| Date: | 06/19/2009 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate Excise
Discussion of Law : General Laws chapter 62, section 6(g) and chapter 63, section 38N authorize an economic opportunity area credit (EOAC) against the tax imposed by those chapters to taxpayers that participate in a certified project as defined in G.L. c. 23A, § 3A.
The EOAC allowed is an amount equal to five percent of the cost of any property that qualifies for the investment tax credit (ITC) allowed by G.L. c. 63, § 31A. G.L. c. 63, § 38N(a). The maximum amount of the credit allowed in any one taxable year shall not exceed fifty percent of the excise imposed under chapter 63 or chapter 62. G.L. c. 63, § 38N(b). Moreover, the credit may not be applied to reduce the excise to an amount less than the minimum excise imposed under any provision of G.L. c. 63. G.L. c. 63, § 38N(c); 830 CMR 63.38N.1(7)(a).
Any credit not used because it exceeds the excise for the current taxable year or because of limitations may be carried over to subsequent taxable years. G.L. c. 63, § 38N(d). Credit not used because of the minimum excise limitation or because it exceeds the excise for the current taxable year may be carried over for ten years. Id. Credit not used because of the fifty percent limitation may be carried over indefinitely. G.L. c. 63, § 38N(b); G.L. c. 63, § 32C; 830 CMR 63.38N.1(7)(a) and (10)(a)1. However, under no circumstance may the credit be carried over for more than five years after a project ceases to be certified. G.L. 830 CMR 63.38N.1(10)(a)3.
If property that qualifies for the EOAC is disposed of or ceases to be in qualified use within the meaning of G.L. c. 63, § 31A or if such property ceases to be used exclusively in a certified project within an economic opportunity area before the end of its useful life, the recapture provisions of G.L. c. 63, § 31A(e) shall apply. G.L. c. 63, 38N(a). The recapture provisions of G.L. c. 63, § 31A (e) provides in part:
If property on which the credit has been taken is disposed of or ceases to be in qualified use prior to end of its useful life, the difference between the credit taken and the credit allowed for actual use must be added back as additional tax due in the year of disposition; provided, however, if such property is disposed of or ceases to be in qualified use after it has been in qualified use for more than twelve consecutive years, it shall not be necessary to add back the credit as provided in this paragraph. For the purposes of this paragraph, useful life of property shall be the same as that used by the corporation for depreciation purposes where computing federal income tax liability.
Id. Regulation 830 CMR 63.38N.1(11) explains how to calculate the amount of EOAC required to be recaptured in situations where qualifying property is disposed of, ceases to be in qualified use, or ceases to be used in a certified project before the end of the property's useful life.
Based on the EOA credit provisions, the duration of a project's certification is significant. It determines the period of time over which a taxpayer may generate EOA credit. It affects the period of time over which the credit may be carried forward. The duration of a project's certification may require recapture of the credit if a taxpayer purchases property with a useful life that extends beyond the duration of the project's certification. The duration of a project's certification is governed by G.L.. c. 23A, §§ 3A, 3F.
G. L. c. 23A, § 3A defines a certified project as a project that has been approved by the Economic Assistance Coordinating Council for participation in the economic development incentive program pursuant to the provisions of section 3F.
G.L. c. 23A, § 3F in part provides:
(1) [t]he EACC may from time to time designate one or more projects as certified projects, and take any and all actions necessary or appropriate thereto, upon compliance with the following:
. . . (c) receipt . . . of a request for a designation of the project as a certified project for a specified number of years, which shall be not less than five years nor more than: (i) twenty years or (ii) the number of years remaining on the duration of the designation of the project EOA, whichever is less; . . .
(2) A certified project shall retain its certification for the period specified by the EACC in its certification decision; provided, however, that such specified period shall not be less than five year from the date of certification nor more than: (i) twenty years from such date; or (ii) the number of years remaining on the duration of designation of the project EOA, including any renewals thereof; or (iii) the number of years requested by the municipality approving the project proposal, whichever is less, unless such certification is revoked prior to the expiration of said specified period.
Issue 1: What effect does the expiration of project's certification have on the taxpayer's ability to generate new EOA credit?
Directive 1: After the project's certification expires no additional EOAC may be generated with respect to that project.
Discussion 1 : General Laws chapter 63, section 38N and chapter 62, section 6(g) provides a credit for companies that participate in a certified project for the duration of the certified project. Once a project's certification expires, there is no longer a certified project and property purchased or otherwise acquired by a taxpayer is not eligible for the credit.
