Section 179 Expenses

For both the corporate excise and the personal income tax, Massachusetts follows the current Code for purposes of I.R.C. §179, which provides an election to expense certain depreciable business assets in its initial year (qualifying property, called section 179 property) rather than treat them as capital expenditures.

To the extent a taxpayer is eligible to deduct trade or business expenses in Massachusetts, the taxpayer is allowed a I.R.C. §179 deduction in the same amount as allowed federally.

The American Taxpayer Relief Act of 2012 (P.L. 112-240): 
Effective for tax years beginning in 2012 and 2013, the dollar limitation for an election under I.R.C § 179 to expense property in its initial year is $500,000, and the I.R.C § 179 overall investment phase-out threshold is $2,000,000.

Massachusetts adopts these changes because I.R.C. § 179 is a trade or business expense deduction; these deductions are adopted by Massachusetts on a current Code basis.

For tax years beginning after 2010, an election not made on an original return must be made on an amended return filed by the due date of the original return (including extensions) unless permission is obtained. Permission to revoke or change an election will also be required. 


Abandoned Building Renovation Deduction

Massachusetts law allows as a deduction an amount equal to 10% of the costs incurred in renovating qualifying abandoned buildings located in an Economic Opportunity Area (EOA). The buildings must be designated as abandoned by the Economic Assistance Coordinating Council. The renovation deduction may be taken in addition to any other deduction for which the renovation costs qualify. (For example, the depreciation deduction on improvements to property.)

This deduction is available for personal income taxpayers (Schedule C or E) or for corporations whose tax liability is determined by net income.

Qualifying Economic Opportunity Areas:
For further information on qualifying EOAs, taxpayers should contact the Massachusetts Office of Business Development, 10 Park Plaza, Room 3730, Boston, MA 02116, 617-973-8600


Allowable Excess Trade or Business Deduction

The excess of allowable Form 1 or Form 1-NR/PY deductions over Form 1 or Form 1-NR/PY income may be deducted against other types of gross income that are effectively connected with the active conduct of a trade or business of the taxpayer.

The excess deductions may be claimed in the following order:

  1. from Schedule B income before any other Schedule B allowable deductions; then
  2. from Schedule D income after netting long-term gains and losses and after deducting excess short-term losses.

Any remaining excess deductions are not allowed to be carried forward to subsequent tax years.

Dividends are generally not considered income from the active conduct of a trade or business of the taxpayer.


Contributions to a Qualified Retirement Plan by Shareholder-Employees of an S Corporation

Federally, a deduction is allowed for employer contributions to a qualified retirement plan deductible under I.R.C. § 404. For Massachusetts purposes, however, in the case of an individual who is an employee within the meaning of I.R.C. § 401(c)(1), employer contributions on their behalf are not deductible. I.R.C. § 401(c)(1) employees are sole proprietors and partners, but not shareholders of an S Corporation. Therefore, unlike sole proprietors and partners, shareholder-employees of an S corporation may deduct employer contributions made to a qualified retirement plan on their behalf for Massachusetts tax purposes.


Federal Bonus Depreciation Allowance

For Massachusetts corporate excise and personal income tax purposes, the new federal bonus depreciation allowance under I.R.C. § 168(k) is not adopted. Bonus depreciation is that part of any depreciation allowed in computing federal taxable income that is attributable to the special first-year depreciation for qualified property allowed under IRC § 168(k).
 

Federal Depreciation Allowance under I.R.C. § 168(k) - Federal Act Provisions:

  • The American Taxpayer Relief Act of 2012 extended the 50% bonus depreciation for qualified property placed in service from Jan. 1, 2013 through Dec. 31, 2013.
  • The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the 50% bonus depreciation for qualified property placed in service from January 1, 2010 through December 31, 2012.
  • The Federal American Recovery and Reinvestment Act of 2009 allows taxpayers an additional depreciation deduction, under I.R.C. § 168(k), in the placed-in-service year equal to 50% of the adjusted basis of "qualified property." The property must be acquired after December 31, 2008 and before January 1, 2010.
  • The federal changes made in 2003 extend the time period for acquisition of qualified property and increase the depreciation allowance from 30% to 50% of the adjusted basis on the qualified property. The Federal Act provides for a special depreciation allowance for certain property placed into service during the period beginning September 11, 2001 and ending January 1, 2005. For qualified property placed in service after May 5, 2003, an additional 50% special depreciation allowance applies for the first year the property is placed in service.
  • The Federal changes made in 2002 provide 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.

