| Date: | 11/22/2013 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Regulatory Authority: | Massachusetts General Laws |
| Official Version: | Published by the Massachusetts Register |
830 CMR: DEPARTMENT OF REVENUE
830 CMR 62.00: TAXATION OF INCOME
830 CMR 62.00 is amended by adding the following section:
830 CMR 62.17A.2: Restatement of Massachusetts Taxation of S Corporations and Their Shareholder
(a) Purpose of Regulation. This regulation, 830 CMR 62.17A.2, sets forth the rules that apply to S corporations under the personal income tax provisions of M.G.L. c. 62, and those that apply under the corporate excise provisions of M.G.L. c. 63. It includes Massachusetts law based upon statutory changes and changes in other legal authority since the effective date of the predecessor regulation, 830 CMR 62.17A.1, which was promulgated July 6, 1990.
For federal income tax purposes, a corporation may elect S corporation status if it meets certain requirements under Internal Revenue Code §§ 1361 through 1363, including that the shareholders must consent to the election. Massachusetts recognizes federal S corporation status for purposes of M.G.L. c. 62 and M.G.L. c. 63, and has no separate S corporation election process. Among other things, 830 CMR 62.17A.2 explains the interaction between Federal and Massachusetts S corporation law.
(b) Outline. 830 CMR 62.17A.2 is organized as follows:
(1) Purpose of Regulation; Outline; Application of Regulation to Particular Tax Periods;
(2) Definitions;
(3) General Rules;
(4) Taxation of S Corporation Income to Individual Shareholders under
M.G.L. c. 62; Distributive Share Income;
(5) Shareholder Basis in S Corporation Stock or Indebtedness;
(6) Distributions from an S Corporation to its Shareholders;
(7) Post-termination Transition Issues Applicable to S Corporation Shareholders;
(8) S corporation Entity-level Taxation in Massachusetts;
(9) S corporations that are Subject to Combined Reporting.
(c) Application of regulation to particular tax periods. 830 CMR 62.17A.2, is generally a restatement of Massachusetts law based upon statutory changes and changes in other legal authority since the effective date of the predecessor regulation, 830 CMR 62.17A.1, which was promulgated July 6, 1990. As such, to the extent that the individual provisions of 830 CMR 62.17A.2 reflect statutory changes occurring since the effective date of 830 CMR 62.17A.1, 830 CMR 62.17A.2 applies to all periods relating back to the effective date of such statutory change. In certain cases, 830 CMR 62.17A.2 relates back to an earlier public written statement issued by the Department of Revenue, and in such cases the rules apply as directed in the earlier statement. Rules relating to the taxation of S corporations that were formerly taxed as corporate trusts, or subject to a separate-entity tax as QSubs, or to S corporations that are financial institutions, apply as of the effective date of St. 2008, c. 173, which is generally applicable to tax years beginning on or after January 1, 2009. See St. 2008, c. 173, § 101. For related provisions and effective dates, see 830 CMR 63.30.3, Entity Classification under St. 2008, c. 173.
The predecessor regulation, 830 CMR 62.17A.1, Massachusetts Taxation of S Corporations and Their Shareholders, is hereby superseded. Rules stated in 830 CMR 62.17A.1, such as transitional rules that relate back to the original recognition of S corporations in Massachusetts in 1986, remain applicable to the extent they do not conflict with provisions of this regulation, 830 CMR 62.17A.2, and to the extent they do not conflict with statutory amendments enacted or Department of Revenue rules announced after the promulgation date of 830 CMR 62.17A.1, namely July 6, 1990.
Accumulated adjustments account, or AAA, an account similar to that described in Code § 1368(e), but as calculated under Massachusetts law. In general, the AAA is a tracking mechanism for an S corporation’s accumulated, undistributed taxable income determined under M.G.L. c. 62. The AAA generally is increased by the income that the S corporation reports to its shareholders as distributive share income, and is decreased by the amount of distributions the S corporation makes to its shareholders. The AAA is an account of the S corporation at the entity level, and is not apportioned among the shareholders. With respect to an entity that for any period was an S corporation for federal purposes, but was not an S corporation for Massachusetts purposes, for example, a corporate trust taxable under the now-repealed M.G.L. c. 62, § 8, the following rules apply: the AAA for such entities generally includes the total amount of the entity’s undistributed income that was reported to shareholders federally as distributive share income under 830 CMR 63.39.1, as may be adjusted based on federal/state differences in calculating income, but was not taxable as distributive share income to shareholders in Massachusetts, and instead was actually taxed at the entity level. Income of such an entity that was not taxed at the entity-level is not added to the AAA, but depending on the circumstances, may be subject to inclusion in the Massachusetts Earning and Profits account, as defined in 830 CMR 62.17A.2.
Business corporation, any corporation, or any other entity as defined in M.G.L. c. 156D, § 1.40, including an S corporation, whether the corporation or other entity may be formed, organized, or operated in or under the laws of the Commonwealth or any other jurisdiction, and whether organized for business or for non-profit purposes, that is classified for the taxable year as a corporation for federal income tax purposes.
Code, with respect to personal income taxation under M.G.L. c. 62, the federal Internal Revenue Code, as modified in M.G.L. c. 62, and particularly in M.G.L. c. 62, § 1(c); and with respect to corporate level taxation under M.G.L. c. 63, the federal Internal Revenue Code, as amended and in effect for the taxable year, as more fully defined in M.G.L. c. 63.
Commissioner, the Commissioner of the Massachusetts Department of Revenue or the Commissioner’s duly authorized representative.
Common ownership, for purposes of the income measure of the corporate excise as determined under M.G.L. c. 63, §§ 2B or 32D, when one or more S corporation shareholders own, in the aggregate, directly or indirectly, more than 50% of the total combined voting control or more than 50% of the total value of shares of two or more corporations. Stock is owned by a person under Common Ownership if the person owns the stock directly or if ownership may be attributed to the person under the constructive ownership rules of Code § 318. Note: Common Ownership differs in certain respects from the definition of the term “common ownership” applied for purposes of combined reporting under M.G.L. c. 63, § 32B. See 830 CMR 63.32B.2(2): Definitions: Commonly Owned or Common Ownership. One significant difference between the two definitions is that for purposes of combined reporting a single shareholder must either directly or indirectly own 50% or more of two or more corporations for there to be common ownership. See 830 CMR 63.32B.2(2): Commonly Owned or Common Ownership. This requirement applicable to combined reporting does not apply to 830 CMR 62.17A.2(2): Common Ownership. In addition, for purposes of 830 CMR 62.17A.2 both an owner’s voting rights in stock owned and the value of stock owned are relevant to the determination of voting control, whereas in the context of combined reporting only voting rights are considered. See 830 CMR 63.32B.2(2): Definitions: Commonly Owned or Common Ownership.
Example (2.1). S Corporation X and S corporation Y are owned by A, B, and C, with each owner having a ⅓ interest. S Corporation X and S corporation Y exhibit common ownership within the meaning of 830 CMR 62.17A.2. However, S corporation X and S corporation Y do not meet the definition of 830 CMR 63.32B.2(2): Definitions: Common ownership, because no single shareholder owns or is considered to own 50% or more of each S corporation.
Example (2.2). Individual A owns 40% of the stock of S corporation X, 30% of the stock of S corporation Y, and 40% of the stock of S corporation Z. Individual B owns 20% of the stock of X, 40% of the stock of Y, and no stock in Z. No other stockholder owns more than 5% of the stock of each S corporation, X, Y, and Z. There is no other common stockholder among X, Y, and Z, and there is no other constructive ownership of the stock under Code § 318. X and Y exhibit common ownership because together Individual A and Individual B own more than 50% of each of them. Z does not share common ownership with X and Y because there is no combination of owners that hold more than 50% of the stock of Z. While X and Y have common ownership for purposes of 830 CMR 62.17A.2, there is no common ownership under 830 CMR 62.32B.2(2): Combined Reporting, since no single common owner of X and Y directly or indirectly owns stock representing more than 50% of the voting control of each corporation. See 830 CMR 63.32B.2(2): Definitions: Common ownership.
Example (2.3). Husband owns 30% of the stock of S corporation Y and 0% of the stock of S corporation Z. Wife owns 0% of the stock of Y and 10% of the stock of Z. Unrelated Investor owns 30% of the stock of Y and 41% of the stock of Z. No other stockholder owns more than 5% of the stock of each S corporation Y and Z, with the result that there is no other common owner between Y and Z. Y and Z are under common ownership under this definition because of the application of the constructive ownership rules of Code § 318. The stock holdings of Husband and Wife, although under separate legal ownership, are considered as being owned by both spouses under Code § 318. When combined, the voting power of Husband, Wife, and Unrelated Investor is greater than 50% for both Y and Z. Y and Z are not under common ownership for purposes of 830 CMR 63.32B.2: Combined Reporting, because no single common owner of Y and Z owns stock representing more than 50% of the voting control of each corporation.
Example (2.4). Shareholder A owns 60% of the value of shares in S corporation X, but only holds 40% of the voting control in X. Shareholder A owns 55% of the value of shares of S corporation Y, but holds only 30% of the voting control of the corporation. X and Y meet the requirement of common ownership under 830 CMR 62.17A.2, because greater than 50% of the value of shares is owned by the same owner or owners. However, X and Y are not under common ownership through A’s ownership interest in the context of 830 CMR 63.32B.2: Combined Reporting, because Shareholder A does not own more than 50% of the voting control in X or Y.
Distributive share, the shareholder's aggregate daily portion of each item of income, loss, deduction, or credit determined by the shareholder's daily percentage of ownership of shares of stock in an S corporation.
DOR, the Massachusetts Department of Revenue.
Financial institution, an entity that is a financial institution within the meaning of M.G.L. c. 63, § 1.
Gross income, with respect to taxes imposed under M.G.L. c. 63, gross income as defined in M.G.L. c. 63, §§ 1, 30.3; and with respect to taxes imposed under M.G.L. c. 62, Massachusetts gross income as defined in M.G.L. c. 62, § 2.
