Nonresident Determination of Income - Overview

Massachusetts tax law distinguishes between residents and nonresidents. Residents are generally taxed on all of their income, unless otherwise excludible; nonresidents are only taxed on their income derived from sources within Massachusetts. Nonresidents are taxed on their Massachusetts gross income (derived from sources within Massachusetts) if such amount exceeds either $8,000 or the prorated personal exemption to which they may be entitled, whichever is less.

The prorated personal exemption formula and nonresident filing requirement examples

1st - Massachusetts Source Income That is Excluded
Massachusetts gross income excludes certain items of income derived from sources within Massachusetts: non-business related interest, dividends and gains from the sale or exchange of intangibles, and qualified pension income.

2nd - Massachusetts Source Income That is Included:
Massachusetts gross income includes items of income derived from sources within Massachusetts. This includes income:

  • derived from or effectively connected with any trade of business, including any employment carried on by the taxpayer in Massachusetts, whether or not the nonresident is actively engaged in a trade or business or employment in Massachusetts in the year in which the income is received;
  • from any lottery or wagering transaction in Massachusetts;
  • from ownership of any interest in real or tangible personal property located in Massachusetts;
  • from  patents, copyrights and other similar intangibles connected to Massachusetts; and
  • of all other types falling within the definition of Massachusetts source income.


3rd - Trade or business, Including Employment Carried on in Massachusetts:  
A nonresident has a trade or business, including any employment carried on in Massachusetts if:

  • the nonresident, directly or through agents or employees, maintains or operates or shares in maintaining or operating a desk, a room, an office, a shop, a store, a warehouse, a factory, or any other place in Massachusetts where the business affairs are systematically and regularly conducted; or
  • the nonresident, directly or through agents or employees, is present for business in Massachusetts as either an employee, sole proprietor, or other self-employed individual.

A nonresident generally is not engaged in a trade or business, including any employment carried on in Massachusetts if the nonresident's presence for business in Massachusetts is casual, isolated and inconsequential. A nonresident's presence for business in Massachusetts will ordinarily be considered casual, isolated and inconsequential if it meets the requirements of the Ancillary Activity Test (AAT) and Examples.

  4th - Apportionment:  
When nonresidents earn or derive income from sources both within Massachusetts and elsewhere, and no exact determination can be made of the amount of Massachusetts source income, an apportionment of income must be made to determine that amount considered Massachusetts gross income.

Apportionment Methods:
The three most common apportionment methods used to determine Massachusetts source income are as follows:
Gross income is multiplied by a:

  • Employees Compensated on an Hourly, Daily, Weekly, or monthly Basis:
    fraction, the numerator of which is the number of days spent working in Massachusetts and the denominator of which is the total working days;
  • Employees Compensated on a Mileage Basis:
    fraction, the numerator of which is the total mileage traveled in Massachusetts and the denominator of which is the employee's total mileage upon which the employer computes total wages;
  • Salespersons:
    fraction, the numerator of which is the amount of sales made within Massachusetts and the denominator of which is the amount of sales made everywhere. 

5th - Filing Requirements:   
Nonresidents are required to file income tax returns with Massachusetts if their Massachusetts gross income (derived from sources within Massachusetts) exceeds either $8,000 or the prorated personal exemption to which they are entitled, whichever is less. Nonresidents file Form 1-NR/PY, Massachusetts Nonresident or Part-Year Resident Income Tax Return.


Massachusetts Source Income That Is Excluded

General Rule - Massachusetts gross income excludes certain items of income derived from sources within Massachusetts: non-business related interest, dividends and gains from the sale or exchange of certain intangibles, and qualified pension income, as defined in 830 CMR 62.5A.1(4)(e).

