| Date: | 03/20/2020 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Regulatory Authority: | Massachusetts General Laws |
| Official Version: | Published by the Massachusetts Register |
830 CMR: DEPARTMENT OF REVENUE
830 CMR: 63.00: TAXATION OF CORPORATIONS
830 CMR 63.30.2: Net Operating Loss Deductions and Carry Forward
(a) Purpose of Regulation. This regulation, 830 CMR 63.30.2, explains the deductions for net operating losses incurred in previous taxable years allowed to certain corporations by M.G.L. c. 63, § 30.5 in determining net income for a taxable year.
(b) Outline of Topics. 830 CMR 63.30.2 is organized as follows:
(1) Statement of Purpose, Outline of Topics
(2) Definitions
(3) Allowance of Net Operating Loss Deduction
(4) Computation and Taking of the Net Operating Loss Deduction
(5) Carry Forward of Net Operating Loss
(6) Examples
(7) S Corporations
(8) Corporations Subject to Combined Reporting
(9) Mergers and Changes of Ownership
For purposes of this regulation, 830 CMR 63.30.2, the following terms shall have the following meanings, unless the context requires otherwise.
Code, the Internal Revenue Code, as amended and in effect for the taxable year.
Commissioner, the Commissioner of the Massachusetts Department of Revenue or the Commissioner's duly authorized representative.
Eligible Business Corporation, a business corporation as defined in M.G.L. c. 63, § 30.1 that is subject to the excise imposed by M.G.L. c. 63, § 39. The term eligible business corporation does not include a financial institution taxable under M.G.L. c. 63, § 2; a security corporation taxable under M.G.L. c. 63, § 38B; or a corporation exempt from the corporate excise, as stated in M.G.L. c. 63, § 68C.
Federal Net Operating Loss, a net operating loss computed under Code § 172 for a taxable year for purposes of determining the federal net operating loss deduction.
Net Operating Loss Deduction, the deduction for net operating losses incurred in previous taxable years allowed by M.G.L. c. 63, § 30.5(b).
Net Income, net income determined under M.G.L. c. 63, § 30.4 for purposes of computing the income measure of the corporate excise.
Net Operating Loss, the amount by which the deductions allowed under M.G.L. c. 63, § 30.4, including the dividends-received deduction allowed in M.G.L. c. 63, § 38(a)(1) but not including a deduction for a net operating loss allowed by M.G.L. c. 63, § 30.5, exceeds gross income for a taxable year determined under the provisions of M.G.L. c. 63, § 30.3. A capital loss is not a net operating loss and cannot be carried forward.
Start‑up Corporation Net Operating Loss Deduction, the deduction for net operating losses incurred in previous taxable years allowed by M.G.L. c. 63, § 30.5(c).
Taxable Year, any fiscal or calendar year or period for which a corporation is required to file a federal income tax return.
Taxable Net Income, net income less the Massachusetts dividends received deduction allowed by M.G.L. c. 63, § 38(a)(1).
(a) General Rule. In calculating net income for a taxable year, G.L. c. 63, § 30 allows an eligible business corporation to claim a deduction for net operating losses incurred in previous taxable years, i.e., a net operating loss carry forward. The statute provides a choice between two deductions, the net operating loss deduction, under M.G.L. c. 63, § 30.5(b) and the start-up corporation net operating loss deduction, under M.G.L. c. 63, § 30.5(c). Because the limitations on the net operating loss deduction set forth in M.G.L. c. 63, § 30.5(b)(1), (2), and (3) have expired, and because the start-up corporation net operating loss deduction allows for a shorter carry forward period than is allowed by the net operating loss deduction, the start-up corporation net operating loss deduction under M.G.L. c. 63, § 30.5(c) is functionally obsolete. Consequently, this regulation does not provide rules for taking the start-up corporation net operating loss deduction.
(b) Losses Attributable to a Period During Which a Business Corporation is Not Subject to Massachusetts Tax Liability. An otherwise eligible business corporation that incurs a loss during a period in which the corporation is not subject to tax liability in Massachusetts is not permitted to claim, or carry forward, those losses. See 830 CMR 63.30.2(5)(g). For the rules applicable to net operating losses incurred during a taxable year for which the eligible business corporation was subject to the Massachusetts corporate excise, see 830 CMR 63.30.2(5)(g)1. See also 830 CMR 63.30.2(6), Example 5.