Massachusetts Earnings and Profits, an account that is increased and decreased based on the current and accumulated earnings and profits of an S corporation, without regard to apportionment, for any taxable year. As a general principle, the Massachusetts Earnings and Profits account includes:
(a) corporate earnings for any period where the S corporation was a C corporation for federal and/or Massachusetts purposes;
(b) in the case where an S corporation has acquired or merged with a C corporation with the S corporation as the surviving entity, those corporate earnings attributable to the former C corporation; and,
(c) any other earnings and profits of any S corporation for any taxable year, including, with respect to an entity that for any period was an S corporation for federal purposes, but was not an S corporation for Massachusetts purposes, for example, a corporate trust taxable under the now-repealed M.G.L. c. 62, § 8, the entity’s undistributed pre-apportioned income that was not taxed in Massachusetts, including such amounts that accrued under the circumstances described in 830 CMR 62.8.2(4)(b).
For transition rules applicable to S corporations after the enactment of St. 1986, c. 488, § 39, see 830 CMR 62.17A.1(10)(c). The Massachusetts Earnings and Profits account does not include distributive share income for any period the entity was treated as an S corporation for Massachusetts purposes under M.G.L. c. 62, § 17A. Massachusetts earnings and profits include items that are required to be taken into account by the S corporation, or that are otherwise attributed to the S corporation, under the applicable Code sections, such as in a corporate acquisition under Code § 381, to the extent consonant with Massachusetts law.
Net operating loss (NOL), the amount by which the deductions allowed to an S corporation under M.G.L. c. 63, § 30.4, including the dividends-received deduction allowed under M.G.L. c. 63, § 38(a)(1), and excluding any deductions for net operating loss, exceed gross income for the taxable year under M.G.L. c. 63. A net operating loss does not include a capital loss.
Pass-through entity, an entity whose income, loss, deductions and credits flow through to its members for Massachusetts tax purposes, including:
(a) a general partnership;
(b) limited partnership;
(c) limited liability partnership;
(d) limited liability company that is treated as a partnership for Massachusetts tax purposes;
(e) an S corporation;
(f) an estate not taxed at the entity level; and
(g) a trust not taxed at the entity level, including a grantor-type trust.
QSub, a federal qualified subchapter S subsidiary, as defined in the Code, as amended and in effect for the taxable year.
S corporation, an entity described at Code § 1361, as amended and in effect for the taxable year.
Tiered structure, a pass-through entity that has a pass-through entity as a member.
Total receipts, gross receipts or sales (including income) realized in a taxable year less returns and allowances, including service charges, carrying charges, and any other charges included in sales prices. Total receipts include sales taxes or other excises where the sales tax or excise is imposed directly on the taxpayer, but not where such taxes or excises are simply collected by the S corporation and remitted to the taxing authority. Total receipts include dividends, interest, all tax-exempt income, royalties, capital gain net income, gross rents, deemed receipts, recognized built-in gain, other passive income, reimbursed costs, the income includable in the taxable year that is attributable to an installment transaction as defined in M.G.L. c. 62, § 63, the S corporation’s pro rata share of the total receipts of any pass-through entity in which the S corporation holds an interest, and all other income. Consistent with the above, total receipts include Category one income, which generally refers to income to the S corporation that is taxed at the entity level for federal income tax purposes, as defined in 830 CMR 62.17A.2(8)(b)1., as well as Category two income, as defined in 830 CMR 62.17A.2(8)(b)1. Similarly, total receipts include both Massachusetts source income and non-Massachusetts source income. The cost of goods sold or the cost of operations shall not be deductible in determining total receipts. Total receipts include any deemed income that is attributed under the Code to an S corporation that takes part in an election under Code § 338(h)(10).
Unitary Business, a group of two or more corporations related through common ownership, as defined in 830 CMR 62.17A.2, that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts. The term Unitary Business shall be construed to the broadest extent permitted under the Constitution of the United States. Unitary Business generally corresponds to the definition of a unitary business as applied for purposes of combined reporting under M.G.L. c. 63, §32B. See 830 CMR 63.32B.2(2). Also, this definition is further explained at 830 CMR 63.32B.2(3), except to the extent that the term Common Ownership, appearing in 830 CMR 62.17A.2, differs from 830 CMR 63.32B.2(2).
Example (2.5). A group of three shareholders owns six S corporations, (S1 – S6), and as to each of the six corporations this ownership meets the definition of common ownership. Each S corporation operates as a separate franchise of a single restaurant chain. Each of the restaurants maintains its own set of books and has a separate on-site manager. The six corporations are presumed to be engaged in a unitary business, because business activities conducted by corporations under common ownership that are in the same general line of business will generally constitute a unitary business. See 830 CMR 63.32B.2(3)(b): Likely Unitary Situations.
(a) Relationship between federal S corporation provisions and Massachusetts law. While Massachusetts taxation of S corporations and their shareholders has many parallels to the federal rules that apply income tax to S corporations and their shareholders, Massachusetts has distinct rules that apply to shareholders under the personal income tax provisions of M.G.L. c. 62, and that apply to the corporate entity under the corporate excise provisions of M.G.L. c. 63. Under Massachusetts law, S corporation shareholders pay an income tax determined by the income of the S corporation, and in many cases the S corporation itself is subject to a separate tax at the entity level. These two taxes are separate and distinct obligations, and payment of one is not a substitute for payment of the other.
(b) S corporation shareholder-level taxation. The taxation of S corporation shareholders for Massachusetts personal income tax purposes under M.G.L. c. 62 is generally modeled on the federal rules that apply to S corporations under the Code. S corporation income, losses, deductions, and allowable credits are calculated by the entity using rules set forth under M.G.L. c. 62, but then these items are passed through to shareholders as their distributive share. The obligation to pay tax on a shareholder’s distributive share exists whether or not the entity actually makes a distribution of the income to its shareholders. Non-resident shareholders of S corporations that are doing business in Massachusetts are also obligated to pay an income tax on their distributive share, as determined under 830 CMR 62.5A.1: Non-Resident Income Tax. Shareholders are subject to tax on their distributive share income irrespective of whether the S corporation is subject to an entity-level tax under M.G.L. c. 63.
(c) S corporation entity-level taxation. The application of the entity-level taxation provisions of M.G.L. c. 63 varies depending on the entity type. S corporations are most commonly taxable under M.G.L. c. 63, §§ 39 and 32D. An S corporation that is a financial institution is subject to the separate tax provisions under M.G.L. c. 63, §§ 2, 2A, and 2B. An S corporation that is a security corporation is subject to the entity-level excise under M.G.L. c. 63, § 38B. For general exclusions from taxation under M.G.L. c. 39, and 32D, see M.G.L. c. 63, § 68C. In every case, the S corporation’s entity-level taxation under M.G.L. c. 63 is separate from the S corporation’s shareholder-level taxation under 830 CMR 62.17A.2(3)(b).
(d) Issues that affect an S corporation that is subject to taxation on its income at both the shareholder and the entity level. The taxation of S corporation income under the personal income tax provisions of M.G.L. c. 62 and the entity-level provisions of M.G.L. c. 63 is similar in that both statutes derive their definition of gross income from the Code. Also, certain rules that apply to determine income may be applicable both for purposes of shareholder taxation and for purposes of entity-level taxation. Due to statutory differences between M.G.L. c. 62 and M.G.L. c. 63, however, gross income determined under M.G.L. c. 62 may differ from gross income determined under M.G.L. c. 63. 830 CMR 62.17A.2 generally evaluates rules for shareholder taxation under M.G.L. c. 62 in separate sections from rules that apply to an S corporation’s entity-level taxation under M.G.L. c. 63. Where practical or necessary, a rule may be stated twice, under the shareholder-level taxation rules, and again under the entity-level taxation rules. A statement or example identifying a rule in one part of 830 CMR 62.17A.2, for example under the M.G.L. c. 62 provisions, but not repeated in another part, for example, the M.G.L. c. 63 provisions, should not be read to imply that the rule is not applicable in both places.
(e) Tax credits that are available under both M.G.L. c. 62 and M.G.L. c. 63. There are certain tax credits that are available both to M.G.L. c. 62 and to M.G.L. c. 63 taxpayers. No credit may be applied against both the entity-level and the shareholder-level tax. An available credit amount may not be divided, with part being used at the corporate level and another part being passed through to shareholders. An S corporation that is eligible for such credits must choose in each taxable year that it generates a credit whether the credit is to be passed through to its shareholders under the provisions of M.G.L. c. 62, or instead to be applied against the S corporation’s corporate excise under M.G.L. c. 63. Once an S corporation has made this choice for a given taxable year through its filings and reporting to shareholders, that choice is binding with respect to the credit amount attributable to that taxable year. Any unused credit amount from that year must carry forward to the extent allowable with regard to the statutory credit at issue, and be taken in future taxable years either by the shareholders or by the entity according to the original filings and reporting of the taxable year in which the credit was generated.
Example (3)(e). An S corporation (S) has a project that qualifies for the Economic Development Incentive Program (EDIP) credit, which is available for five years. In year one S places $100,000 of qualifying assets in service and generates $5,000 EDIP. S claims $3,000 of the EDIP in year one and has a carryover to year two of $2,000. Because S claimed the credit, none of the $2,000 can be claimed by the shareholders in any taxable year. In year two, S places $120,000 of qualifying assets in service and generates a credit of $6,000. The corporation chooses to pass through to its shareholders this $6,000 credit, to be applied against their individual income tax obligations under M.G.L. c. 62. S is eligible to use the $2,000 of carryover from year one in year two against its corporate excise obligations under M.G.L. c. 63, but it cannot use any of the $6,000 credit generated in year two against its corporate excise. The shareholders may use the $6,000 of EDIP in year two and in later years to the extent allowed under general EDIP rules.
(f) Taxable year.
1. S Corporation’s taxable year for entity-level taxation. Massachusetts generally follows the relevant federal income tax rules for purposes of the determination of an S corporation’s taxable year for purposes of the S corporation’s entity-level taxation under M.G.L. c. 63. An S corporation that adopts or elects a taxable year under the provisions of the Code is deemed to have adopted or elected the same taxable year for Massachusetts purposes.
