This Technical Information Release ("TIR") announces that for Massachusetts corporate excise and personal income tax purposes, the new federal depreciation allowance under Section 101 of the Job Creation and Worker Assistance Act of 2002, P.L. 107-147 (the "Federal Act"), is not adopted.

I. Federal Depreciation Allowance under Code s. 168(k)

The Federal Act provides for a special depreciation allowance for certain property placed into service during the three-year period beginning September 11, 2001 and ending September 11, 2004. Specifically, the Federal Act allows an additional first-year depreciation deduction equal to 30% of the adjusted basis of the qualified property. These new "bonus" depreciation rules are contained in a new subsection (k) to Internal Revenue Code ("Code") section 168.

II. Massachusetts Adoption of the Internal Revenue Code

For corporate excise purposes, Massachusetts follows the provisions of the Code, as amended and in effect for the current year. G.L. c. 63, ss. 1, 30, 52A. For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 1998, with certain exceptions. For purposes of trade or business expense deductions, Massachusetts follows the provisions of the Code, as amended and in effect for the current year. G.L. c. 62, s. 1(c). (1)

III. Massachusetts Depreciation Rules for Tax Year 2001 and After

Massachusetts law was recently amended, on April 17, 2002, to decouple it from the adoption of Code section 168(k) for purposes of depreciation. Chapter 96 of the Acts of 2002, An Act Providing Equitable Tax Deductions For The Depreciation Of Certain Assets (the "Massachusetts Act"), provides that for corporate excise purposes, the definition of net income shall not include the new federal depreciation allowance available under Code s. 168(k). St. 2002, c. 96, ss. 4-6. (2) The Massachusetts Act
provides that for personal income tax purposes, Massachusetts Part B adjusted gross income also shall not include the new federal depreciation allowance. St. 2002, c. 96, s. 2. (3) These changes to both the corporate excise and the personal income tax are effective retroactively for taxable years ending after September 10, 2001. St. 2002, c. 96, s. 8.

IV. Return Filing Requirements

For Massachusetts purposes, for taxable years ending after September 10, 2001, depreciation is to be claimed on all assets, regardless of when they are placed in service, using the method used for federal income tax purposes prior to the enactment of Code s. 168(k).

A. Massachusetts Returns for 2001

1. Returns Filed

Taxpayers who filed a 2001 Massachusetts tax return and paid all taxes due with their return, taking advantage of the provisions under Code s. 168(k), are required to file an amended Massachusetts tax return, using Form CA-6, Application for Abatement/Amended Return, correcting their depreciation calculation. Form CA-6 is available on the Department's website at www.mass.gov/dor or by calling the Department's Customer Service Bureau at (617) 887-MDOR(6367).

Taxpayers should write "DEPRECIATION RECALCULATION" on the return envelope and on the top of Form CA-6 that they submit to the Department of Revenue. As a result of this recalculation, an additional tax payment may be required. This additional tax payment may trigger underpayment of estimated tax penalties under G.L. c. 62B, s. 14 or G.L. c. 63B, s. 3. However, as authorized by the Massachusetts Act, the Department will waive interest and penalties relating to this depreciation recalculation
for up to 180 days after the due date of the original return, regardless of any extension. See St. 2002, c. 96, s. 9. If taxpayers are required to submit either Form M-2210, Underpayment of Estimated Income Tax, or Form M-2220, Underpayment of Estimated Tax by Corporations, they should write "DEPRECIATION RECALCULATION" on the top of the form, as well as write "WAIVER" in the appropriate box(es) in line 13.

2. Returns Filed With Extension Applications

Taxpayers who timely filed an application for an extension of time to file their 2001 Massachusetts tax return, calculating their tax liability based on the provisions under Code s. 168(k), must submit their final return by the extension due date calculating their tax liability without regard to the provisions of Code s. 168(k). If the final return indicates that the taxpayer did not pay 80% of the total tax liability with his or her extension application, the taxpayer will not incur interest or late payment penalties, (4) or underpayment of estimated tax penalties associated with any additional payment due to the extent that the additional required payment results from their depreciation recalculation. Taxpayers should write "DEPRECIATION RECALCULATION" on the return envelope and on the top of the return that they submit to the Department of Revenue. If taxpayers are required to submit either Form M-2210, Underpayment of Estimated Income Tax, or Form M-2220, Underpayment of Estimated Tax by Corporations, they should write "DEPRECIATION RECALCULATION" on the top of the form, as well as write "WAIVER" in the appropriate box(es) in line 13.

B. Estimated Tax Payments for 2002

Taxpayers who timely filed and paid estimated tax payments (5) towards their 2002 tax year liability, taking into consideration the provisions under Code s. 168(k), should recalculate their remaining estimated tax payments, if necessary, to correctly determine their amount of estimated tax due for the 2002 tax year. Taxpayers who had timely filed and paid estimated taxes for installment periods prior to the issuance of this TIR, relying on Code s. 168(k), will not incur underpayment of estimated tax penalties under G.L. c. 62B, s. 14 or G.L. c. 63B, s. 3 for such periods. If taxpayers are required to submit either Form M-2210, Underpayment of Estimated Income Tax, or Form M-2220, Underpayment of Estimated Tax by Corporations, with their 2002 tax year returns, they should write "DEPRECIATION RECALCULATION" on the top of the form, as well as write "WAIVER" in the appropriate box(es) in line 13.

Footnotes:

1. St. 2002, c. 96 amends G.L. c. 62, s. 1(c) to refer to trade or business expenses under current year Code at s. 62(a)(1), effective retroactive to January 1, 1998. See St. 2002, c. 96, ss. 1, 7. This amendment strikes out the previous reference to Code s. 162(a). This technical correction by the Legislature confirms the policy announced by the Department with respect to the treatment of trade or business expense deductions in TIR 98-8(II)(D) and TIR 98-15(V). ( return to text)

2. St. 2002, c. 96, § 4 amends the definition of "net income" in G.L. c. 63, § 1, applicable to financial institutions. St. 2002, c. 96, § 6 amends the definition of "net income" in G.L. c. 63, § 52A, applicable to utility corporations. St. 2002, c. 96, § 5 aims to disallow the depreciation allowance for general corporations. However, this section references G.L. c. 63, § 30, cl. 5(c), dealing with net operating losses, instead of G.L. c. 63, § 30, cl. 4, defining "net income." This inadvertent statutory reference has been stricken by St. 2002, c. 300, § 10 and replaced by St. 2002, c. 300, § 9 to correctly reference G.L. c. 63, § 30, cl. 4(iv). This change is effective for taxable years ending after September 10, 2001. St. 2002, c. 300, § 63. ( return to text)

3. St. 2002, c. 96, s. 2 amends G.L. c. 62, s. 2(d)(1), applicable to an individual taxpayer claiming trade or business expense deductions, as well as a partner in a partnership, S corporations, and corporate trusts. ( return to text)

4. See G.L. c. 62C, ss. 33, 34, 35. ( return to text)

5. Estimated tax payments are required by certain taxpayers. See G.L. c. 62B, s. 13 or G.L. c. 63B, s. 2. ( return to text)

/s/Alan L. LeBovidge
Alan L. LeBovidge
Commissioner of Revenue

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August 1, 2002
TIR 02-11