle transportation benefits. For tax year 2014, the Internal Revenue Service has calculated, based on inflation adjustments contained in IRC § 132(f), as set forth in the January 1, 2005 Code, the 2014 exclusion amounts for employer-provided parking ($250 per month) and for combined transit pass and commuter highway vehicle transportation benefits ($130 per month). Massachusetts adopts these 2014 tax year monthly exclusion amounts as they are based on the January 1, 2005 Code.
Massachusetts does not adopt the federal amendments to IRC §132(f) enacted after January 1, 2005 that increased the federal monthly exclusion amount for the combined transit pass and commuter highway vehicle transportation benefits to equal the exclusion amount for the employer-provided parking benefit. Also, Massachusetts does not adopt the Act’s extension to December 31, 2014 of the most recent increase in the federal monthly exclusion amount for the combined transit pass and commuter highway vehicle transportation benefits. Massachusetts has not adopted any of the amendments described in this paragraph as they were enacted after January 1, 2005.
IRC § 179 Election to Expense Certain Depreciable Business Assets - Adopted
Under IRC § 179, a taxpayer may elect to treat the cost of certain types of depreciable business property (i.e., tangible depreciable business assets acquired by purchase for use in the active conduct of a trade or business and certain qualified real property) as an expense rather than a capital expenditure, and deduct it in the year the property is placed in service, instead of depreciating it over several years. Under the Act, effective for tax years beginning after December 31, 2013 and before January 1, 2015, the dollar limitation for an election under IRC § 179 to expense property in its initial year is $500,000, and the overall investment phase-out threshold is $2,000,000. Massachusetts adopts these changes because, as a trade or business deduction under G.L. c. 62, § 1(c), IRC § 179 is adopted by Massachusetts on a current Code basis.
Qualified Charitable Distribution From an Individual Retirement Account (“IRA”) -IRC § 408(d)(8) - Adopted
The federal exclusion under IRC § 408(d)(8) that allowed taxpayers age 701⁄2 or greater to make tax-free distributions from traditional and Roth IRAs to qualified charities not to exceed $100,000 per tax year has been extended by the Act to tax year 2014. Massachusetts adopts the exclusion, as IRC § 408(d)(8) is adopted by Massachusetts on a current Code basis.
Cancellation of Indebtedness on Principal Residence - IRC § 108(a)(1) (E) - Federal Exclusion - Not Adopted
For federal tax purposes, the exclusion from gross income for qualified principal residence indebtedness that is discharged has been extended until December 31, 2014, under the Act. Massachusetts does not adopt the extension of the IRC § 108(a)(1)(E) exclusion under the Act because IRC § 108(a)(1)(E) was enacted after January 1, 2005.
Federal Bonus Depreciation Deduction - IRC § 168(k) – Decoupled From
Under the Act, the 50% bonus depreciation deduction allowed under IRC § 168(k) was extended to eligible property acquired and placed in service before January 1, 2015 (January 1, 2016 for certain property with a longer production period). Under 2002 legislation, Massachusetts decoupled from bonus depreciation allowed under IRC § 168(k), as amended and in effect for the current taxable year. Therefore, Massachusetts does not adopt the extension of the federal bonus depreciation deduction pursuant to the Act.
Domestic Production Activity Deduction - IRC § 199 – Decoupled From
For federal income tax purposes, under IRC § 199, a business entity that pays wages to employees and conducts qualified production activities is allowed a deduction for domestic production activities. 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 decoupled from the domestic production activity deduction allowed under IRC § 199, as amended and in effect for the current taxable year. Therefore, Massachusetts does not adopt the federal domestic production activity deduction, nor does it adopt the Act’s extension of the IRC § 199 deduction allowable for income attributable to domestic production activities in Puerto Rico through December 31, 2014.