2. S Corporation shareholder’s taxable year. An S corporation shareholder’s taxable year is defined in M.G.L. c. 62, §§ 1, 62. A shareholder of an S corporation shall take into account the shareholder's distributive share of items of income, loss, deduction, or credit for the shareholder's taxable year in which the taxable year of the S corporation ends.
Example (3)(f). Shareholder A disposes of her interest in an S corporation in the middle of a taxable year. All affected shareholders, within the meaning of Code § 1377(a)(2)(B), generally Shareholder A and those who acquire her shares, consent under the method described in Code § 1377(a)(2)(A). The entity continues in existence as an S corporation. As under federal law the S corporation’s taxable year for purposes of M.G.L. c. 62 is treated as two taxable years, the first of which ends on the date of termination. In such a case, each affected shareholder’s distributive share is calculated as provided under the Code for each short year, as such distributive share may be modified under G.L. c. 62. See Code § 1377(a). In contrast, note that for purposes of the entity-level excise applicable to the S corporation under M.G.L. c. 63, there is only one taxable year on the facts in this example.
3. Taxable year accounting in the case of a decedent shareholder. In filing a return on behalf of a shareholder of an S corporation who dies before the end of the S corporation's taxable year, the filer shall take into account the shareholder's distributive share of the S corporation's items of income, loss, or deduction by multiplying those items by a ratio of the number of days to the date of death to the number of days in the year. Upon the death of an S corporation shareholder, the estate may be treated as a successor shareholder under the provisions of Code § 1361(b)(1)(B). An estate shareholder in an S corporation shall account for its distributive share of income, loss, or deduction of the S corporation from the date of death.
(g) Accounting method. The accounting method applicable to S corporations with respect to calculating tax liability under M.G.L. c. 62, including the distributive share of income of its shareholders, is the method detailed in M.G.L. c. 62, § 62. The accounting method applicable to S corporations with respect to calculating tax liability under M.G.L. c. 63, is the method of accounting that the S corporation has adopted or elected under the provisions of the Code.
(h) Relation to former corporate trusts that are now S corporations. Prior to tax years beginning on or after January 1, 2009, Massachusetts applied special rules for the taxation of certain S corporations that were treated in Massachusetts as corporate trusts, under the now-repealed M.G.L. c. 62, § 8. In particular, the corporate trust’s income generally was taxed at the entity level and not passed through as taxable income to the shareholders. The separate taxation rules for corporate trusts were repealed in Massachusetts with the passage of St. 2008, c. 173, § 19, generally effective for taxable years beginning on or after January 1, 2009. St. 2008, c. 173, § 101. As a result, distributive share income of S corporations that were formerly taxed under M.G.L. c. 62, § 8 is subject to shareholder-level tax in Massachusetts notwithstanding the legal form of the entity’s organization.
(a) In general. The Massachusetts rules that attribute S corporation income to shareholders, particularly under M.G.L. c. 62, § 17A, are similar to the federal rules that require an S corporation to calculate income or loss, using the corporation’s items of income, loss and deduction, and then attribute that income or loss to its shareholders. Shareholders pay the personal income tax under M.G.L. c. 62 based on the amount of taxable income that is earned by the S corporation, attributed to the shareholder as distributive share income. The S corporation shareholder is taxed on this income whether or not any amount is actually distributed to the shareholder.
Shareholders are allowed to claim certain tax credits against their personal income tax liabilities. See 830 CMR 62.17A.2(4)(g). Such allowable credits are calculated by the S corporation at the entity level, and are reported to shareholders to be used in determining the shareholders’ personal income tax liabilities. See 830 CMR 62.17A.2(3)(e)(credits may be taken at the individual shareholder level, or the S corporation entity level, but not at both levels).
The taxation of an S corporation shareholder under M.G.L. c. 62 is separate and distinct from the taxation of an S corporation at the entity level under M.G.L. c. 63. An S corporation shareholder is taxable on its distributive share regardless of any S corporation entity-level tax obligation in Massachusetts.
(b) Determining a shareholder's distributive share of income. An S corporation shareholder’s distributive share of income is calculated under the general rules that apply to the taxation of income under M.G.L. c. 62. The starting point for determining distributive share income is the S corporation’s federal items of ordinary income (or loss), capital gains, and other income. Massachusetts then requires state-specific adjustments as described in 830 CMR 62.17A.2(4). The shareholder's distributive share of the S corporation's items of income, loss, or deduction is passed through to the shareholder as if such items were realized directly by the shareholder.
(c) Character of pass-through items. The character of any item of income, loss, deduction, or credit of an S corporation included in a shareholder's distributive share is determined under the provisions of M.G.L. c. 62 as if realized or incurred directly by the shareholder.
With respect to a non-resident S corporation shareholder, the character of an item does not determine the source of the income for purposes of determining whether the item is subject to Massachusetts tax. For the sourcing rules that apply to non-resident shareholders, see 830 CMR 62.17A.2(4)(i).
Example (4)(c). S corporation X provides professional services, does business only in Massachusetts, and has a taxable year that is a calendar year. During its taxable year X earns $10 million from the provision of professional services; buys a capital asset on January 30th that it sells it at a profit on November 1st; and, sells a second capital asset that it has held for more than one year. Under the provisions of M.G.L. c. 62, § 2, the earnings from X’s provision of its professional services are Part B income (see M.G.L. c. 62, § 2(b)(2)), and are reported and taxable to X’s shareholders as Part B income. The gain from the sale of the capital asset that X purchased on January 30th and sold on November 1st is Part A income (see M.G.L. c. 62, § 2(b)(1)), and is reported to and taxable to X’s shareholders as Part A income. The gain from the sale of the capital asset held for more than one year is Part C income (see M.G.L. c. 62, § 2(b)(3)), and is reported to and taxable to X’s shareholders as Part C income.
(d) Treatment of capital gains. Capital gains and losses that flow through to the shareholders of an S corporation and are taxable under M.G.L. c. 62 shall be taken into account by the shareholders in proportion to each shareholder’s ownership share in the S corporation. The member’s ownership share is determined under the Code.
(e) Deductions taken in determining a shareholder’s distributive share, and limitations of losses.
1. General rule. In calculating a shareholder’s distributive share, an S corporation is allowed only those expense deductions that a sole proprietor would be allowed. M.G.L. c. 62, § 2(d)(1). Deductions that are itemized by an individual for federal income tax purposes are not allowed. M.G.L. c. 62 § 2(d). Also, a deduction for a net operating loss carryover is not allowed in calculating a shareholder’s distributive share. M.G.L. c. 62, § 2(d)(1)(C).
Example (4)(e)(1). S Corporation A is not engaged in a trade or business, and has an investment interest expense deduction that is allowed for federal tax purposes. The investment interest expense deduction of A as it may be allowed under federal law must be disregarded in computing the Massachusetts tax liability of A’s shareholders since investment interest does not qualify as a deductible business expense under M.G.L. c. 62.
2. Passive investment income and built-in gains. If an S corporation is taxed at the entity level on income under Code §§ 1374, 1375, such income is also taxed at the entity level under Massachusetts law. See 830 CMR 62.17A.2(8)(b)1. (Category one income). When calculating a shareholder’s distributive share, such income is reduced by the entity-level tax paid at the federal and state level that is attributable to the shareholder’s portion of the income so taxed. This rule is similar to that set forth at Code § 1366(f).
3. Limitation on losses and deductions for shareholder-level taxation under M.G.L. c. 62.
a. Net Operating Losses (NOLs). Under the personal income tax provisions of M.G.L. c. 62, a net operating loss carryforward is not allowed, and therefore must be disregarded in computing distributive share income. For treatment of NOLs with respect to the entity-level tax under M.G.L. c. 63, §§ 32D, 39, see 830 CMR 62.17A.2(8)(c)3.
b. Deductions limited by shareholder basis in stock. The deductions computed under M.G.L. c. 62 that can be taken into account by the shareholder of an S corporation may not exceed the sum of the adjusted Massachusetts basis of the shareholder's stock in the S corporation and the shareholder's adjusted basis in any indebtedness of the S corporation to the shareholder. 830 CMR 62.17A.2(4)(e)3.b. is similar to the rule set forth at Code § 1366(d).
(f) Treatment of installment sales.
1. Effect of an installment sale by the S corporation. The determination of whether a sale or a deemed sale by an S corporation is treated as an installment sale is made at the S corporation entity level, and is binding on all shareholders. Once a transaction is determined to be treated as an installment sale, the installment transactions statute, M.G.L. c. 62, § 63 and regulation, 830 CMR 62.63.1, govern the responsibilities of the S corporation and its shareholders. In particular, 830 CMR 62.63.1(10) states the installment transaction rules that apply to flow-through entities, including S corporations and their shareholders.
With respect to a non-resident shareholder, two different rules apply depending on the residence of the shareholder at the time of the sale or deemed sale by the S corporation that is treated as an installment sale. If the non-resident shareholder was a Massachusetts resident at the time of the sale or deemed sale, then the shareholder is treated as a resident with respect to income derived from such sale or deemed sale. Pursuant to the authority in M.G.L. c. 62, § 5A(b), such a shareholder is not permitted to apportion the income from the sale or deemed sale, but rather must report the full amount of such income as taxable Massachusetts source income, and is entitled to its proportionate share of the credit for taxes paid to another jurisdiction as it directly relates to such income, and under the terms that apply to credits for taxes paid to another jurisdiction, as set forth in 830 CMR 62.17A.2(4)(g)2.
In the case of a non-resident shareholder who was a non-resident at the time of the sale or deemed sale, where income derived from an installment sale is subject to apportionment, the apportionment percentage that applies to such income in each year that it is taxable, irrespective of the year in which payment is actually received, is the S corporation’s apportionment percentage from the year of the sale. The S corporation’s apportionment percentage is determined under M.G.L. c. 62, § 17A(b).