Specifically, Massachusetts source income excludes:

  • Compensation paid by the United States of America to its uniformed military personnel for services rendered on active duty, including members of the Army, Navy, Air Force, Coast Guard and Marines who are assigned to a military air base, naval station, or any facility, public or private, in Massachusetts, to which they must report under service orders;
  • Income from certain intangibles, e.g. annuities, interest, dividends, and gains from the sale or exchange of intangibles, when not related to Massachusetts employment, business or the sale or exchange of Massachusetts real or tangible personal property, or when such income is qualified pension income, as defined in 830 CMR 62.5A.1(4)(e);
  • Massachusetts source income received by a nonresident who is a citizen of a foreign country, which income is excluded from federal gross income under an income tax treaty or convention to which the United States is a party. Massachusetts source income which is not excluded from federal gross income by the treaty or convention and which is included in federal gross income is subject to Massachusetts income tax;
  • Pension income from any contributory annuity, pension, endowment or retirement fund of the United States government or the Commnwealth….to which the employee has contributed;
  • Qualified pension income, which means any distribution received by the taxpayer under:
    • a qualified trust under I.R.C. Section 401(a) exempt from taxation under I.R.C. § 501(a);
    • simplified employee pension plans under I.R.C. § 408(k);
    • annuity plans under I.R.C. § 403(a) and annuity contracts under I.R.C. § 403(b);
    • individual retirement plans under I.R.C. § 7701(a)(37)
    • eligible deferred compensation plans of state and local governments and tax exempt organizations as defined by I.R.C. § 457;
    • government plans under I.R.C. § 414(d)
    • trusts described in I.R.C. § 501(c)(18);
    • any plan, program or arrangement described in I.R.C. § 3121(v)(2)(C) if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries, or if payments are spread over at least a ten year period.
    • non-contributory government plans; and
    • military pensions of nonresidents.

Massachusetts Source Income That Is Included

General Rule - Massachusetts gross Income includes items of income derived from sources within Massachusetts.

Specifically, this includes income: 

  • derived from or effectively connected with any trade or business, including any employment carried on by the taxpayer in Massachusetts, regardless of the year in which that income is actually received by the taxpayer and regardless of the taxpayer's residence or domicile in the year it is received;
  • from any lottery or wagering transaction in Massachusetts;
  • from ownership of any interest in real or tangible personal property located in Massachusetts;
  • from  patents, copyrights and other similar intangibles connected to Massachusetts; and
  • all other types falling within the definition of Massachusetts source income.

Trade or Business Defined

A nonresident generally is not engaged in a trade or business, including any employment carried on by the taxpayer in Massachusetts if the nonresident's presence for business in Massachusetts is casual, isolated and inconsequential. See Ancillary Activity Test (AAT.)

Specifically, Massachusetts source income does include:

