In St. 1988, c. 106, § 1, the Massachusetts legislature redefined the word "Code" in G.L. c. 62, § 1(c), to refer to the Internal Revenue Code as amended on January 1, 1988, and in effect for the taxable year. Before this amendment, the provisions of General Laws Chapter 62 generally incorporated the Internal Revenue Code as amended on January 1, 1985, and in effect for the taxable year.

Because of this "Code update," many federal tax law changes that took effect for federal purposes after January 1, 1985, and that did not previously apply to those Massachusetts taxpayers subject to the personal income tax under General Laws Chapter 62, will now apply to these taxpayers for taxable years beginning on or after January 1, 1988. In particular, many significant tax law changes that were contained in the federal Tax Reform Act of 1986 (TRA 1986), P.L. 99-514, will now apply to Chapter 62 taxpayers.

Among many other changes, TRA 1986 amended the provisions of Code § 168, the Accelerated Cost Recovery System, in numerous significant respects, including applicable depreciation methods, applicable recovery periods, applicable conventions, classification of property, etc. Both for federal income tax purposes and for purposes of the Massachusetts corporate excise under General Laws Chapter 63, the TRA 1986 amendments apply to tangible property placed in service after December 31, 1986, in taxable years ending after that date, unless the taxpayer properly elects under Temp. U.S. Treas. Reg. § 5h.5 to have the amendments apply to property placed in service after July 31, 1986.

The shareholders of a Massachusetts S corporation are generally subject to tax under G.L. c. 62 on the shareholders' distributive shares of the S corporation's income, loss, or deduction. G.L. c. 62, § 17A(a). Unlike C corporations, which are generally subject to General Laws Chapter 63, S corporations are affected by the Chapter 62 Code update. A Massachusetts S corporation must compute a shareholder's distributive share of the Massachusetts S corporation's items of income, loss, or deduction under the applicable Code provisions in effect in Massachusetts for the S corporation's tax year.

This Technical Information Release (TIR) describes the changes in depreciation rules that Massachusetts S corporations must follow in taxable years beginning before and after the Chapter 62 Code update.[ 1] The TIR has three parts. The first part explains how a corporation which is a Massachusetts S corporation on December 31, 1986, computes the depreciation deduction for property acquired after December 31, 1986, and before January 1, 1988. The second part explains how a C corporation that becomes a Massachusetts S corporation after December 31, 1986, after it has acquired property subject to Code § 168, as amended by TRA 1986, must compute the depreciation deduction. The third part explains the basis adjustments that must be made to determine a Massachusetts S corporation shareholder's distributive share of Massachusetts gain or loss upon the disposition of property by the Massachusetts S corporation.

Depreciation Deductions for Massachusetts S Corporations After December 31, 1986

For taxable years beginning before January 1, 1988, a corporation or corporate trust which is a Massachusetts S corporation must compute the depreciation deduction for property placed in service after December 31, 1986 under the provisions the Code as amended on January 1, 1985 and in effect for the taxable year. The provisions of TRA 1986 do not apply for the purpose of calculating a Massachusetts S corporation shareholder's distributive share during that period.

For taxable years beginning on or after January 1, 1988, the Massachusetts deduction for depreciation for property placed in service after December 31, 1986, must be the federal deduction for that year for such property. Current Massachusetts personal income tax law does not provide for modifying the federal depreciation deduction allowed in determining Massachusetts adjusted gross income.

Depreciation Deductions for C Corporations Which Convert to S Corporation Treatment After December 31, 1986

For federal income tax purposes if, after December 31, 1986, a C corporation elects under Code § 1362 to become an S corporation, then the depreciation calculations under Code § 168 continue to be determined under the federal law in effect when the property was placed in service. The adjustments to basis are provided for under Code § 1011.

For Massachusetts income tax purposes if, after December 31, 1986, a corporation or corporate trust elects S corporation status for federal purposes and is a Massachusetts S corporation, and if, while it was a C corporation, it placed property in service which is subject to Code § 168, it must change its method of calculating the Massachusetts depreciation deduction as of the date of its conversion to an S corporation. For taxable years beginning on or after the date of conversion and before January 1, 1988, the depreciation deduction must be computed under the Code as amended on January 1, 1985. The amount of the deduction during that period will depend upon the type of property and the date the property was placed in service by the C corporation.

For taxable years beginning on or after January 1,1988, the Massachusetts depreciation deduction for property placed in service by such former C corporation after December 31, 1986, shall be the federal deduction for such property.

Basis Adjustments

Upon the disposition of property by a Massachusetts S corporation, the shareholder is subject to tax imposed by G.L. c. 62 on the shareholder's distributive share of the gain or loss as if the gain or loss were realized directly by the shareholder. The provisions of G.L. c. 62, § 6F determine the Massachusetts gain or loss computed by the Massachusetts S corporation upon its disposition of property. See Technical Information Release 88-7 for an explanation of G.L. c. 62, § 6F.

For the purposes of determining the basis of property under G.L. c. 62, § 6F(b), the property owned by a C corporation when it becomes a Massachusetts S corporation is treated as if it had been acquired on the date of conversion to Massachusetts S corporation status. There is no "transfer," as that term is used in G.L. c. 62, § 6F(b), requiring separate consideration of the basis of prior property.

The Massachusetts initial basis, for purposes of G.L. c. 62, § 6F(b)(2), is the federal basis, as adjusted on the date conversion to Massachusetts S corporation status, except that federal adjustments made under Code § 1015(d) are disregarded. The Massachusetts adjusted basis of property after the date of conversion to Massachusetts S corporation status is determined under G.L. c. 62, § 6F(c).

/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue


October 7, 1988

TIR 88-11

ENDNOTE:

1. In St. 1988, c. 202, §§ 6 and 16, the Massachusetts legislature amended G.L. c. 62, § 17A and G.L. c. 63, § 32D to provide that S corporations with total receipts of $6 million or more in taxable years ending on or after December 31, 1988, would be treated as either a C corporation under G.L. c. 63 or a corporate trust under G.L. c. 62. This TIR applies to S corporations qualified to be treated as Massachusetts S corporations in the applicable year. [ return to text]