Example (4)(f)(1). S corporation S is a calendar-year corporation that does business in multiple taxing jurisdictions and is 100% owned by M, a Massachusetts resident. On December 15, 2010, S sells off the majority of its assets and realizes a gain of $100 million. S elects installment sale treatment. Because S has elected installment sale treatment, $40 million of its realized gain is taken into account in its taxable year ending December 31, 2010. The remaining $60 million in gain is to be taken into account ratably over the next three years. On January 1, 2011, M changes her residency to Florida. Because M was a resident at the time of the sale of S’s assets, M is treated as a resident with respect to all income that is derived from the sale. Thus, 100% of the income that is taken into account ratably over the period that M is a Florida resident is taxed in Massachusetts. M is entitled to take her proportionate share of the credit for taxes paid to another jurisdiction that directly relates to the income that derives from the installment sale income for the transaction dated December 15, 2010, under the terms that apply to credits for taxes paid to another jurisdiction, as set forth in 830 CMR 62.17A.2(4)(g)2.
Example (4)(f)(2). Same facts as in Example (4)(f)(1), except that on December 15, 2010, the date of the sale that is subject to installment sale treatment, M is a non-resident residing in Florida. All of M’s income that is attributable to the installment sale is subject to the allocation and apportionment rules at 830 CMR 62.17A.2(4)(i). The determination of whether any gain should be reported to Massachusetts by M is based on the facts and circumstances in the year of the sale. If the income was Massachusetts source income in the year of the sale it will remain Massachusetts source income in subsequent years. Allocable items of income are determined based on the allocation rules that apply in the year of the sale and are reportable in their entirety to M as Massachusetts source income. Items subject to apportionment are apportioned to Massachusetts and are taxable to M using S’s apportionment percentage for the year of the sale. With respect to both Example (4)(f)(1) and Example (4)(f)(2), because the total receipts derived from the installment sale under these facts exceed the $6 million threshold for income measure taxation at the entity level for each year from 2010 through 2013, S is subject to entity-level taxation on the gain from the installment sale in each of those years, under 830 CMR 62.17A.2(8).
2. Applicability to the sale of a shareholder’s stock in an S corporation. 830 CMR 62.17A.2(4)(f) does not apply to a shareholder’s sale of S corporation stock, except where such a sale is treated as a deemed sale of assets by the S corporation, as in a transaction described at Code § 338(h)(10).
(g) Credits available to S corporation shareholders.
1. General rule. A shareholder of an S corporation may be entitled to a proportionate share of the Massachusetts personal income tax credits under M.G.L. c. 62, § 6 that are calculated by the S corporation. Some Massachusetts tax credits are allowed both to corporate-level taxpayers under M.G.L. c. 63, and to personal income taxpayers under M.G.L. c. 62. However, 830 CMR 62.17A.2(3)(e), applies, namely that a credit may not be applied against both an entity-level and a shareholder-level tax, and a credit may not be divided, part being used at the corporate level, and part being passed through to the S corporation’s shareholders to be used at the individual level.
Example (4)(g)(1). S corporation S is eligible for the Economic Development Incentive Program (EDIP) credit for its taxable year. The EDIP credit set forth in M.G.L. c. 62, § 6(g) and M.G.L. c. 63, § 38N, is among those credits that may be taken either by S’s shareholders and applied against a shareholder’s income tax under M.G.L. c. 62, or by S itself to apply against its entity-level tax. Therefore this credit is subject to the general rule at 830 CMR 62.17A.2(3)(e). If the EDIP credit is taken by individual shareholders, all amounts relevant to the calculation of the credit are attributed to S’s shareholders and are taken into account in determining the shareholders' credit for the taxable year during which the taxable year of S ends. If S’s shareholders take the credit with respect to property, S must maintain adequate records to specifically identify that property and to distinguish it from property with respect to which S has taken any credit. If S’s shareholders take the credit and do not use the full amount of the credit generated in a taxable year, the shareholders may carry over the unused amount of the credit to succeeding taxable years. Amounts carried over by a shareholder may be applied only to offset that shareholder's tax liability. If recapture of the credit is later required, each shareholder that took the credit must recapture. For rules related to the EDIP credit that may be taken against S’s corporation’s entity-level tax, see 830 CMR 62.17A.2(8)(a).
2. Credits for taxes paid to another jurisdiction.
a. A resident shareholder may claim the credit under M.G.L. c. 62, § 6(a) for taxes paid to another jurisdiction for a taxable year if the S corporation pays a tax during the shareholder's taxable year and if the conditions set forth in 830 CMR 62.17A.2(4)(g)2.a.i. through iv. and 830 CMR 62.17A.2(4)(g)2.b, are met. For the credit to apply:
i. The tax must be imposed by another state, territory, or possession of the United States, or the Dominion of Canada or its provinces;
ii. The tax must be measured by income earned by the S corporation, the distributive share of which is required to be included in the shareholders' Massachusetts gross income. For the credit to be allowed, the income tax paid by the S corporation must be based on an item of Massachusetts gross income and the tax must be imposed on the apportionable net income of the entity that flows through to the Massachusetts shareholders, subject to all other requirements and limitations described in M.G.L. c. 62, § 6(a) and 830 CMR 62.17A.2(4)(g). Individuals are not allowed a credit for gross receipts-based taxes paid to another jurisdiction either by the S corporation or by the shareholder, because these taxes are not based on net income, as required under M.G.L. c. 62, § 6(a);
Example (4)(g)(2)(a). S corporation M does business in Massachusetts and owns an office building in State A. State A fully allocates the rental income of $100,000 to itself, and M’s shareholders pay their proportionate share of the tax attributable to that rental income to State A. The total amount of such tax paid on this rental income to State A is $10,000. Massachusetts residents own 60% of the total value of shares of M. The rental income is included in the Massachusetts income reported to M shareholders as distributive share income. Massachusetts resident M shareholders are allowed to take the credit for taxes paid to the other jurisdiction, each member taking his or her proportionate share of the credit, in accordance with 830 CMR 62.17A.2(4)(g)2.b. The total credit taken by all Massachusetts resident shareholders may not exceed $6,000, that is 60% (representing total share ownership of Massachusetts resident shareholders) multiplied by the total amount of tax paid to State A, namely $10,000. In accordance with 830 CMR 62.17A.2(4)(g)2.d., non-resident M shareholders are not allowed the credit, but rather pay tax as determined after the application of the allocation and apportionment rules set forth at 830 CMR 62.17A.2(4)(i), and in the Non-resident Income Tax regulation, 830 CMR 62.5A.1(6).
iii. The S corporation must not deduct any portion of the tax paid to another jurisdiction in computing distributive share income for Massachusetts purposes;
iv. The S corporation must provide each shareholder with the names of each applicable jurisdiction to which an income tax was paid, the amount income that was subject to an income tax in the other jurisdiction, and the amount of income tax that was paid to that jurisdiction.
b. A resident shareholder seeking to claim the credit under M.G.L. c. 62, § 6(a) must apply the same proportionate share percentage the S corporation uses in calculating that shareholders distributive share of income to the income tax amount that was paid to the foreign jurisdiction. Thus, the total credit amount that can be taken by the resident shareholders is limited to the residents’ total proportionate share percentage multiplied by the total tax amount paid to other jurisdictions.
Example (4)(g)(2)(b). S corporation has five resident shareholders and five non-resident shareholders. Each shareholder owns a 10% interest in the S corporation. The S corporation pays taxes measured by its income in several other states, for a total tax paid to other jurisdictions of $10,000. Each resident shareholder is allowed a credit in an amount that represents a 10% share of the total eligible tax paid to the other jurisdictions. Thus each resident shareholder is allowed a credit of $1,000.
c. An eligible resident shareholder must include with the shareholder's return the information from the S corporation listing the amount of the shareholder's distributive share of each tax paid by the S corporation for which a credit for taxes paid to another jurisdiction is allowable under M.G.L. c. 62, § 6(a), as well as the name of the taxing jurisdiction to which each tax was paid.
d. Non-residents are not eligible for the credit for taxes paid to another jurisdiction, but rather are taxed on Massachusetts source income, as more fully set out in 830 CMR 62.17A.2(4)(i), and 830 CMR 62.5A.1.
(h) State and federal differences relating to an S corporation shareholder’s distributive share income. The definition of Massachusetts gross income in M.G.L. c. 62, § 2 is based on the definition of gross income in the Code. As a general rule, M.G.L. c. 62, § 1(c) refers to the Code in effect on a specific date, but for certain other purposes, M.G.L. c. 62 refers to the Code as amended and in effect for the current tax year. In addition, Massachusetts has its own items of loss, deduction, and credit, which may not correspond to those of the Code. Thus, distributive share income may be calculated differently for state and federal purposes. The following provisions state Massachusetts rules and also provide illustrations of differences between the state and federal calculation of shareholder distributive share income. It is not a comprehensive statement of state and federal differences.
1. Bonus depreciation decoupling. Massachusetts personal income tax provisions are decoupled from the federal bonus depreciation rules at Code § 168(k), and thus the distributive share calculation shall not take into account the federal depreciation allowance under Code § 168(k). See M.G.L. c. 62, § 2(d)(1)(N).
2. Interest on government bonds. Interest income received by an S corporation from U.S. debt obligations is included in taxable distributive share income to shareholders for federal purposes. This interest income is not taxable in Massachusetts to S corporation shareholders. M.G.L. c. 62, § 2(a)(2)(A). In contrast, non-Massachusetts state and municipal bond interest is not taxed to S corporation shareholders by the U.S. government, but is taxable in Massachusetts to S corporation shareholders. M.G.L. c. 62, § 2(a)(1)(A). See also Code § 103. An S corporation must adjust its net income figure to be reported to shareholders to reflect these differences.
3. Qualified production activities. Under federal law, an S corporation passes through to its shareholders the deduction for qualified production activities under Code § 199. Massachusetts law decouples from the qualified production activities income deduction. Thus, the deduction that is passed through to shareholders for federal purposes is not passed through in computing the distributive share for Massachusetts purposes. M.G.L. c. 62, § 2(d)(1)(O).
(i) Taxation of non-resident and part-year resident shareholders of Massachusetts S corporations.