Example 1: Taxpayer's project is certified on July 1, 2003 for 5 years. The project's certification expires on June 30, 2008. On August 4, 2008 Taxpayer purchases a piece of machinery to use in the project. Taxpayer may not take the EOAC on the machinery because as of July 1, 2008, Taxpayer is no longer eligible to generate new credits with regard to the project because the project certification has ended.
Issue 2 : What effect does the expiration of a project's certification have on the taxpayer's EOAC carryover?
Directive 2: No EOAC may be carried over and applied to a taxable year beginning more than five years after date that the project's certification expires.
Discussion 2 : General Laws chapter 63, section 38N and chapter 62, section 6(g) provide that that in no event shall a business apply the credit against its excise for any taxable year beginning more than five years after the certified project or economic opportunity area ceases to qualify as such under the provisions G.L. c. 23A. A project whose certification has expired ceases to qualify as a certified project on the date its certification expires.
Example 2: Taxpayer's project is certified on July 1, 2003 for 5 years. The project's certification expires on June 30, 2008. Taxpayer begins its taxable year on January 1. The taxpayer may not carry over unused EOAC beyond its taxable year beginning on January 1, 2013. As of its taxable year beginning on January 1, 2014, the taxpayer is not allowed to carry over any EOAC generated in the certified project.
Issue 3: Does the expiration of a project's certification have an effect on the taxpayer's requirement to recapture the EOAC?
Directive 3: Yes. When a project's certification expires before the end of the useful life of the qualifying property upon which the business took an EOAC, recapture of the EOAC is required unless the property has been in use in the certified project for more than 12 years.
Discussion 3: Pursuant to the EOAC provisions set out above, if property that qualifies for the EOAC ceases to be used exclusively in a certified project within an economic opportunity area before the end of its useful life, the recapture provisions of G.L. c. 63, § 31A(e) shall apply. When the project's certification ends, the qualifying property is no longer being used in a certified project. If the project's certification ends before the end of the useful life of property upon which a credit was taken, recapture is required unless the property has been in use in a certified project for more than 12 years.
Example 3a: Taxpayer's project is certified on July 1, 2009 for 5 years. The project's certification expires on June 30, 2014. In 2009, Taxpayer purchased machinery with a useful life of 10 years for $1,000,000. This machinery generated $50,000 of EOAC which Taxpayer will use over the five-year period. In 2014 when the project's certification expires, the taxpayer will be required to recapture a portion of the EOAC. The recapture amount is calculated pursuant to Regulation 830 CMR 63.38N.1(11) as follows:
Taxpayer is allowed a credit for 60 months. The allowable credit is $25,000 ($50,000 x 60/120). The difference between the allowable credit ($25,000) and the credit used ($50,000) must be recaptured as additional tax. At the end of the certified project, Taxpayer is required to recapture $25,000.
Example 3b: Taxpayer's project is certified on July 1 2009 for 10 years. The project's certification expires on June 30, 2019. At the outset of the project, Taxpayer purchased a building with a useful life of 39 years for $5,000,000. The purchase of the building generated $250,000 of EOAC which Taxpayer will use over the ten-year period. In 2019 when the certified project ceases as such, Taxpayer is required to recapture a portion of the EOAC. The recapture amount is calculated pursuant to Regulation 830 CMR 63.38N.1(11) as follows:
Taxpayer is allowed a credit for 120 months. The allowable credit is $ 64,103 ($250,000 x 120/468). The difference between the allowable credit ($64,103) and the credit used ($250,000) must be recaptured as additional tax. At the end of the certified project, Taxpayer is required to recapture $185,897.
Example 3c: Taxpayer's project is certified on July 1, 2009 for 15 years. The project's certification expires on June 30, 2024. At the outset of the project, Taxpayer purchased a building with a useful life of 39 years for $5,000,000. The purchase of the building generated $250,000 of EOAC which Taxpayer will use over a ten year period. In 2024 when the project's certification ends, the taxpayer will not be required to recapture any portion of the EOAC because the property was used in the certified project for more than twelve consecutive years.
Effective Date: Directive 1 and Directive 2 apply to all certified projects. Directive 3 applies to projects whose certification begins on or after April 1, 2009. Nothing in this Directive is intended to affect or defer the existing requirement to recapture the EOAC when, prior to the expiration of a project's certification, property is disposed of or ceases to be used in a certified project before the end of its useful life. Moreover, this Directive does not affect or defer the existing requirement to recapture if a project's certification is or has been revoked by the Economic Assistance Coordination Council.
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:lbr
June 19, 2009
DD 09-4