Massachusetts relies on the Internal Revenue Code ("the Code") as amended on January 1, 1988 and in effect for the taxable year ("the 1988 Code"), in determining Massachusetts gross income, see G.L. c. 62, § 2(a), the availability of dependency exemptions, see G.L. c. 62, § 3(B)(b)(3), and the deduction for child care expenses, see G.L. c. 62, § 3(B)(a)(7). Since January 1, 1988, Code provisions have changed regarding the exclusion from federal gross income of certain employer-provided benefits, the availability of exemptions for student dependents, the availability of the child care credit, and accounting for long-term contracts. This Technical Information Release (TIR) discusses these Code changes and their effect on the Massachusetts personal income tax. The TIR applies only to the tax imposed by General Laws Chapter 62.

1. Employer-Provided Educational Assistance and Legal Services.

The current Code allows employees to exclude from federal gross income amounts received from employers under employer-provided educational assistance and legal services programs. I.R.C. §§ 127, 120. When Massachusetts adopted the 1988 Code, the Code provisions affording these exclusions had expired for taxable years beginning after December 31, 1987, in the case of educational assistance, and for taxable years ending after December 31, 1987, in the case of legal services. See I.R.C. §§ 127(d), 120(e) (as amended on January 1, 1988). After Massachusetts adopted the 1988 Code, the U.S. Congress twice retroactively extended the expiration dates for the educational assistance and legal services exclusions. See I.R.C. §§ 127(d), as amended by P.L. 101-239, § 7101(a) (1989) and P.L. 100-647, § 4001(a) (1988); I.R.C. § 120(e), as amended by P.L. 101-239, § 7102(b) (1989) and P.L. 100-647, § 4002(a) (1988). The exclusions are now in effect for federal purposes for taxable years beginning before September 30, 1990. I.R.C. §§ 127(d), 120(e).

Because the Code provisions affording the exclusions for educational assistance and legal services had expired under the Code as it existed on January 1, 1988, these exclusions are not available for Massachusetts purposes. Thus, amounts employees receive from their employers under employer-provided educational assistance and legal services programs must be included in Massachusetts gross income under General Laws Chapter 62, § (2)(a).

2. Student Dependents.

For taxable years beginning after December 31, 1988, the current Code imposes new age restrictions on the availability of the dependency exemption for children who are students. Taxpayers can no longer claim a dependency exemption for students who are twenty-four years of age or older at the end of the calendar year in which the taxpayer's taxable year begins, unless the student earns less income for the calendar year than the amount of the federal exemption. See I.R.C. § 151(c)(1), as amended by P.L. 100-647, § 6010(a) (1988).
In determining the availability of the dependency exemption, Massachusetts follows the Code as it existed before the new age restriction was imposed. See G.L. c. 62, §§ 1(c), 3(b)(3). Thus, for Massachusetts purposes, taxpayers may claim an exemption for student dependents without regard to the student's age, if the student otherwise qualifies for the exemption.

3. Child Care Expenses.

New Code provisions enacted in 1988 limit the federal child care credit to child care expenses paid for dependent children under the age of thirteen, and reduce the amount of the credit for taxpayers who receive employer-provided child care benefits that are excluded from federal gross income. See I.R.C. § 21, as amended by P.L. 100-485, § 703(a),(b) (1988). The credit is no longer available for thirteen and fourteen year old dependents and the amount of qualifying expenses upon which the credit is based now must be reduced by the amount of employer-provided child care benefits excluded from the taxpayer's federal gross income.

Massachusetts bases its child care expense deduction on the amount of qualifying expenses used to compute the federal child care credit under Code Section 21 as it existed on January 1, 1988. See G.L. c. 62, §§ 1(c), 3(B)(a)(7). Thus, for Massachusetts purposes taxpayers may claim the child care expense deduction for dependents fourteen years of age or under and need not reduce the amount of the deduction by the amount of employer-provided child care benefits excluded from Massachusetts gross income.

4. Long-Term Contracts.

Under new Code provisions enacted in 1989, taxpayers must account for most long-term contracts entered into on or after July 11, 1989, by using the percentage completion method of accounting. I.R.C. § 460(a), as amended by P.L. 101-239, § 7621(a) (1989). The completed contract method is no longer available for federal purposes for most long-term contracts entered into on or after July 11, 1989. Id.

The new Code provisions change the required method of accounting for income from long-term contracts and the timing of the recognition of such income. However, the new Code provisions do not change the substantive law regarding the taxation of income from long-term contracts.

The Department of Revenue has adopted the accounting rules contained in the new Code provisions under I.R.C. § 460(a). Thus, taxpayers must account for long-term contracts entered into on or after July 11, 1989, for Massachusetts purposes in the same manner as they do for federal purposes.

Stephen W. Kidder
Commissioner of Revenue

TIR 90-4

April 11, 1990