1. General rule of non-resident shareholder taxation. Except as otherwise provided, a non-resident shareholder of an S corporation is subject to tax under M.G.L. c. 62, § 5A on the shareholder's distributive share of the S corporation's income, loss, deductions, or credits from sources within Massachusetts, including all items allocated to Massachusetts, and all income apportioned to Massachusetts. M.G.L. c. 62, § 17A(b); see 830 CMR 62.5A.1. The activities of the S corporation are attributed to all its shareholders, whether or not they are residents. Thus, if a non-resident has an ownership interest in an S corporation that is engaged in the conduct of a trade or business in Massachusetts, or derives income from the ownership of real or tangible personal property in Massachusetts or otherwise receives income taxable to a non-resident under M.G.L. c. 62, § 5A, the non-resident is treated as if conducting those activities in his or her individual capacity. The S corporation must inform each non-resident shareholder at year-end of the shareholder's distributive share of income, losses, deductions, or credits apportioned to and taxable in Massachusetts, as well as each shareholder’s proportionate share of allocable income.
2. Allocable income. Other than with respect to income derived from real or tangible personal property, as stated in 830 CMR 62.17A.2(4)(i)4., where an S corporation recognizes an allocable item of income, as that term is defined in 830 CMR 63.38.1(2), that income is allocated to Massachusetts (i.e., and not apportioned to the state) if the S corporation’s commercial domicile is in Massachusetts. See 830 CMR 63.38.1(3)(c): Treatment of an Allocable Item of Income. If the corporation’s commercial domicile is not in Massachusetts, the allocable income is neither allocated nor apportioned to Massachusetts.
3. Apportionment of S corporation distributive share income of non-resident S corporation shareholders.
a. In general. An S corporation with non-resident shareholders that does business both within and without Massachusetts and that realizes income from sources within Massachusetts that are derived from or effectively connected with a trade or business, must calculate its income to be apportioned according to the applicable statutory formula, such as that under M.G.L. c. 63, §§ 2A, 38, 42, or other applicable statutory apportionment formula.
b. No further apportionment at the non-resident shareholder level. The allocated or apportioned income, as described in 830 CMR 62.17A.2(4)(i), that is reported to a non-resident S corporation shareholder is the Massachusetts source income amount that must be reported on the return. This amount is not subject to any other apportionment method that might otherwise apply to the non-resident under 830 CMR 62.5A.1.
4. Income derived from real or tangible personal property. Income of an S corporation that is derived from the ownership or disposition of an interest in real or tangible personal property located in Massachusetts is taxable in Massachusetts. If the real or tangible personal property is part of the trade or business of the S corporation, it is includible in the S corporation’s income that is subject to apportionment, and is passed through to shareholders as distributive share income. If the real or tangible personal property is not part of the trade or business of the S corporation, the income derived from the property is allocated, not apportioned, to Massachusetts, and is reported to the S corporation’s shareholders as such. A non-resident shareholder is taxable in Massachusetts on the full amount of such allocated income. See 830 CMR 62.5A.1(3)(d).
5. Non-resident shareholder sale of S corporation shares. A non-resident shareholder who sells shares in an S corporation may be subject to tax in Massachusetts on the income from the sale. See, e.g., 830 CMR 62.5A.1(3)(c)3.: Shares of Stock Issued by a Corporation as Compensation, and 830 CMR 62.5A.1(3)(c)8.: Sale of a Business or an Interest in a Business.
6. Filing requirements for part-year residents that are S corporation shareholders. If during the taxable year a shareholder of an S corporation that is subject to taxation in Massachusetts changes status from a non-resident to a resident, or from resident to non-resident, the shareholder is required to account separately for each period.
a. Determination of income for portion of the year that the shareholder is a resident. The shareholder's items of income, loss, deduction, or credit for the portion of the taxable year that the shareholder is a resident are calculated on a daily basis. An S corporation may approximate the amount of distributive share income for the part-year period of residency by multiplying the shareholder's distributive share for the full taxable year by a ratio of the number of days of residency to the number of days in the shareholder's taxable year.
b. Determination of income for portion of the year that the shareholder is a non-resident. The shareholder's items of income, loss, deduction, or credit for the portion of the taxable year that the shareholder is a non-resident are determined by multiplying the shareholder's distributive share of those items by a ratio of the number of days of non-residency to the number of days in the shareholder's taxable year, and then applying the S corporation’s apportionment ratio to the extent such income is subject to apportionment under 830 CMR 62.17A.2(4)(i).
Example (4)(i). S corporation Y has income of $5,000,000 for the taxable year. Y has a Massachusetts apportionment percentage of 60% for the taxable year. Shareholder B has a 20% ownership interest in Y. B resides in Massachusetts from January 1st through March 31st of the taxable year, then moves out of state. B’s distributive share income from Y is $1,000,000 for the taxable year. The calculation of B’s Massachusetts tax liability for the taxable year is as follows:
For the period of residency, January 1st through March 31st, the income taxable to Massachusetts is based on the formula at 830 CMR 62.17A.2(4)(i)6.a., namely, first determining the portion of the distributive share income that is attributable to the period of residency, in this case 90 days divided by 365 = 24.66%. Then, B’s distributive share of $1,000,000 is multiplied by 24.66% to yield $246,600, B’s distributive share income that is taxable to Massachusetts for the period of residency.
For the period of non-residency, April 1st through December 31st, the income taxable to Massachusetts is based on the formula at 830 CMR 62.17A.2(4)(i)6.b., namely, first determining the portion of the distributive share income that is attributable to the period of non-residency, in this case 275 days divided by 365 = 75.34%. Then, B’s distributive share of $1,000,000 is multiplied by 75.34% to yield $753,400, B’s Massachusetts source income for the period of non-residency, which must then be multiplied by Y’s apportionment percentage of 60%, to yield $452,040 of Massachusetts source income taxable to B during the period of non-residency.
(a) S corporation shareholder basis in S corporation stock, in general. An S corporation shareholder’s basis in the S corporation’s stock is generally determined by taking into account the provisions of the Code, including, without limitation, §§ 1012, 1014, 1015, and 1367, except as modified by statute or regulation, or other public written statement. As more specifically explained in 830 CMR 62.17A.2(5) and (6)(concerning the effect of S corporation distributive share and distributions on a shareholder’s basis in the S corporation’s stock), a shareholder’s basis is generally increased by the shareholder’s distributive share of the S corporation’s income and is generally decreased by distributions from the S corporation to the shareholder.
(b) Initial basis adjustment in shares to account for periods before the enactment of St. 1986, c. 488, § 39. Shareholders of entities that were S corporations for federal purposes before the recognition in Massachusetts of S corporation status in 1986 were required to adjust their stock basis to reflect the difference in basis that resulted from federal S corporation basis adjustments for pre-1986 taxable years, which adjustments would have been inapplicable in Massachusetts during the pre-1986 period. See 830 CMR 62.17A.1(8). Entities to whom this adjustment applies must use the rules in St. 1986, c. 488, § 39, as codified at M.G.L. c. 62, § 17A, and in 830 CMR 62.17A.1(8).
(c) Current Basis Adjustments. A shareholder’s Massachusetts basis in the stock of an S corporation must be adjusted at least annually to the extent that the S corporation's items of income, loss, or deduction are included in the shareholder's computation of income taxable under M.G.L. c. 62 for the taxable year. Items of income, loss, or deduction are calculated under M.G.L. c. 62, and thus may differ from income, loss or deduction as calculated under the Code for federal purposes. Once items of income, loss, or deduction are determined under Massachusetts law, a shareholder must apply the rules at Code § 1367, which state the mechanics for determining current basis adjustments, to determine Massachusetts basis adjustments on accounts of such items.
1. Effect on basis of certain federal deductions that are disallowed in Massachusetts. Certain items are deductible by an S corporation for federal purposes when calculating distributive share income and are not deductible when calculating distributive share income under M.G.L. c. 62. In cases where a federal deduction is not allowed in Massachusetts, the federally-allowed deduction that results in a decrease in basis in a shareholder’s stock for federal purposes will also result in a decrease in basis of a shareholder’s S corporation stock for Massachusetts purposes.
2. Effect on basis of certain federal deductions where Massachusetts permits a similar deduction, but on a different schedule. Certain items that are deductible by an S corporation for federal purposes when calculating distributive share income represent amounts for which Massachusetts generally allows a deduction, but on a different schedule. In such a case, the federally-allowed deduction that results in a decrease in basis in a shareholder’s stock for federal purposes will not result in a decrease in basis of a shareholder’s S corporation stock for Massachusetts purposes. To illustrate, as stated in 830 CMR 62.17A.2(4)(h)1., Massachusetts personal income tax provisions are decoupled from the federal bonus depreciation rules at Code § 168(k). The depreciation amount represents an expenditure that is capitalized for both federal and state purposes and recovered over time, but on a different schedule for federal and state tax purposes. The taking of the bonus depreciation deduction at the federal level will not result in a decrease in the Massachusetts basis in shares for an S corporation shareholder. Instead, basis for Massachusetts purposes will be adjusted based on the depreciation timetable permitted under Massachusetts law. See M.G.L. c. 62, § 2(d)(1)(N).
(d) Transfers of stock or indebtedness. In a transaction in which the basis of the stock or indebtedness to the transferee carries over from the transferor, the adjustments and modifications to Massachusetts basis described in 830 CMR 62.17A.2(5) and (6) as to any part of a shareholder’s interest in such stock or indebtedness of the S corporation continue to apply.
(e) Special rules for adjustment to basis in indebtedness. An S corporation shareholder may have made loans to the S corporation and in such a case will have a basis in his or her interest in the indebtedness to the S corporation. Massachusetts generally follows the federal rules for adjustment to basis in indebtedness under Code § 1367(b)(2). See also Treas. Reg. § 1.1367-2. However, to the extent that there are federal and Massachusetts differences in calculating income or loss, see 830 CMR 62.17A.2(4)(h), that would have an effect on the basis adjustment, an S corporation shareholder’s basis in an S corporation’s indebtedness may differ from his or her federal basis.