Massachusetts Depreciation Rules:

  • for corporate excise purposes, the definition of net income does not include the new federal depreciation allowance available under IRC § 168(k); and
  • for personal income tax purposes, Massachusetts Part B adjusted gross income also does not include the new federal depreciation allowance;
  • these changes to both the corporate excise and the personal income tax are effective retroactively for taxable years ending after September 10, 2001.

Return Filing Requirements:
For Massachusetts purposes 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 IRC § 168(k).

A Massachusetts taxpayer that claims bonus depreciation under IRC § 168(k) for federal purposes must calculate a separate depreciation schedule for purposes of claiming depreciation on the Massachusetts corporate excise return or the Massachusetts personal income tax return. For the year property is placed in service and subsequent years, a taxpayer must calculate Massachusetts depreciation as if the taxpayer elected not to utilize the bonus depreciation allowance at IRC § 168(k).

Effect of Depreciation on Basis; Modifications to Gain or Loss in Year of Disposition  


Trade or Business Expenses

To the extent a taxpayer is allowed to deduct trade or business expenses in Massachusetts, the amount of the Massachusetts deduction corresponds to the amount of the federal deduction. The following are examples of how certain trade or business expenses allowed for Massachusetts purposes will be updated to the current Code treatment:

  • I.R.C. § 179 Expense;
  • Nonresidential Real Property.

Massachusetts adopts the federal treatment for Trade or Business expenses, under the Internal Revenue Code, as amended and in effect on January 1, 2005 and automatically adopts any future changes to the Federal provisions for these expenses.

S Corporation shareholders, partners in partnerships, sole proprietors and landlords now get all of the same business expense deductions as they do for federal purposes.


Where to Report on Original Tax Return; What to Enclose:

Abandoned Building Renovation

  • For Personal Income, enter the deduction allowed on either Schedule C, Line 30 or Schedule E, Part I, II or III, Line 4;
  • For Corporations, Massachusetts Schedule E - Taxable Income.
  • Nonresidents and part-year residents may claim this deduction if the property is located in Massachusetts

Allowable Excess Trade or Business

  • Massachusetts Schedule C-2, Excess Deductions against Trade or Business Income.

Documentation to Submit with Abatement/Amended Tax Return:

Abandoned Building Renovation

  • For Personal Income, enter the deduction allowed on either Schedule C, Line 30 or Schedule E, Part I, II or III, Line 4;
  • For Corporations, Massachusetts Schedule E - Taxable Income;
  • Statement detailing the location and renovation cost of the qualifying abandoned building;
  • Verification from Economic Coordinating Council that building is designated as abandoned.

Allowable Excess Trade or Business

  • Corrected Massachusetts Schedule C-2, Excess Deductions against Trade or Business Income;
  • Corrected Massachusetts Schedule B, if applicable;
  • Corrected Massachusetts Schedule D, if applicable.

Contributions to Qualified Retirement Plan

  • Amended SK-1 - Shareholder's Massachusetts Information;
  • Amended Massachusetts Schedule S - S Corporation Distributive Income.

Trade or Business

  • Massachusetts Form 1 or 1-NR/PY, amended Schedules C, and/or E;
  • Copy of U.S. 1040, Schedules C, C-EZ, E, or F (if applicable);
  • Copy of amended U.S. Form 4562 - Depreciation & Amortization;
  • Copy of Form 1040X - Amended U.S. Individual Income Tax Return and supporting schedules.

Massachusetts References:
 

Section 179 Expenses

Abandoned Building Renovation

  • M.G.L. Chapter 23A, Section 3B
  • M.G.L. Chapter 62, Section 3(B)(a)(10)
  • M.G.L. Chapter 63, Section 38O

Allowable Excess Trade or Business

Contributions to Qualified Retirement Plan

Federal Bonus Depreciation

Trade or Business


Federal References:

179 Expense

  • I.R.C. §§ 179, as amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (the 2003 Federal Act); as amended by The Federal Jobs and Growth tax package (P.L. 108-2); §179(b); §179(b)(1), as amended by the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28); 280F
  • IRS Rev. Proc. 2005-70

Contributions to Qualified Retirement Plan

  • I.R.C. § 401(c)(1); 404

Federal Bonus Depreciation

  • I.R.C. § 168(k), as amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (the 2003 Federal Act); as amended by Section 101 of the Job Creation and Worker Assistance Act of 2002, P.L. 107-147 (the "Federal Act")

Trade or Business

  • I.R.C. §§ 162(a); 179; 168(e)(2)(B); 1250