  • Income derived from or effectively connected with a trade or business, including any employment carried on by the taxpayer in Massachusetts, whether or not the nonresident is actively engaged in a trade or business or employment in Massachusetts in the year in which the income is received :
    • Compensation for Personal Services performed in Massachusetts, regardless of where paid. Personal service compensation includes but is not limited to wages, salaries, tips, bonuses, commissions, fees, and other compensation which relate to activities carried on in Massachusetts, regardless of where the compensation is paid. In the case of compensation for personal services, a nonresident must report all Massachusetts source income even though the entire amount is not received. For example, amounts withheld by an employer for federal income taxes, FICA contributions, medical insurance plans, or other similar withholding deductions must be included in Massachusetts source income;
    • Covenant Not to Compete Payments. Covenants often provide for payments over a number of years. The later payments are Massachusetts source income if the original covenant was based on the taxpayer's Massachusetts activity. See DD 03-12, Directive 5;
    • Deferred Compensation. This does not include qualified pension income as defined in 830 CMR 62.5A.1(5)(e), nor does it include any income from retirement plans that are exempt from state taxation under federal law;
    • Disability Income;
    • Distributive Share Income from a partnership or S corporation. Distributions based on an ownership interest in an entity doing business in Massachusetts, whether in the form of dividends or any other category of income;
    • Nonqualified Pension Benefits that states are permitted to tax under federal law. See DD 03-12, Directive 1.b.1;
    • Sale of a business or interest in a business;
    • Severance and Accumulated Sick Leave. See DD 03-12, Directive 1.a.;
    • Stock Options (Nonqualified) Granted or Exercised in connection with employment, or with the conduct of a trade or business in Massachusetts. See DD 03-12, Directive 4;
    • Stock Ownership as part of Compensation for Personal Services. If a taxpayer is granted an ownership interest in a trade or business as part of the taxpayer's compensation attributable to the period the taxpayer is employed or conducting the trade or business in Massachusetts. See DD 03-12, Directive 3;
    • Taxable Unemployment Compensation. A nonresident whose unemployment compensation is derived from employment both in Massachusetts and elsewhere is subject to Massachusetts income taxation on a percentage of the taxable compensation received equal to the amount paid in Massachusetts or charged to Massachusetts under the interstate system divided by the amount paid in Massachusetts and elsewhere.
  • Income from any Lottery or Wagering Transactions in Massachusetts;
  • Income from ownership of any interest in real or tangible personal property located in Massachusetts. This includes but is not limited to rents derived from and gains and interest from the sale or exchange of:
    • real property located in Massachusetts;
    • tangible personal property having a situs in Massachusetts;
    • any interest in a Massachusetts cooperative housing corporation;
    • any interest in a Massachusetts timesharing or similar arrangement.

Example: A Vermont resident owns real estate located in Massachusetts that is sold for a profit.  Any gain derived from the sale of the real estate would be included in Massachusetts gross income to this Vermont resident.

  • Income from Patents, Copyrights and Other Similar Intangibles; This includes royalty income from the licensing of a patent or copyright, and income from the licensing of a design, idea or other similar intangible to a person for use or production in Massachusetts; it also includes income from sale or exchange of a patent, copyright, design, idea or other similar intangible by a nonresident is Massachusetts source income if derived from or effectively connected with a trade or business including employment carried on in Massachusetts;
  • Other Income. All other types of income falling within the definition of Massachusetts source income.

When a nonresident earns or derives income from sources both within Massachusetts and elsewhere, only that portion of the income earned or derived within Massachusetts is taxed. To determine income taxed in Massachusetts see Apportionment of Income.

In general, the same deductions and exemptions allowed to residents are available to nonresidents to determine taxable income. These items are allowed, however, only to the extent that the deductions and exemptions relate to, or are allocable to, Massachusetts source income. For specific rules governing the allocation of such deductions and exemptions, nonresidents use the Nonresident Deduction and Exemption Ratio on Massachusetts Form 1-NR/PY, Line 14g


Trade or Business, Including Employment Carried on in Massachusetts

A nonresident has a trade or business, including any employment carried on in Massachusetts if:

  • the nonresident, directly or through agents or employees, maintains or operates or shares in maintaining or operating a desk, a room, an office, a shop, a store, a warehouse, a factory, or any other place in Massachusetts where the business affairs are systematically and regularly conducted; or
  • the nonresident, directly or through agents or employees, is present for business in Massachusetts as either an employee, sole proprietor, or other self-employed individual.

A nonresident generally is not engaged in a trade or business, including any employment carried on in Massachusetts if the nonresident's presence for business in Massachusetts is casual, isolated and inconsequential. A nonresident's presence for business in Massachusetts will ordinarily be considered casual, isolated and inconsequential if it meets the requirements of the Ancillary Activity Test (AAT.) 

Ancillary Activity Test (AAT):

A nonresident's presence for business in Massachusetts is ancillary to his/her primary business or employment duties performed at a base of operations outside Massachusetts if the nonresident's occasional presence in Massachusetts for management reporting or planning, training, attendance at conferences or symposia, and other similar activities is secondary to his primary out-of-state duties.

Note: when a nonresident is present for business both in Massachusetts and elsewhere on the same day, that day will be treated as one full day spent present for business in Massachusetts.