(f) Special rules for shareholders in S corporations that were formerly taxed as corporate trusts under the repealed M.G.L. c. 62, § 8. Certain S corporations were formerly taxed as corporate trusts under M.G.L. c. 62, § 8, which has been repealed. See St. 2008, c. 173, § 19. The relevant tax provisions of M.G.L. c. 62, § 8 last applied to corporate trusts for tax years beginning on or before December 31, 2008. Shareholders of S corporations that were formerly taxed under the repealed provisions of M.G.L. c. 62, § 8 are required to make a basis calculation as to their shares for periods commencing on the first day the entity became subject to taxation under M.G.L. c. 63, following the rules in 830 CMR 63.30.3(3)(d)4.a. (which applies particularly to the treatment of tax-free earnings and profits of the former corporate trust). Shareholders of an entity that formerly was treated as a corporate trust under M.G.L. c. 62, § 8, but that was simultaneously an S corporation for federal income tax purposes will often have a Massachusetts basis in their shares that differs, possibly significantly, from their federal basis. See 830 CMR 63.30.3(4)(a)2.
(a) General rule regarding distributions from an S corporation to its shareholders. Unless otherwise excluded from gross income, actual distributions of cash or property by an S corporation with respect to its stock are included in the income of shareholders in a manner similar to that described in Code § 1368. Income, losses and deductions computed according to M.G.L. c. 62 are used to adjust Massachusetts basis, Massachusetts accumulated adjustments accounts, and Massachusetts Earnings and Profits. A taxable distribution is included in a shareholder’s Massachusetts gross income in the taxable year it is received or constructively received.
(b) Massachusetts Accumulated Adjustments Accounts. Every S corporation must maintain a Massachusetts accumulated adjustments account (AAA) as defined in 830 CMR 62.17A.2(2) for purposes of determining the proper tax treatment of distributions, whether or not it is required to do so under Code § 1368. Except as to those S corporations that are subject to the rules otherwise provided in 830 CMR 62.17A.1, on the first day of the first taxable year for which the corporation is an S corporation for Massachusetts purposes, the balance of the AAA is the balance of the AAA for federal purposes.
(c) Massachusetts Earnings and Profits. Every S corporation must maintain a Massachusetts Earnings and Profits account as defined in 830 CMR 62.17A.2(2) for purposes of determining the proper tax treatment of distributions during taxable years that an entity is treated as an S corporation for Massachusetts purposes, and also for taxable years it was not treated as such.
(d) Overview of the tax consequences of distributions and the application of distributions against S corporation Massachusetts accounts and stock basis. The general effect of a distribution from an S corporation to a shareholder is to require the application of a cascading set of rules that determine whether and how the distribution is taxable to the shareholder, and the effect of the distribution on the shareholder’s basis in his or her stock.
As explained in more detail in the specific rules below, an S corporation’s distribution to its shareholders is taken first from the S corporation’s AAA, which account contains amounts that have been previously reported to the S corporation’s shareholders as distributive share income and that has been taxed to such shareholders. Because such amounts have been previously taxed, have not been distributed to the S corporation’s shareholders, and have increased such shareholders’ basis in the S corporation stock, distributions from the AAA are tax-free to these shareholders, and correspondingly decrease the shareholders’ basis in the S corporation stock. Distributions from AAA in excess of basis are generally treated as a taxable gain from the sale or exchange of property.
An S corporation may also have earnings and profits that derive from a period that the S corporation was previously a C corporation or from an acquisition by the S corporation of a C corporation that has earnings and profits. After the AAA is fully depleted, the next distributions from the S corporation to its shareholders are taken from the Massachusetts Earnings and Profits account. These distributions are taxable to the S corporation shareholders as dividends and have no effect on basis. In such cases, once the Massachusetts Earnings and Profits account is fully depleted, the same rules apply to shareholders of S corporations that have no Earnings and Profits account: further distributions from the S corporation to its shareholders are made tax-free to the shareholders to the extent of the shareholders’ basis in shares, and the distributions reduce the shareholders’ basis in the shares. Once an S corporation shareholder’s basis in shares is fully depleted, any further distribution from the S corporation to its shareholders is treated as taxable gain from the sale or exchange of property.
(e) Specific rules on the consequences of distributions from an S corporation to its shareholders. Unless a distribution occurs in a post-termination transition period as defined at 830 CMR 62.17A.2(7) and the post-termination transition rules require otherwise, each distribution of property (including cash) from an S corporation shall be applied to reduce the AAA, the Massachusetts Earnings and Profits account, and Massachusetts adjusted shareholder basis in the S corporation shares according to rules set forth below. For adjustment to basis in a post-termination transition year, see 830 CMR 62.17A.2(7). For S corporations that were formerly treated as corporate trusts, see 830 CMR 62.17A.2(6)(f).
1. S Corporations with no Massachusetts Earnings and Profits. Each distribution of property (including cash) from an S corporation that has no Massachusetts Earnings and Profits shall have the following tax consequences and shall be applied to reduce the Massachusetts accumulated adjustments account and Massachusetts adjusted shareholder basis in shares, in the following order:
a. The distribution shall not be included in the shareholder’s gross income to the extent that it does not exceed the shareholder's Massachusetts adjusted basis in the S corporation stock, as determined under 830 CMR 62.17A.2(5) and (6); the Massachusetts adjusted basis of the stock and the AAA shall be reduced by the amount of the distribution.
b. If the amount of the distribution exceeds the shareholder’s Massachusetts adjusted basis in the S corporation stock, such excess is treated as gain from the sale or exchange of property.
2. S Corporations with Massachusetts Earnings and Profits. Each distribution of property (including cash) from an S corporation that has Massachusetts Earnings and Profits shall have the following tax consequences and shall be applied to reduce the AAA, the Massachusetts Earnings and Profits account, and the shareholder’s Massachusetts adjusted basis in the S corporation stock, in the following order:
a. The portion of the distribution that does not exceed the Massachusetts accumulated adjustments account shall not be included in gross income to the extent it does not exceed the shareholder’s Massachusetts adjusted basis in the S corporation stock. The Massachusetts adjusted basis in the S corporation stock and the Massachusetts accumulated adjustments account shall be reduced by the amount of the distribution;
b. In the event that a distribution exceeds Massachusetts adjusted basis but does not exceed the Massachusetts Accumulated Adjustment Account, the amount of such distribution shall be treated as taxable gain on the sale or exchange of property;
c. To the extent a distribution exceeds the AAA but such excess distribution does not exceed accumulated Massachusetts Earnings and Profits, the amount of such excess distribution shall be taxable as a dividend to the extent of the Massachusetts Earnings and Profits account. The Massachusetts Earnings and Profits account to the extent thereof will be reduced by the amount of the distribution;
d. After applying the rules in 830 CMR 62.17A.2(6)(e)(2)a. through c., where the AAA and the Massachusetts Earnings and Profits account are fully depleted, but the shareholder has an adjusted basis in the S corporation shares that is greater than zero, further amounts distributed are tax-free to the extent of any remaining shareholder’s Massachusetts adjusted basis in the S corporation stock; such basis shall be reduced by the amount of the distribution; and
e. After applying the rules in 830 CMR 62.17A.2(6)(e)(2)a. through d, where the AAA and the Massachusetts Earnings and Profits account are fully depleted, and the shareholder has a zero basis in the S corporation shares, all additional amounts distributed shall be treated by the shareholder as gain from the sale or exchange of property.
3. Massachusetts generally follows the federal election to treat certain distributions as dividends, as provided in Code § 1368(e)(3); this election may not be made solely for Massachusetts purposes.
(f) Rules for S corporations that were formerly treated as corporate trusts.
Prior to tax years beginning on or after January 1, 2009, certain entities were subject to taxation as corporate trusts under the now-repealed M.G.L. c. 62, § 8. See St. 2008, c. 173. Entities that were formerly taxed as corporate trusts at the entity level are subject to special rules with respect to the taxation of their tax-free earnings and profits. See 830 CMR 62.17A.2(3)(h), 830 CMR 63.30.3(3)(d). Rules for recognizing income to S corporation shareholders that derives from these tax-free earnings and profits are set forth in 830 CMR 63.30.3(3)(d), (4)(a), (4)(a)2., (4)(c)2. The tax-free earnings and profits amounts attributable to each S corporation shareholder do not become a part of the AAA or the Massachusetts Earnings and Profits account. Rather, distributions from the S corporation are treated first as paid from tax-free earnings and profits until this account is exhausted. Such payments are taxable to shareholders as described in 830 CMR 63.30.3: Entity Classification Under St. 2008, c. 173, and neither reduce nor increase the AAA or the Massachusetts Earnings and Profits account. The effect of such distributions on a shareholder’s basis is explained in 830 CMR 63.30.3, Entity Classification Under St. 2008, c. 173, particularly at 830 CMR 63.30.3(3)(d)4. and (4)(a)2: Change from a Corporate Trust to a Corporation.
(a) Post-termination transition period. If an S corporation ceases to qualify as an S corporation, Massachusetts follows the federal rules that allow distributions from the former S corporation to be treated under the distribution rules for S corporations for a period of time. See e.g., Code §§ 1371(e), 1377(b).
1. Timing of pass-through items in the post-termination transition period. A shareholder of an entity that ceases to qualify for S corporation treatment under Code § 1362 is subject to tax under M.G.L. c. 62 on the S corporation’s items of income, loss, or deduction as provided under the rules of Code § 1366(a) and 830 CMR 62.17A.2(4). The shareholder shall recognize and report such items, in the shareholder's taxable year in which the taxable year of the S corporation ends.
2. Cash distribution in the post-termination transition period. Under the rules of Code § 1371(e), any distribution of money by an S corporation with respect to its stock during the post-termination transition period shall reduce the shareholder's Massachusetts adjusted basis to the extent of the Massachusetts accumulated adjustments account. Distributions other than of cash during the post-transition period must follow the rules that apply to distributions from C corporations, and are not given special treatment.
