Federal Business Related Deductions Allowed

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.

Effective for tax years beginning in 2014, the dollar limitation for an election under I.R.C. § 179 to expense property in its initial year has been decreased to $25,000, and the I.R.C. § 179 overall investment phase-out threshold has been reduced to $200,000.

Massachusetts adopts these changes because I.R.C. § 179 is a trade or business expense deduction, which is 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. 


Depreciation

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.


Massachusetts Business Related Deductions Allowed

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.


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.

Massachusetts References:
 

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

Section 179 Expenses

Trade or Business


Federal References:

179 Expenses

  • 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

Trade or Business

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