Under the General Laws, all domestic business, manufacturing, and research and development corporations are subject to the excise imposed by G.L. c. 63, § 32. The excise is comprised of several components (i.e., a minimum corporate excise; a property measure consisting of two alternate amounts, a tangible property amount or a net worth amount; and a net income measure), and is expressed as the minimum corporate excise or the combined property measure and net income measure, whichever is greater. However, in the case of a federal S corporation that is also a Massachusetts S corporation the net income measure of the corporate excise is determined under G.L. c. 63, § 32D. "Net income," as that term is used in G.L. c. 63, §§ 32, 39, and 32D, is defined, in relevant part, as "gross income less the deductions, but not the credits, allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year." See G.L. c. 63, § 30.
General partnerships that are treated as S corporations for federal income tax purposes are not treated as S corporations for Massachusetts tax purposes. Instead, such partnerships are subject to tax in the same manner as other partnerships; i.e., income tax is imposed on its partners pursuant to G.L. c. 62, § 17. In Letter Ruling 99-13, the Commissioner ruled that a general partnership that elected to be treated as a corporation for federal income tax purposes would be treated as a partnership for Massachusetts purposes. That ruling concluded that a partnership could not be classified as a corporation because it does not fit the definition of a corporation under G.L c. 63, §§ 30(1) and 30(2).
The Code accords special "QSUB" status to a corporation that meets certain requirements including the fact that it is 100% owned by an S corporation parent when the parent elects this status for the sub. See IRC § 1361(b)(3)(B). Under the Code, a QSUB is not treated as a separate corporation, but rather all of its assets, liabilities, items of income and deduction are treated as belonging to its S corporation parent. See IRC § 1361(b)(3)(A)(i), (ii). For purposes of the corporate excise, a QSUB is a separate corporation that is subject to the greater of either the minimum excise or the property measure. SeeTIR 97-6. However, because a QSUB's items of income and deduction pass through for purposes of the Code, a QSUB is not taxable pursuant to the income measure of the corporate excise, i.e., G.L. c. 63, §§ 32 and 39, or pursuant to the entity level tax imposed under G.L. c. 63, § 32D. Rather, as is also true under the Code, these income tax attributes pass-through to the shareholders of the QSUB. See id.
You have also asked about the pass-through of state tax credits from a QSUB to individual partners that own an interest in a general partnership that owns the QSUB. The individual partners in the general partnership may claim only those credits that are allowed under chapter 62. A QSUB is a corporate excise taxpayer and may claim only those credits that are allowed under chapter 63. The general partnership may take into account the QSUB's activities when determining the credits of the individual partners under chapter 62. Alternatively, the QSUB may determine its credits separately and apply them to reduce the non-income measure of its corporate excise. However, the same activity cannot generate a credit for both the partners in the general partnership and the QSUB. Thus, when a QSUB engages in an activity that can generate a credit under either chapter 62 or chapter 63 (e.g., the Economic Opportunity Area credit under. c. 62, §6(g) or c. 63, § 38N), the general partnership and the QSUB may agree to take that activity into account in determining the credit for either the partners or the QSUB, but not both. In contrast, when a QSUB is engaged in activity that generates a credit under chapter 63 only (e.g., the investment tax credit under c. 63, § 31A or the business facility credit under c. 63, § 38E), the credit can be claimed only by the QSUB. See DD 00-9. See also 830 CMR 62.17.1(3)(d).