(b) Effect on a shareholder’s basis in the S corporation stock from a distribution by the S corporation in a post-termination period. If the AAA is not fully depleted at the end of a post-termination transition period, as defined at 830 CMR 62.17A.2(7)(a), it has no further effect, and is treated as part of the successor C corporation’s paid-in capital. Any distributions from the entity after the end of the post-termination transition period are subject to the rules for distributions from the C corporation successor. No additional basis adjustment to the S corporation shareholder’s shares is required or allowed when the undistributed Massachusetts accumulated adjustments account balance is added to paid-in capital.
(a) General. An S corporation that meets the requisite jurisdictional requirements is subject to a corporate excise at the entity level in Massachusetts. The components of the excise differ based on whether the entity is taxed as a corporation subject to M.G.L. c. 63, §§ 32D and 39, a financial institution subject to M.G.L. c. 63, § 1 through 2B, or an entity subject to another provision of M.G.L. c. 63.
Each of the various statutory sections under which an S corporation may be taxed at the entity level under M.G.L. c. 63 has its own requirements. Except as otherwise provided by statute or in 830 CMR 62.17A.2, rules that apply to C corporations with respect to calculating the entity-level excise generally also apply to S corporations. For example, the determination of the Massachusetts basis of an S corporation in its assets generally follows the same rules as the determination of the Massachusetts basis of a C corporation in its assets. See M.G.L. c. 63, § 31N.
For S corporations that are subject to the entity-level excise under M.G.L. c. 63, §§ 32D and 39, each of the three components of the excise potentially apply, namely the income measure, the non-income measure, and the minimum excise. For S corporations that are financial institutions and that are subject to the entity-level excise under M.G.L. c. 63, § 1 through 2B, the two components of the financial institution excise potentially apply, namely the income measure and the minimum excise.
S corporations that are not subject to the entity-level excise at M.G.L. c. 63, §§ 1 through 2B or 32D and 39 are otherwise subject to an entity-level excise under M.G.L. c. 63, for example, security corporations, which are subject to M.G.L. c. 63, § 38B.
An S corporation is generally allowed to use credits against its entity-level excise in the same manner and subject to the same limitations that other corporations taxable under the various provisions of M.G.L. c. 63 are allowed to use such credits. However, as stated in 830 CMR 62.17A.2(3)(e), no credit may be applied against both the entity-level excise and the shareholder-level tax. Similarly, an available credit may not be divided, part being used at the entity level and part being used at the shareholder level.
The taxation of an S corporation at the entity level is separate and distinct from the taxation of an S corporation’s shareholders on their distributive share income, as set forth in M.G.L. c. 62, § 17A, and 830 CMR 62.17A.2 (1) through (7). Payment of an entity-level corporate excise does not satisfy the obligation of an S corporation’s shareholders to pay an income tax on their distributive share of income, and vice-versa.
(b) Rules generally applicable to entities taxable under M.G.L. c. 63, §§ 1 and 2B (financial institutions) and 32D and 39 (certain business corporations) fordetermining the income measure of the excise.
1. Two categories of income, with separate rules for each. There are two categories of income that are subject to the income measure of the excise as measured under M.G.L. c. 63, §§ 2B and 32D.
Category one income is that income of an S corporation that is taxable at the entity level under the Code; for example, built-in gains of an S corporation taxable under Code § 1374, or excess net passive income of an S corporation that has accumulated earnings and profits for a taxable year and that has gross receipts more than 25% of which are passive investment income, taxable under Code § 1375. Category one income is taxed at the rate that would apply if the S corporation were a C corporation. M.G.L. c. 63, §§ 2B(a)(1), 32D(a)(i).
Category two income is that income of an S corporation that is not Category one income. Category two income is subject to the income measure excise as calculated under M.G.L. c. 63, § 2B(a)(2) through (5) or § 32D(a)(ii). This income is subject to the income measure excise only if the total receipts of the S corporation (and certain affiliates of the S corporation) are $6 million or greater. See M.G.L. c. 63, §§ 2B(a)(2) through (5), 32D(a)(ii). With respect to this income, the rate of tax depends on the level of receipts; one rate of tax applies to an entity with receipts of at least $6,000,000 and below $9,000,000, and another rate of tax applies to an entity with receipts of $9,000,000 or more. When computing its tax, the S corporation must generally calculate its income in the same manner as other corporations subject to M.G.L. c. 63, §§ 1 through 2A (financial institutions) and §§ 30 and 39 (certain categories of business corporations), and must subtract its Category one income from its Category two net income.
The following sections state additional rules that apply to the taxation of Category two income.
2. Method for determining total receipts, aggregation rules. In order to determine whether an S corporation must pay an entity-level excise measured by Category two income, the S corporation must first determine whether its total receipts meet the $6 million total receipts threshold for such taxation. For purposes of this calculation, if the S corporation owns one or more QSubs, its total receipts must be computed by combining them with those of its QSubs, irrespective of whether the S corporation and its QSubs are engaged in a unitary business. Also, if the S corporation is engaged in a unitary business with one or more other S corporations or pass-through entities (such as an LLC or partnership), its total receipts must be aggregated with the receipts of:
a. such other S corporations, including any QSubs owned by them; and
b. other pass-through entities with which the S corporation is engaged in a unitary business, including entities that are owned by other pass-through entities in a tiered-ownership or similar structure. However, the total receipts of two or more corporations, including one or more entities subject to the aggregation rules of 830 CMR 62.17A.2(9)(b)2. shall not include receipts derived from intercompany transactions between such entities.
Further, an S corporation’s total receipts must be aggregated with the receipts of any other corporation with which the S corporation is engaged in a unitary business, including any C corporation that the Commissioner finds was established for the purpose of avoiding the total receipts thresholds of $6,000,000 and $9,000,000. The Commissioner will presume that any entity created after the formation of the S corporation was organized to reduce the total receipts of an S corporation with which it has common ownership and with which it engages in a unitary business.
The aggregate total receipts of all such entities as set forth in the previous paragraphs is the total receipts amount that is attributed to each entity individually to determine whether and at which rate each S corporation in the group is subject to the excise on Category two income. See 830 CMR 62.17A.2(8)(c).
Example (8)(b). Husband and Wife own S Corporation that produces and markets computer software designed to organize hospital patient records. Husband and Wife also own a Partnership that studies the methodology used in various Massachusetts hospitals for patient record keeping, with a goal of finding the most efficient methods and for translating these to computer code. Receipts in the S corporation are less than six million dollars. However, S Corporation and Partnership are engaged in a unitary business. The receipts of both S Corporation and Partnership must be combined in order to determine whether S Corporation is subject to the entity-level excise under M.G.L. c. 63, § 32D.
3. Taxable year issues related to group members when determining total receipts.
a. Choosing a principal group member. It is possible that a group of entities that is required to combine the total receipts of each group member in order to determine whether and at what rate an S corporation each member of the group is subject to the entity-level excise will have different taxable years. In such cases the group must perform its total receipts calculation based on the taxable year of one group member (the “principal group member”).
The principal group member is the group member that the group reasonably expects will have the largest amount of total receipts subject to the income measure excise under M.G.L. c. 63, §§ 2, 2B or 32D, 39 on a recurring basis. Once the group identifies the principal group member, that group member is the principal group member for as long as that member is subject to the income measure excise.
b. Method for determining total receipts for a group of entities. Where more than one entity in a group must combine its total receipts and the taxable year differs as to one or more group members, those members’ accounting periods must be adjusted, generally following the principles of fiscalization that apply in the context of combined reporting as set forth at 830 CMR 63.32B.2(12). The group must use this method in a reasonable and consistent way, such that it will not materially distort the total receipts of the group members. The Commissioner reserves the right to adjust the method of fiscalization used by the group.
4. Determining an S Corporation’s total receipts in a short taxable year.
a. Annualization method. Except as allowed under 830 CMR 62.17A.2(8)(b)4.b., in computing its total receipts for a taxable year consisting of fewer than 12 months, an S corporation must annualize its total receipts for the taxable year by taking the average income for the number of months in the short taxable year, and multiplying the result by 12.
b. Actual twelve-month receipts method. In the case of a company that terminates its business, for example, by sale or dissolution, and as a result has a taxable year consisting of fewer than 12 months, such taxpayer may elect to count actual receipts of the corporation for the twelve-month period ending on the closing date of the short taxable year.
(c) Rules specific to calculating the income measure of the excise for Category two income for corporations subject to M.G.L. c. 63, §§ 32D, 39.
1. General. An S corporation subject to the entity-level tax under M.G.L. c. 63, §§ 32D, 39 must pay an excise on its Category two income if its total receipts for the taxable year are $6 million or more. It must calculate the income measure using the following rules.
2. Rate of excise under M.G.L. c. 63, § 32D(a)(ii). There are two rates that apply to the taxation of an S corporation’s Category two income measured under M.G.L. c. 63 § 32D(a)(ii):
a. If the S corporation’s actual and deemed total receipts for the taxable year are $9,000,000 or more, the income measure rate is derived by subtracting the rate applicable to Part B taxable income for that taxable year pursuant to M.G.L. c. 62, § 4(b) from the income measure rate applicable to C corporations under M.G.L. c. 63, § 39(a)(2).
b. If the S corporation’s total receipts for the taxable year are at least $6,000,000 but less than $9,000,000, the rate is ⅔ of the rate set forth in the preceding paragraph, 830 CMR 62.17A.2(8)(c)2.a.