(c) Transition Rule for Former Utility Corporations. Eligible business corporations that were classified as utility corporations subject to tax under former M.G.L. c. 63, § 52A, may not carry forward or deduct a loss incurred in a tax year beginning before January 1, 2014. However, such eligible business corporations may carry forward a net operating loss incurred in a tax year beginning on or after January 1, 2014.
(d) Corporations Subject to the Massachusetts Unrelated Business Income Tax (UBIT). A business corporation that is exempt from taxation under Code § 501 is subject to tax under M.G.L. c. 63, § 39 on its unrelated business taxable income (see M.G.L. c. 63, § 38Y). A business subject to tax on its UBIT may claim a net operating loss to the extent the taxpayer incurs losses from unrelated business taxable income.
(e) Life Sciences Tax Incentive Program. Under M.G.L. c. 63, § 30.17 and M.G.L. c. 23I, § 5, an eligible business corporation engaged in business as a certified life sciences company as defined in M.G.L. c. 23I, § 2 and authorized by the life sciences tax incentive program is entitled to carry forward a net operating loss for not more than 15 years from the year such loss was incurred. Because all eligible business corporations are now entitled to carry forward a net operating loss for up to 20 years from the year the loss was incurred, this statutory provision relating to life sciences companies is functionally obsolete.
(a) Computing a Net Operating Loss in a Taxable Year. A net operating loss incurred by a corporation in a given taxable year must be computed without considering its net operating losses incurred in prior years. See M.G.L. c. 63, § 30.5. A corporation’s net operating loss incurred in a given taxable year is equal to the amount by which its deductions allowed under M.G.L. c. 63, § 30.4, including the dividends-received deduction allowed under M.G.L. c. 63, § 38(a)(1), but not including a deduction for a net operating loss carry forward from a prior year, exceed its gross income for the taxable year.
(b) Allowable Net Operating Loss Deduction for a Current Taxable Year. The amount of an eligible business corporation’s net operating loss deduction for a taxable year is the lesser of the sum of the corporation’s net operating losses available for carry forward from previous taxable years under the provisions of 830 CMR 63.30.2(5), or the maximum amount of the corporation’s deduction determined under the limitation provision of 830 CMR 63.30.2(4)(c).
1. Losses Available for Carry Forward. The amount of an eligible business corporation’s net operating loss available for carry forward from a previous taxable year is the corporation’s net operating loss for the taxable year as calculated under 830 CMR 63.30.2(4), that may be carried over under the provisions of 830 CMR 63.30.2(5), reduced by the amount of the corporation’s net operating loss for such taxable year that has been previously deducted. An eligible business corporation may have net operating loss carry forwards from multiple years.
2. An Eligible Business Corporation’s Net Operating Losses Previously Deducted. The amount of an eligible business corporation’s net operating loss previously deducted is the amount of the corporation’s net operating loss incurred in a taxable year that already has been deducted under the provisions of M.G.L. c. 63, § 30.5, in taxable years beginning after the taxable year in which the corporation’s loss occurred and before the current year. See 830 CMR 63.30.2(5)(c).
(c) Limitation of the Deduction. The amount of the net operating loss deduction may not exceed one hundred percent of the corporation's net income as computed under 830 CMR 63.30.2(4)(b). The amount of net operating loss disallowed as a deduction for a taxable year because of the foregoing limitation may be carried forward to one or more subsequent taxable years to the extent allowed under the carry forward rules of 830 CMR 63.30.2(5).
(d) Net Income Defined for Purposes of Applying the Limitations on the Net Operating Loss Deduction. For purposes of applying the limitation on the amount of the net operating loss deduction set forth at 830 CMR 63.30.2(4)(c), an eligible business corporation’s net income for a taxable year is its net income as defined in M.G.L. c. 63, § 30.4, determined without regard to the net operating loss deduction(s) allowed under M.G.L. c. 63, § 30.5, and after applying the apportionment provisions of M.G.L. c. 63, §§ 38 and 42.
