For property placed in service after December 31, 1985, I.R.C. § 49(a) repeals the federal investment tax credit, with some exceptions. Furthermore, in those instances where a federal credit is still available, I.R.C. § 49(d) now requires a basis reduction of 100% of the federal credit determined under section 46(a), as compared to the 50% reduction formerly required under section 48(q)(1). Also, section 49(d)(1)(B) eliminates the election of a lower federal credit in lieu of reducing the basis of the property, as previously allowed under section 48(q)(4). These federal changes will affect the computation of the Massachusetts investment tax credit available under G.L. c. 63, § 31A.
Section 31A(a) allows manufacturing corporations, research and development corporations and corporations engaged primarily in agriculture or commercial fishing a credit for acquiring, constructing, reconstructing or erecting qualified tangible property. For taxable years ending on or after December 31, 1985, the credit is 1% of a base amount which is the cost or other basis of the property for federal income tax purposes reduced by the amount of any federal credit taken with respect to the property.
As a result of the federal changes, in the limited situations where both the federal and the Massachusetts credits are available for the same property, a corporation begins the computation under section 31A(a) using its federal adjusted basis in the property. This basis equals the cost or other federal basis of the property reduced by 100% of the federal credit allowed. I.R.C. § 49(d). Next, to arrive at the base amount upon which the state credit is computed, section 31A(a) requires that the federal basis be further reduced by the amount of any federal credit taken with respect to the property. The result is that 200% of the federal credit is deducted from the cost or other federal basis of the property before calculating the 1% Massachusetts credit.
Federal credit carryovers are "taken with respect to the property," as that phrase is used in section 31A(a), in the year in which the federal credit is determined under I.R.C. § 46(a), without regard to the fact that the federal credit may be carried over to another tax year. This means that, in computing the Massachusetts credit, the amount of federal credit deducted will include any federal credit on the property that is carried to another year.
In situation where no federal credit is available, there will be no federal basis reduction required by I.R.C. § 49(d), and likewise, no further reduction under Massachusetts section 31A(a). In this event, the base amount upon which the Massachusetts credit is computed is the cost or other federal basis of the property.
The following examples illustrate the effect of the federal changes on the computation of the Massachusetts investment tax credit. It is assumed in these examples that no adjustments to the basis of the qualifying property have been made other than those required by the investment tax credit rules. In the first example, the corporation is entitled to a 10% federal credit. The same principles will apply, however, where a corporation is eligible only for a reduced federal credit under the transition rules of I.R.C. § 49(c). The examples do not take into account the special federal rules for qualified timber property under I.R.C. § 49(c)(5)(B)(ii) & (d)(1).
Example 1: Corporation X, a manufacturing corporation, purchases for $100,000 tangible property which qualifies for both the federal and Massachusetts investment tax credits. Corporation X takes a federal credit of $10,000, which reduces its federal basis in the property to $90,000. ($100,000 - $10,000 = $90,000.) To arrive at the base amount upon which the Massachusetts credit is computed, Corporation X further reduces the federal basis by the amount of the federal tax credit taken. Thus, the base amount is $80,000. ($90,000 - $10,000 = $80,000.) Corporation X's Massachusetts investment tax credit is $800. ($80,000 x 1% = $800.)
Example 2: Corporation Y, a manufacturing corporation, purchases for $100,000 tangible property which qualifies for the Massachusetts investment tax credit, but not for the federal credit. Corporation Y's federal basis in the property is $100,000. Its base amount for computing the Massachusetts credit is $100,000. Corporation Y's Massachusetts tax credit is $1,000. ($100,000 x 1% = $1,000.)
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue
April 13, 1987