3. Net operating loss carryforward deduction with respect to S corporations subject to tax under M.G.L. c. 63, §§ 32D and 39.
a. S corporations are generally allowed to take net operating loss (NOL) carryforward deductions, subject to some restrictions. An S corporation subject to tax under M.G.L. c. 63, §§ 32D, 39 pursuant to 830 CMR 62.17A.2(8)(c) is generally allowed to deduct, on a carryforward basis, a net operating loss (NOL) incurred in a prior taxable year from its Category two income (but not from its Category one income), under the rules set forth at M.G.L. c. 63, § 30.5. See generally 830 CMR 63.30.2: Net Operating Loss Deductions and Carryover. The deduction is available to the extent that it would be allowed to a C corporation under the provisions of M.G.L. c. 63, § 30.5 and 830 CMR 63.30.2. NOL carryforwards have no effect on, and shall not be taken into account in, the calculation of a shareholder’s distributive share income or loss under M.G.L. c. 62. See 830 CMR 63.17A.2(4)(e)3.a. Further, an S corporation that is subject to tax under M.G.L. c. 63, §§ 2 shall not be entitled to deduct an NOL carry forward. In no case can an NOL deduction be carried back.
b. Limitation on NOL carryforward deduction where an S corporation has Category one income. Category one income is a net-income amount of the S corporation determined under the Code. M.G.L. c. 63, § 32D(a)(i). From this net income figure certain federal loss carryforward amounts have already been deducted. See Code §§ 1374(b), (d), Treas. Reg. § 1.1374-5. To the extent that an S corporation’s Massachusetts NOL carryforward includes one or more amounts that were previously deducted from Category one income under Code § 1374(b), (d), and Treas. Reg. § 1.1374-5, such NOL amounts may not be deducted by the S corporation from its Category two income.
c. i. Specific rules for carrying forward NOL deductions. An S corporation that is entitled to deduct carryforward NOLs is allowed to carry forward an NOL for a prior taxable year, subject to the general rules that apply to carry forwards, whether or not the S corporation was subject to the entity-level excise on Category two income in such year. The determination as the amount to carry forward must be made using the carryforward calculation set forth in 830 CMR 62.17A.2(8)(c)3.c.ii. A net operating loss shall not be carried back; thus, for example, a taxpayer that sustains a loss in a taxable year may not amend a prior year’s return to claim that loss.
ii. Carryforward calculation. In order to properly determine the allowable NOL carryforward amount that an S corporation may use, the S corporation must calculate its apportioned net income or loss for each relevant taxable year, whether or not it is subject to the income measure on its Category two income for such year. Any loss amount carried forward must be reduced by the S corporation’s post-apportionment positive income amounts in succeeding taxable years for the carryforward period as determined under M.G.L. c. 63, § 30.5, and increased by its post-apportionment loss amounts incurred in such succeeding taxable years.
Example (8)(c)(3). In year one, S corporation S is subject to M.G.L. c. 63, § 32D and has total receipts of $3 million, and is not subject to the income measure excise. S has no Category one income. S performs a pro forma calculation of its income measure as if it were subject to the income measure as calculated under M.G.L. c. 63, §§ 32D, 39, and arrives at a post-apportioned loss figure of $100,000. In years two and three, S corporation continues to have total receipts below $6 million, and thus is not subject to the income measure for those years. The pro forma calculation for year two results in a post-apportioned loss figure of $20,000. The pro forma calculation for year three results in a post-apportionment income figure of $70,000. In year four, S has total receipts of $7 million, and is thus liable for the income measure excise as calculated under M.G.L. c. 63, §§ 32D, 39. The cumulative loss amount of S for the period year one through year three that may be carried forward to year four is $50,000, calculated as follows: $100,000 (year one loss) plus $20,000 (year two loss) minus $70,000 (year three income).
d. Carryforward rules when an S corporation acquires a C corporation. The following rules apply when an S corporation acquires a C corporation. 830 CMR 62.17A.2(8)(c)3.d is unrelated to the rules that apply to an S corporation merger or restructuring that results from the application of St. 2008, c. 173, relating to changes in entity classification under Massachusetts law. See 830 CMR 63.30.3: Entity Classification Under St. 2008, c. 173.
i. S corporation acquires a C corporation, elects QSub status for the acquired corporation. Where an S corporation acquires a C corporation and elects to treat the acquired entity as a QSub, the transaction is treated as a liquidation of the C corporation into the parent S corporation. In such a case, the net operating losses attributable to the former C corporation cannot be carried forward, and therefore are not available to the S corporation.
ii. S corporation acquires a C corporation, with no QSub election. Where an S corporation acquires a C corporation and does not elect to treat the acquired entity as a QSub, the net operating losses attributable to the acquired C corporation continue to reside with and are available to the C corporation, to the extent otherwise allowed under Massachusetts law.
4. Treatment of income derived from a Code § 338(h)(10) election. An S corporation that is subject to an election made under Code § 338(h)(10) recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction. The S corporation in such a case will make a final return for the period ending as of the close of the date of the sale. All income attributable to the deemed sale of assets is reportable by the S corporation as income subject to the entity-level excise under M.G.L. c. 63, §§ 32D and 39.
(d) Rules specific to calculating the income measure excise for Category two income for financial institutions subject to M.G.L. c. 63, §§ 2B(a)(2) through (4).
1. General. An S corporation that is a financial institution and thus is subject to the entity-level tax under M.G.L. c. 63, §§ 2B(a)(2) through (4) must pay an excise on its Category two income if its total receipts for the taxable year are $6 million or more. It must calculate the income measure using 830 CMR 62.17A.2(8)(d)2. Financial institutions are not eligible to deduct losses incurred in prior years.
2. Rate of excise under M.G.L. c. 63, §§ 2B(a)(2) through (4). There are two rates that apply to the taxation of an S corporation’s Category two income taxable under M.G.L. c. 63, § 2B(a)(2) through (4):
a. If the S corporation’s total receipts for the taxable year are $9,000,000 or more, the income measure rate is derived by subtracting the rate applicable to Part B taxable income for that year in M.G.L. c. 62, § 4(b) from the rate applicable to financial institutions in that taxable year in M.G.L. c. 63, § 2.
b. If the S corporation’s total receipts for the taxable year are at least $6,000,000 but less than $9,000,000, the income measure rate is ⅔ of the rate set forth in the preceding paragraph, 830 CMR 62.17A.2(8)(d)2.a.
3. Treatment of income derived from a Code § 338(h)(10) election. An S corporation that is subject to an election made under Code § 338(h)(10) recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction. The S corporation in such a case will make a final return for the period ending as of the close of the date of the sale. All income attributable to the deemed sale of assets is reportable by the S corporation as income subject to the entity-level excise under M.G.L. c. 63, §§ 1 through 2B.
(a) Income measure filing requirements. An S corporation (including its QSubs) that is doing business in Massachusetts is subject to combined reporting within the meaning of M.G.L. c. 63, § 32B when it is engaged in a unitary business with one or more other corporations, including one or more S corporations that are subject to combined reporting. See generally 830 CMR 63.32B.2: Combined Reporting; see also 830 CMR 63.32B.2(4)(a). In such cases, if the S corporation is subject to the income measure excise, it is required to be included in the combined report and to compute its net income subject to tax and its income measure consistent with the rules for combined reporting. See generally 830 CMR 63.32B.2(7), and (7)(l), Example 8 (discussing the rules that apply when an S corporation is to file as a member of a combined group).
Where an S corporation is not itself subject to the income measure excise, it is nonetheless required to be included in a combined report if it is engaged in a unitary business with one or more other corporations that are subject to the income measure excise and any member of such group that is a C corporation. In contrast, in any instance where an S corporation is engaged in a unitary business only with one or more other S corporations, and the aggregate gross receipts of such corporations is less than $6 million (that is, no corporation in the combined group is liable for the income measure excise), the group is not required to file a combined report.
An S corporation is not subject to combined reporting unless it is engaged in a unitary business with one or more other corporations. Therefore, in any case in which an S corporation owns one or more QSubs but is not engaged in a unitary business with one or more other corporations apart from its ownership of these QSubs, the S corporation is not subject to combined reporting, because a QSub is not treated as an entity separate from its parent for Massachusetts corporate excise purposes.
(b) Net operating loss issues in the case of an S corporation member of a combined group.
1. General rules with respect to NOLs where a combined group contains one or more S corporations. An S corporation subject to M.G.L. c. 63, § 32D included in a combined report can share NOL carry forwards with other members of the combined group, to the extent such sharing would be allowed if the taxpayer were a C corporation. See 830 CMR 63.32B.2(8): Net Operating Loss Carry Forwards. In such cases, the NOL attributable to and carried forward by the S corporation member of the combined group must be calculated according to the carryforward calculation rules set forth at 830 CMR 62.17A.2(8)(c)3. However, an S corporation that is a financial institution subject to M.G.L. c. 63, § 2B is not allowed to carry forward an NOL or to use an NOL carryforward where the loss being carried forward was generated by another combined group member.
2. Restrictions on loss sharing with respect to Category one income. An S corporation in combined reporting is generally able to share NOL carryforward losses of other group members in the manner of a C corporation under 830 CMR 63.32B.2(8): Net Operating Loss Carry Forwards, and the sharing rules at 830 CMR 63.32B.2(8)(b), however, an S corporation member of a combined group may not take an NOL carryforward deduction when computing its income measure excise on Category one income. See 830 CMR 62.17A.2(8)(c)3.a. See also Code § 1374(b), (d), Treas. Reg. § 1.1374-5.
(c) Non-income measure; minimum excise. An S corporation that is included in a combined report is subject in its own right to the non-income measure excise or the minimum excise, as applicable, and must file accordingly. See M.G.L. c. 63, §§ 32D, 39.
(d) Effect of a combined report on an S corporation’s calculation of its shareholders’ distributive share income. An S corporation included in a combined report cannot apply the provisions related to combined reporting at 830 CMR 63.32B.2: Combined Reporting or 830 CMR 62.17A.2(9) for purposes of determining a shareholder’s distributive share of income. See 830 CMR 62.17A.2(4). Rather, the income or loss for such a shareholder is determined by the S corporation using the provisions of M.G.L. c. 62 and the Code, without regard to the entity’s combined reporting obligations. See 830 CMR 62.17A.2(4). The amount of such income to be apportioned to Massachusetts in the case of a non-resident shareholder taxable under M.G.L. c. 62, § 5A is also determined without reference to the combined reporting provisions. See generally 830 CMR 63.32B.2(7): Apportionment of Income Computation; Tax Computation Where No Apportionment, and (7)(l), Example 8 (discussing the rules that apply as to the taxation of S corporation shareholders, including non-resident shareholders, when an S corporation is to file as a member of a combined group).
REGULATORY AUTHORITY
830 CMR 62.17A.2: M.G.L. c. 14, § 6(1); M.G.L. c. 62C, § 3.
Date of Promulgation: November 22, 2013