(e) Adjustments to Deductions; Adjustments Based on the Taking of Certain Credits. Certain Massachusetts statutes including, without limitation, M.G.L. c. 63, §§ 31E, 38H(b)(1), and 38M, require business corporations to make adjustments with respect to deductions or the taking of credits in determining their net income. In the event an eligible business corporation is required by statute to make such an adjustment, the eligible business corporation must make a corresponding adjustment in calculating its net operating loss.
Examples of such adjustments that will affect the net operating loss deduction include, without limitation, those referenced at M.G.L. c. 63, § 38H(b)(1) (modifying certain deductions with respect to expenditures for solar and wind power equipment), M.G.L. c. 63, § 31E (requiring an adjustment to a depreciation deduction for a company shuttle van purchase or lease if a credit is taken), and M.G.L. c. 63, § 38M (requiring an adjustment to business expense deductions for research expenses that are eligible for a credit).
(f) Disregard of Certain Other Deductions, Adjustments, and Credits. An eligible business corporation’s net operating loss is determined solely with reference to M.G.L. c. 63, § 30 and § 38(a)(1). Except as provided in 830 CMR 63.30.2(4)(e), any deduction, adjustment, or credit allowed by any other provision of M.G.L. c. 63, or by the Code, is disregarded in determining a net operating loss. Examples of such other items include, without limitation:
1. Deductions not included in M.G.L. c. 63, § 30 or § 38(a)(1), such as those taken from taxable net income apportioned to Massachusetts, including those at M.G.L. c. 63, § 38F (deduction from a business corporation’s post-apportioned net income for compensation paid to certain individuals) and M.G.L. c. 63, § 38H (deduction from a business corporation’s net income with respect to expenditures for solar and wind power equipment).
2. Massachusetts Credits. Net operating loss is computed without regard to any of the credits against the corporate excise allowed under M.G.L. c. 63.
3. Federal Adjustments. Any deduction, adjustment, and credit allowed by the Code but not allowed by M.G.L. c. 63, § 30 and § 38(a)(1), including, without limitation, bonus depreciation and the federal production activity deduction, is disregarded in determining a net operating loss.
(g) Net Operating Loss Computed on a Post-apportionment Basis. For tax years beginning on or after January 1, 2010, where an eligible business corporation does business both within and outside of Massachusetts, the corporation’s allowable net operating loss is determined and carried forward by multiplying the loss by the corporation’s apportionment percentage as determined under M.G.L. c. 63, § 38 for the taxable year in which the loss is incurred, with respect to the business that generated the loss. Such loss is to be deducted by the eligible business corporation from its taxable net income allocated or apportioned to Massachusetts.
(a) General. A net operating loss incurred in a taxable year beginning on or after January 1, 2010 may be carried forward to the twenty succeeding taxable years following the year in which the loss was incurred.
(b) Ordering Rules. A net operating loss carry forward must be deducted after all current deductions allowed in determining current taxable net income, including the dividends received deduction allowed by M.G.L. c. 63, § 38(a)(1). A net operating loss must be carried over to the earliest succeeding taxable year in which it may be used. The portion of such loss that may be carried over to a succeeding taxable year is the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may have been carried. The portion of the net operating loss that is not used in the earliest succeeding taxable year may be carried over to a subsequent succeeding taxable year within the applicable carry forward period set forth at 830 CMR 63.30.2(5)(a).
(c) Amount of Loss That May Be Carried Forward. The amount of net operating loss incurred in a taxable year that may be carried forward to a succeeding taxable year is determined using the following steps:
1. Compute the net operating loss for the taxable year under the provisions of 830 CMR 63.30.2(4). Losses incurred by an otherwise eligible business corporation in a taxable year during which the corporation is not subject to the corporate excise are not treated as net operating losses and are not eligible for the net operating loss deduction, in accordance with the rule at 830 CMR 63.30.2(3)(b). The net operating loss for the taxable year must be determined under the law applicable to the taxable year in which the loss was incurred without regard to the law applicable to the taxable year to which the net operating loss is being carried forward. The result is the corporation's net operating loss to be carried forward from the taxable year in which the loss was incurred.