Example 1: The president of a large Texas corporation flies to Boston to meet a prospective customer, spends two days in Boston meeting with the customer and then flies back to Texas. The president had never been to Massachusetts on business, nor is he scheduled to return. His business is secondary to his primary out-of-state employment duties. This nonresident is not considered to be carrying on employment in Massachusetts.

Example 2: A former politician, a resident of California, now earns a living speaking at various functions across the country. She spends one day in Massachusetts delivering a speech at a convention in Massachusetts and earns $10,000. This nonresident is considered to be carrying on business in Massachusetts because the fee is earned as a direct consequence of the Massachusetts activity.

Example 3: A dentist employed by a health maintenance organization in Maine comes to Massachusetts for a paid six-week training course in dentistry. Her presence for business in Massachusetts is ancillary to her primary employment duties elsewhere and is therefore casual, isolated and inconsequential. She is not considered to be carrying on employment in Massachusetts.

Example 4:
A New York attorney, operating as a sole practitioner primarily in New York City, is retained by a Massachusetts business in connection with a pending lawsuit in a Massachusetts court. All of the trial preparation occurs in New York but the attorney appears in court in Massachusetts every day for 4 weeks. This nonresident is considered to be carrying on business in Massachusetts and the duties performed in Massachusetts are not ancillary to his primary duties.

Example 5: The regional manager of a New England shoe manufacturer has an office in the company's headquarters in Maine. The company maintains four retail outlet stores in Massachusetts, and the manager spends one week each month assisting in the management of each of the four Massachusetts retail stores. The manager is not performing duties, which are ancillary to his primary employment duties, so his presence for business is not casual, isolated and inconsequential. This nonresident is considered to be carrying on employment in Massachusetts.

Example 6: The West Coast sales manager of a Massachusetts corporation is based in California and performs all of her duties as sales manager from the Los Angeles California office. The sales manager flies to Boston at least once a year for a two-week sales symposium and as-needed for technical training sessions. This is the only contact the manager has with Massachusetts. Because these services are merely ancillary to her primary employment carried on in California, this nonresident's presence for business is casual, isolated and inconsequential. She is not considered to be carrying on employment in Massachusetts.

Example 7: A nonresident engineer works in the Illinois office of a Massachusetts-based corporation. The nonresident is sent to the Massachusetts headquarters from January to June to review the development and operation of the company's latest computer. The engineer receives her regular salary during the six months in Massachusetts. This nonresident is considered to be carrying on employment in Massachusetts because her presence in Massachusetts is not ancillary to her primary employment duties in Illinois.

Example 8: A nonresident sells various gift items from a small store in New Hampshire. For four weeks during the Christmas shopping season, the nonresident also operates a pushcart in Boston selling the gift items. Since she operates a place of business in Massachusetts, this nonresident is considered to be carrying on business in Massachusetts.


Apportionment of Income

Rules for Apportionment of Income to Massachusetts:
When nonresidents earn or derive income from sources both within Massachusetts and elsewhere and no exact determination can be made of the amount of Massachusetts source income, an apportionment of income must be made to determine that amount considered Massachusetts gross income. The following apportionment provisions set out the rules for the determination of a nonresident's Massachusetts source income. Any nonresident can submit an alternative basis of apportionment and explain that basis on the return. However, the basis would be subject to review and modification by DOR.

Apportionment Methods:
The three most common apportionment methods used to determine Massachusetts source income are as follows:
Gross income is multiplied by a:

  • Employees Compensated on an Hourly, Daily, Weekly or Monthly Basis:
    f
    raction, the numerator of which is the number of days spent working in Massachusetts and the denominator of which is the total working days. Total working days does not include weekends, holidays, sick days, vacations, and paid or unpaid leave.
  • Employees Compensated on a Mileage Basis:
    fraction, the numerator of which is the total mileage traveled in Massachusetts and the denominator of which is the employee's total mileage upon which the employer computes total wages.
  • Salesperson:
    fraction, the numerator of which is the amount of sales made within Massachusetts and the denominator of which is the amount of sales made everywhere.

