- General Rules
- Home Office Deduction, Optional Safe Harbor Method
- Net Operating Loss Carry Forward and Carry Back
- Passive Activity Losses (PALs) - at Risk and Suspended
- Nonresidents and Part-year Residents
- Where to Report on Original Tax Return; what to Enclose
- Massachusetts and Federal References
The federal Schedule C or Schedule C-EZ is used to calculate net profit or loss from a business if the net earnings from self-employment are $600 or more. If taxpayers are required to file a federal Schedule C, they are required to do the same for Massachusetts purposes.
If Taxpayers have more than one business, they must calculate a Schedule C for each business separately.
Taxpayers who must file a Schedule C or Schedule C-EZ include the following:
- sole proprietors;
- any taxpayer who receives a 1099-MISC, Miscellaneous Income in the amount of $600 or more; and
- any taxpayer who receives a Form W-2, Wage and Tax Statement as a "Statutory Employee" (oval on Massachusetts Schedule C must be filled in.)
- residents must report income from all sources (inside and outside Massachusetts) received from their business (gross receipts) unless it is specifically excluded by law;
- part year residents report income from all sources during their period of residency;
- nonresidents report income derived from Massachusetts sources. Nonresidents who earn or derive income from sources both within Massachusetts and elsewhere and no exact determination can be made of the amount of Mass source income, an Apportionment of Income must be made to determine that amount.
Business income includes cash, checks and credit card charges received, and the barter of property or services (fair market value).
Items that are not considered Income:
- money borrowed through a bona fide loan;
- appreciation increase in the value of property is not considered income until realized through a sale or taxable disposition;
- like kind exchanges;
- consignment of merchandise to others to sell for the sole proprietor is not considered income until actually sold.
Gross Receipts, Less the Following Items, Equals Gross Profit:
- Returns and Allowances:
Taxpayers who make or buy goods to sell may deduct any merchandise that was included in gross receipts that has been returned and/or damaged. Returns include cash or credit reimbursements the business makes to customers as well as any other allowances deducted from the actual sales price.
- CGS - Cost of Goods Sold:
Taxpayers who make or buy goods to sell may deduct the cost of goods sold from their gross receipts on Schedule C, calculated on Schedule C-1, Cost of Goods Sold and/or Operations.
Taxpayers may claim as business expenses the cost of running the business. Cost of goods sold and purchases that must be capitalized are not included in business expenses. In order to qualify as a valid deduction, business expenses must be both ordinary (common and accepted in that particular field of business) and necessary (helpful and appropriate for the business).
Net Profit or Loss:
Gross Profit less Business Expenses equals Net Profit or Loss. If the expenses are less than income, the difference is net profit. If the expenses are more than income, the difference is a net loss.
Net Operating Loss Carry Forward and Carry Back:
Massachusetts does not allow for the federal provisions to either carry back or carry forward any unused net operating loss.
Home Office Deduction, Optional Safe Harbor Method
I.R.C. §280A(c) allows a deduction for expenses related to certain business use of a home. Effective for tax years beginning 2013, per Rev. Proc. 2013-13, taxpayers may use an optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a home. The allowable deduction for home office expense is $5 per square foot for a maximum of 300 square feet of qualified home office space used, for a maximum yearly deduction of $1,500.
Rules for Use of the Safe Harbor Method:
- any actual expenses related to the qualified business use of the home for the taxable year are not deductible;
- any disallowed amount carried over from a prior taxable year in which the taxpayer calculated and substantiated actual expenses is not deductible in the current year; and
- the depreciation deduction allowable for the business portion of the home for the taxable year is deemed to be zero.
Taxpayers using the safe harbor method may deduct certain expenses related to the home (e.g., mortgage interest and real estate taxes) exclusively on their federal Schedule A, Itemized Deductions.
In general, Massachusetts adopts the current federal rules for I.R.C. §280A and the optional safe harbor method allowed by Rev. Proc. 2013-13. Taxpayers who elect to use the safe harbor method of claiming the home office deduction on federal Schedule C, Profit or Loss from Business, line 30,may deduct the same amount, not to exceed $1,500, on Massachusetts Schedule C, Massachusetts Profit or Loss from Business, line 29, “expenses for business use of your home.”
However, like the federal rules, those taxpayers electing the safe harbor method are not allowed to deduct any portion of mortgage interest and real estate taxes for the business use of a residence on their Massachusetts Schedule C. Furthermore, to the extent that taxpayers electing the safe harbor method can deduct mortgage interest and real estate taxes on their federal Schedule A, these amounts are not deductible for Massachusetts purposes, as Massachusetts law does not allow any federal Schedule A deductions for mortgage interest and real estate taxes.
Passive Activity Losses (PALs) - at Risk and Suspended:
Both the IRS and Massachusetts allow PAL's to be carried forward.
Massachusetts S corporations with total receipts of six million dollars or more will be allowed to carry forward (but not carry back) net operating losses (NOL) as defined in IRC Section 172 beginning in tax year 1990. Losses can be carried forward for no more than 5 years. This is on the S Corporation return.
Deduction for Self-Employment Tax:
A self-employed individual may deduct on Form 1, Line 11 or 1-Nr/PY, Line 15, up to the maximum of $2,000 of self-employment tax calculated on U.S. Form SE, Self-Employment Tax, which was paid during the taxable year. A nonresident or part-year resident adjusts the self-employment tax related to income reported on Massachusetts Form 1 NR/PY.
Schedule C, Line 13 insurance deduction does not include any amounts paid for health insurance.
- Enter net amount on Form 1, Line 6 or Form 1-NR/PY, Line 8. Amount is from Mass. Schedule C, Line 31 or 33; enclose Mass Schedule C.
Note: U.S. Schedules C or C-EZ are no longer allowed as a substitute for Mass. Schedule C.
- Rev. Proc. 2013-13
- I.R.C. §280A(c)