2. Subtract from the net operating loss that is carried forward, as determined under 830 CMR 63.30.2(5)(c)1, the amount of such net operating loss that was previously deducted under the provisions of M.G.L. c. 63, § 30.5, in taxable years beginning after the taxable year in which the loss was incurred. The result is the amount of the net operating loss incurred in the taxable year that is available for carry forward.
(d) Amount of Net Operating Loss Available for Carry Forward. The amount of the net operating loss that is available for carry forward to a taxable year is the sum of the net operating losses available for carry forward from previous taxable years, determined under 830 CMR 63.30.2(5)(c), that may be carried forward under the applicable period set forth at 830 CMR 63.30.2(5)(a).
(e) Unused Net Operating Loss. Net operating loss incurred in a taxable year that is not deducted within the period set forth at 830 CMR 63.30.2(5)(a), is lost and may not be deducted for Massachusetts corporate excise purposes.
(f) Short Taxable Years. A taxable year that consists of less than twelve months is treated as a full taxable year for purposes of this regulation, 830 CMR 63.30.2.
(g) Rules and Calculations for Certain Years.
1. Losses Not Allowed for Years a Corporation is Not Subject to the Corporate Excise. Eligible business corporations may not deduct net operating losses that were incurred in taxable years during which the corporation was not subject to the corporate excise. See 830 CMR 63.30.2(3)(b).
2. Carry Forward Years. After a corporation generates a specific net operating loss, each subsequent year counts in determining the remaining carry forward period associated with that loss, as set forth at 830 CMR 63.30.2(5)(a), even if the corporation was not subject to the income measure of the corporate excise in such year. There is no adjustment to the amount of a net operating loss that is being carried forward in years that the corporation is not subject to the income measure of the corporate excise.
The following examples illustrate the provisions of 830 CMR 63.30.2(1)‑(5). For purposes of these examples assume that all of the corporations are calendar year taxpayers that are not subject to the combined reporting rules at M.G.L. c. 63, § 32B, and therefore file separate returns. Further assume that none of the corporations claim a Massachusetts dividends received deduction, unless otherwise stated. The corporations do not carry any net operating loss back to previous taxable years for federal tax purposes unless otherwise stated.
Example 1. Alpha Centauri, Inc., a Massachusetts business corporation, is organized and begins doing business exclusively in Massachusetts in 2009. In 2009 Alpha Centauri incurs a net operating loss of $100,000. In 2010 Alpha Centauri has net income of $50,000, determined without regard to the net operating loss deduction.
As an eligible business corporation, Alpha Centauri may claim the net operating loss deduction. Alpha Centauri takes a net operating loss deduction of $50,000, resulting in net income of $0 for 2010 and $50,000 of net operating loss available for carry forward. Alpha Centauri may not deduct more than 100% of its net income in a tax year.
Example 2. Same facts as Example 1. In 2011, Alpha Centauri has net income of $80,000, determined without regard to the net operating loss deduction. Alpha Centauri is eligible for a net operating loss deduction of $50,000, the carry forward amount available carry forward from 2010, resulting in net income of $30,000, with no further net operating loss available for carry forward.
Example 3. Rigel, Inc., a Massachusetts business corporation, is organized in 2015 and during that tax year does business exclusively in Massachusetts. In 2015, Rigel incurs a net operating loss of $150,000, which it is entitled to carry forward. In 2016, Rigel has gross income of $100,000 and allowable deductions under M.G.L. c. 63, § 30.4 of $50,000, determined without regard to the prior year net operating loss deduction.
Rigel’s net income in 2016 is $50,000, determined by subtracting its allowed deductions under M.G.L. c. 63, § 30.4 from its gross income. As an eligible business corporation, Rigel may claim the net operating loss deduction. Using its net operating loss carry forward, Rigel applies a net operating loss deduction of $50,000, resulting in net income of $0 for 2016 and $100,000 of remaining net operating loss carry forward. Rigel incurs no net operating loss in 2016 because its deductions under M.G.L. c. 63, § 30.4 do not exceed its gross income.
Example 4. Betelgeuse, Inc. is a business corporation that has been in existence for several years. In 2009 Betelgeuse does not do business in Massachusetts, but incurs a loss for the year. In 2010 Betelgeuse does business in Massachusetts and incurs a pre-apportioned loss of $60,000.