Example:
An auditor who lives in Maine receives an annual salary of $85,000 from his employer, a Boston accounting firm. He works 240 days: 160 days on audit engagements in Maine and 80 days in Boston. His Massachusetts gross income would be calculated as follows:  $85,000 x 80/240 = $28,333 

Self-employed Nonresidents Carrying on a Trade or Business in Massachusetts and Elsewhere:
If the books of the self-employed nonresident clearly show the amount of Massachusetts source income, the return must reflect the gross income of the trade or business, wherever derived, the amount apportioned to Massachusetts and the basis used. Otherwise, the self-employed nonresident must use one of the three apportionment methods listed above.

Nonresident Entertainers:
The Massachusetts source income of a nonresident entertainer is generally the entire amount received for a performance or an engagement performed in Massachusetts. A nonresident entertainer who is not paid specifically for a performance in Massachusetts can apportion by multiplying the total annual compensation by a fraction, the numerator of which is number of performances in Massachusetts and the denominator of which is the total number of performances that the entertainer was obligated to perform under contract.

Entertainer, an individual employee, partner or sole proprietor who receives compensation to perform, entertain, amuse, or inform (as, for example, a lecturer) at one or more discrete events. 

Example 1:
A nonresident entertainer performs for three evenings at Symphony Hall in Boston and earns $100,000. The entire $100,000 is income subject to Massachusetts income tax.

Example 2: A nonresident professional dancer earns an annual salary of $50,000. She dances in all forty of her dance company's 1998 performances, twenty of which took place in Massachusetts. The income subject to tax in Massachusetts is $25,000, calculated by multiplying $50,000 by 20/40.

Nonresident Professional Team Athletes

Nonresident professional team athletes who perform services in Massachusetts must apportion income. The general rules are as follows:

  • Duty Day Apportionment Method:
    For tax years beginning on or after January 1, 2002, the taxation of nonresident professional team athletes is governed by new regulation 830 CMR 62.5A.2 which is based on a "duty day" apportionment method. Duty days include all days from the initial pre-season training day through the last day of competition, e.g., game days, practice days, days spent at team meetings and promotional "caravans and training" camps. Massachusetts source income is determined by multiplying the person's total compensation for performing such personal services by a fraction, the numerator of which is the number of duty days in Massachusetts and the denominator of which is the total number of duty days everywhere.
  • Total compensation for services of a nonresident professional team athlete includes salaries, wages, performance bonuses, and pay for championship, playoff or bowl games or for selection to all-star play. However, the original signing bonus received by a nonresident athlete is excluded from total compensation if all of the following conditions are met:
  1. it is not conditional upon the signee performing services (such as making the team or playing any games);
  2. it is payable separately from salary and other compensation; and
  3. it is nonrefundable.

Members of a Professional Athletic Team include, but are not limited to, those employees who are active players, players on the disabled list, and any other persons required to travel and who do travel with and perform services on behalf of a professional athletic team on a regular basis, including coaches, managers, and trainers. 

Professional Athletic Team
includes, but is not limited to, any professional baseball, basketball, football, soccer or hockey team.
 
Example 1:
Player A, a member of a professional athletic team, is a nonresident of Massachusetts. Player A's contract requires A to report to the team's training camp and to participate in all exhibition, regular season, and playoff games. Player A's contract provides that A receive $500,000 for the year one/year two season and $600,000 for the year two/year three season. Assuming player A receives $550,000 from such contract during taxable year two ($250,000 for one-half the year one/year two season and $300,000 for one-half the year two/year three season), the portion of such compensation received by Player A for taxable year two, attributable to Massachusetts, is determined by multiplying the compensation Player A receives during the taxable year ($550,000) by a fraction, the numerator of which is the total number of duty days Player A spends rendering services for the team in Massachusetts during taxable year two (attributable to both the year one/year two season and the year two/year three season) and the denominator of which is the total number of Player A's duty days spent both within and without Massachusetts for the entire taxable year.

