On October 22, 2004, the U.S. Congress enacted the American Jobs Creation Action of 2004, Public Law 108-357 (the "Federal Act"), which provides a new federal deduction for a percentage of "qualified production activities income" under Section 199 of the Internal Revenue Code ("Code" or "IRC"). On January 3, 2005, the Massachusetts Legislature enacted chapter 466 of the Acts of 2004, An Act to Decouple from Federal Production Activity Deduction (the "Massachusetts Act"), whereby IRC § 199 is not adopted for purposes of Massachusetts tax law. This Technical Information Release announces that, for purposes of the corporate excise and personal income tax, the new federal deduction at IRC § 199 is not adopted.

I. Federal Production Activity Deduction under Code § 199

To bring the United States into compliance with a World Trade Organization ruling, the Federal Act repealed the Code's extraterritorial income (ETI) exclusion at IRC § 114. The Federal Act replaced the ETI exclusion with a new domestic production activities deduction at IRC § 199 equal to a percentage of a taxpayer's net income earned form qualified domestic production activities. Domestic production activity is broadly defined under the Federal Act to include manufacturing, construction (including engineering and architectural services related to construction), energy production, production of computer software, film production, and processing of agricultural products.

Effective for taxable years beginning after December 31, 2004, the IRC § 199 deduction is equal to a portion of the taxpayer's "qualified production activities income" from "domestic production gross receipts." The amount of the deduction is phased in as follows: 2005 - 2006, three percent (of domestic production activities income); 2007 - 2009, six percent; and 2010 and after, nine percent. However, the amount of the deduction is limited to 50 percent of wages paid during the calendar year. The allowance of this deduction for a percentage of a class of income has the effect (as so described in the legislative history of the Federal Act) of providing a federal rate cut for those taxpayers qualifying for the deduction.

II. Massachusetts Adoption of the Internal Revenue Code

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

III. Decoupling from the Federal Production Activity Deduction at IRC § 199

The Massachusetts Act provides that, for corporate excise purposes, in determining net income there shall not be allowed the new federal production activity deduction provided by IRC § 199. St. 2004, c. 466, § 3, amending G.L. c. 63, § 30(4) by inserting new clause (vi). [1]

The Massachusetts Act provides that, for personal income tax purposes, in determining Massachusetts Part B adjusted gross income there also shall not be allowed the new federal production activity deduction at IRC § 199. St. 2004, c. 466, § 1, amending G.L . c. 62, § 2(d)(1) by inserting new subparagraph (O).

These changes to both the corporate excise and the personal income tax are effective for taxable years beginning on or after January 1, 2005.

 

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

 

AL:LEM:adh

May 10, 2005

TIR 05-5
 


[1] To the same effect, St. 2004, c. 466, § 2 amends the definition of "net income" in G.L. c. 63, § 1, applicable to financial institutions; and St. 2004, c. 466, § 4 amends the definition of "net income" in G.L. c. 63, § 52A, applicable to utility corporations.