Betelgeuse may not claim a net operating loss deduction for the loss incurred in 2009 because it was not subject to Massachusetts tax during that year. Betelgeuse may claim a net operating loss deduction for the loss incurred in 2010 when computing net income for 2011. The deduction is computed as follows:
The pre-apportionment amount of loss available to Betelgeuse for carry forward from 2010 is $60,000. Betelgeuse must convert its pre-apportionment loss figures to post-apportionment net operating loss by multiplying the loss by its Massachusetts apportionment percentage for the year in which the loss was incurred. Betelguese’s apportionment percentage for 2010 is 25%. Betelgeuse thus has a post-apportionment net operating loss available to carry forward from 2010 of $15,000, calculated as follows: $60,000 * 25%.
In 2011, Betelgeuse does business in Massachusetts and has net income of $100,000, determined without regard to the net operating loss deduction. Betelgeuse's Massachusetts apportionment percentage is 10% for 2011. Betelgeuse’s taxable net income apportioned to Massachusetts for 2011 is $10,000, calculated as follows: $100,000 net income * 10% apportionment percentage = $10,000 taxable net income.
Betelgeuse's net operating loss deduction for the taxable year 2011 is $10,000, the lesser of the $15,000 of net operating loss available for deduction from 2010, or the $10,000 maximum deduction, namely one hundred percent of the corporation's net income, determined under 830 CMR 63.30.2(4)(c). Betelgeuse has Massachusetts net income of $0, computed by subtracting the $10,000 net operating loss deduction from $10,000 of Massachusetts net income, determined without regard to the net operating loss deduction. After 2011, Betelgeuse has $5,000 of net operating loss available to carry forward. The entire $5,000 is attributable to the 2010 net operating loss.
Example 5. Assume the same facts as in Example 4 and that Betelgeuse does not have net income that is subject to the income measure of the Massachusetts corporate excise tax from 2012 through 2014. In 2012, Betelgeuse does no business in Massachusetts and is not taxable in the state. In 2013 and 2014, Betelgeuse resumes doing business in Massachusetts and is therefore taxable in the state but is protected from the imposition of the income measure of the corporate excise by Public Law 86-272 (note that Betelgeuse would nonetheless be subject to the non-income measure of the corporate excise or the minimum excise). In 2015, Betelgeuse continues its business activity in Massachusetts but is no longer protected by Public Law 86-272, and is thus subject to the income measure of the corporate excise. In 2015, Betelgeuse has net income of $8,000, determined without regard to the net operating loss deduction. Betelgeuse's Massachusetts apportionment percentage is 20% in 2015. Thus, Betelgeuse’s post-apportioned Massachusetts net income is $1,600 in 2015.
Betelgeuse may claim the net operating loss deduction for losses incurred in 2010 when computing its 2015 net income. The amount available to carry forward from 2010 is $5,000, determined as follows. Betelgeuse must subtract from the $15,000 post-apportioned net operating loss incurred in 2010, the $10,000 of that loss that was deducted in 2011, leaving $5,000. Betelgeuse makes no adjustment to the $5,000 carry forward amount in 2012, 2013 and 2014, although those three years count in determining the remaining carry forward period associated with the loss incurred in 2010 Thus the remaining $5,000 carry forward from 2010 is available for use in 2015.
The maximum allowable amount of Betelgeuse's net operating loss deduction for 2015 is $1,600, namely, 100% of the corporation’s net income for purposes of applying the limitations on the net operating loss deduction, as set forth in 830 CMR 63.30.2(4)(c), determined by multiplying the corporation’s net income of $8,000 by its apportionment percentage of 20%.
Betelgeuse's net operating loss deduction for the taxable year is $1,600 resulting in Massachusetts net income of $0, determined by subtracting the $1,600 net operating loss deduction from $1,600 of Massachusetts net income as set forth in 830 CMR 63.30.2(4)(c).
After subtracting the $1,600 of net operating loss from the total available net operating loss of $5,000 carried forward from tax years 2010 – 2014, Betelgeuse has $3,400 of net operating loss remaining that is attributable to 2010. Because losses incurred in a taxable year beginning on or after January 1, 2010 may be carried forward twenty taxable years from the year in which they are incurred, including taxable years during which a corporation is not subject to the income measure of the corporate excise in Massachusetts, the $3,400 of net operating loss is available to carry forward to subsequent taxable years until 2030.