Example 2: A player of a professional athletic team is a nonresident of Massachusetts. During the season, the player travels to Massachusetts to participate in the annual all-star game. The number of days the player spends in Massachusetts for practice, the game, meetings, etc. are considered duty days spent in Massachusetts.

Example 3: Player D, a member of a professional athletic team, is a nonresident of Massachusetts. During the pre-season, D travels to Massachusetts to participate in a training camp which D's team conducts in Massachusetts. D performs no further services in Massachusetts. D's team does not play any regular season or playoff games in Massachusetts. The days D spends in Massachusetts at the team's training camp are considered to be duty days spent in Massachusetts for player D for that taxable year. 

For Composite Returns

Nonresident Professional Non-team Athletes:
The rules for the taxation of nonresident professional athletes who are not members of a professional athletic team are the same as the rules for taxation of nonresident entertainers (see above). 


Passive Activity Losses

For nonresidents, passive activity income and losses that are not attributable to Massachusetts must be taken out of the amounts of these items reported for federal purposes. For Massachusetts purposes, a nonresident must recalculate allowed passive activity losses based upon income or losses from passive activities which generate income subject to tax in Massachusetts. To do so, the taxpayer must complete a pro-forma federal Form 8582, using only those amounts from activities which generate income subject to Massachusetts tax.

When calculating the pro forma federal Form 8582, the taxpayer must limit the amount of the $25,000 allowance for rental real estate activities with active participation to the amount which was allowed the taxpayer for federal purposes.

Note: Federal gross income of $100,000 or more reduces or eliminates the offset allowance. The limitation would be the same for Massachusetts. 


Composite Returns for Nonresident Participants

A pass -through entity may file a composite return on behalf of qualified electing nonresidents reporting and paying income tax on the nonresidents' pro rata or distributions share of Massachusetts source income of the pass-through entity. Massachusetts allows a partnership, an S corporation, or a trust or estate to file an electronic composite return on Form MA MRCR and make estimated tax payments as an agent on behalf of two or more qualified electing nonresident members. (Professional athletic teams who may file a return on behalf of two or more qualified electing nonresident team members must file a composite return on the Form 1-NR/PY, not the Form MA NRCR.)

Recent Legislation:
Recent legislation has expanded composite filing; there is no longer a requirement that composite filing participants have no Massachusetts source income other than their pass-through entity income, and composite returns are now available to other pass-through entities in addition to partnerships.

Eligible members of a composite return must meet the following requirements:

  • must be an individual or the estate or trust of a deceased nonresident partner;
  • must be nonresidents for the entire taxable year;
  • must elect to be included in the composite return by signing a statement;
  • must agree to be subject to Massachusetts tax jurisdiction; and
  • must waive the right to claim deductions, exemptions and credits allowable under M.G.L Chapter 62, Sections 3, 5 and 6;

Nonresident Composite Return Information

Composite Returns by Professional Athletic Teams:
Any professional athletic team that has two or more qualified electing nonresident team members may file a composite tax return as an agent for the qualified electing nonresident team members. Each electing non-resident team member must sign under penalties of perjury a statement affirmatively stating such team member's qualifications and election to file a composite return.

The composite return is filed on Form 1-NR/PY along with the applicable schedules and attachments. The total Massachusetts gross income on the composite Form 1 NR/PY must be the sum of all the qualified electing nonresident partners' Massachusetts source income. 


Massachusetts References:

Federal References:

  • Title 49 United States Code, sections 40116, and 1512 Transportation; Aviation Programs, Air Commerce and Safety
  • I.R.C §§ (c)(7), (i)(3)(F)(iv); 469 (i)(3)(A)

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