Example 6. In taxable year 2030 Corporation X has a Massachusetts net income of $10,000. This net income figure was calculated by taking into account a dividends received deduction of $5,000 that Corporation X was eligible to take in 2030. Corporation X has a net operating loss of $20,000 generated in 2010 that was carried forward and never used. Corporation X is permitted to use $10,000 of the carried-forward loss against its net income of $10,000. The remaining $10,000 of loss generated in 2010 is not eligible for further carry forward, and is lost.
An S corporation that is subject to the income measure of the corporate excise under M.G.L. c. 63, §§ 32D, 39 may claim a net operating loss deduction for net operating losses as provided in 830 CMR 63.30.2(7), 830 CMR 62.17A.2, and in particular, 830 CMR 62.17A.2(8)(c)3. Application of the statutory rule under M.G.L. c. 63, § 32D that imposes the net income measure of the corporate excise based on an S corporation’s total receipts for the taxable year may result in an S corporation being subject to the income measure in some years but not others. The rules for the carrying forward of a net operating loss for years that an S corporation is not subject to the income measure of the corporate excise are set forth in 830 CMR 62.17A.2(8)(c)3.c.
For corporations subject to combined reporting under M.G.L. c. 63, § 32B, the rules that explain the carry forward of losses are set forth in the Combined Reporting regulation. See 830 CMR 63.32B.2(8).
(a) Mergers. In the event of a merger of two or more corporations where one corporation survives as the successor entity, the surviving corporation retains any net operating loss that it separately incurred before the merger, subject to the limitations of 830 CMR 63.30.2(9)(b). All of the net operating loss of a corporation absorbed in the merger is lost. The surviving corporation may not deduct or carry forward the net operating loss of a corporation it absorbs. In the event of a consolidation of two or more previously existing corporations into a new corporation, the new corporation starts with no net operating loss. All of the net operating loss of the previously existing corporations is lost. The new corporation may not deduct or carry forward any net operating loss incurred by any of the previously existing corporations before the consolidation.
(b) Changes in Ownership. Where a corporation undergoes an ownership change, as defined in Code § 382(g), the amount of the corporation's net income that may be offset by pre-change net operating loss in any taxable year shall not exceed the limitation imposed by Code § 382 (the “Code § 382 limitation”), subject to the following provisions:
1. Adjusted § 382 Limitation. The Code § 382 limitation shall be adjusted by multiplying the Code § 382 limitation by Massachusetts taxable net income, allocated or apportioned to Massachusetts, determined without regard to the net operating loss deduction, and dividing the resulting amount by federal taxable income (determined without regard to the federal net operating loss deduction). For corporations subject to combined reporting, the Adjusted § 382 limitation shall be calculated separately for each member of the combined group.
2. Carry Forward of Adjusted § 382 Limitation. If the Adjusted § 382 limitation exceeds the taxable income of the corporation in a given post-change year, the Adjusted § 382 limitation for the following year shall be increased by the amount of such excess.
3. The Adjusted § 382 limitation shall be determined without regard to Code § 382(n), which has no effect for Massachusetts tax purposes.
4. Carry Forward of Non-deducted Net Operating Loss Due to the Adjusted § 382 Limitation. Any amount of net operating loss that cannot be deducted because of the Adjusted § 382 limitation may be carried over as provided in 830 CMR 63.30.2(6).
(c) Corporate Reorganizations. The Massachusetts net operating loss carry forward generally does not survive a transaction that qualifies as a reorganization under Code § 368, except as otherwise provided in 830 CMR 63.30.2(9)(a). However, if a transaction qualifies as a reorganization under Code § 368(a)(1)(F), the Massachusetts net operating loss carry forward will be preserved to the extent that it could have been used by the predecessor corporation.
REGULATORY AUTHORITY
830 CMR 63.30.2: M.G.L. c. 14, §6(l); M.G.L. c. 62C, § 3
REGULATORY HISTORY
Date of Promulgation: 1/1/93
New regulation promulgated 3/20/2020
