Technical Information Release  TIR 14-13: Tax Changes Contained in An Act Promoting Economic Growth Across the Commonwealth

Date:	10/29/2014
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Personal Income Tax/Corporate/Sales and Use

This Technical Information Release (TIR) explains provisions in St. 2014, c. 287, An Act Promoting Economic Growth Across the Commonwealth, (the Act) relating to the personal income tax, G.L. c. 62, the corporate excise, G.L. c. 63, and sales tax, G.L. c. 64H. 

I.  Changes to the Research and Development Credit

Sections 54 and 123 of the Act re-wrote G.L. c. 63, § 38M, effective for tax years beginning on or after January 1, 2015.  Effective for tax years beginning on or after January 1, 2015, a business corporation may elect to calculate its research credit using one of two methods.

• The first method revises the existing research credit by changing two definitions that affect the calculation of the credit, i.e., the definitions of "base amount"[1]and "fixed base rate”[2].  The amount of the credit is equal to the sum of 10% of the excess, if any, of the qualified research expenses for the taxable year over the base amount plus 15% of the basic research expenses determined under I.R.C. § 41(e)(1)(A).
• The second method, which a taxpayer may elect to use in lieu of the method described above, provides for an alternative simplified research credit, which generally conforms to the methodology of the federal alternative simplified credit provided by I.R.C. § 41(c)(5), as amended and in effect for January 1, 2014.

The Massachusetts alternative simplified credit, the second method, will be phased in over a seven year period as follows:

For calendar years 2015, 2016, and 2017, the amount of the credit is equal to 5% of the taxpayer’s qualified research expenses for the taxable year that exceeds 50% of the taxpayer’s average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined. 

For calendar years 2018, 2019 and 2020, the amount of the credit is 7½% of the taxpayer’s average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.[3]

For calendar years beginning on or after January 1, 2021, the amount of the credit is increased to 10%.[4]  If the corporation did not have qualified research expenses in any one of the three taxable years preceding the taxable year for which the credit is being determined, the amount of the Massachusetts alternative simplified research credit is equal to 5% of the taxpayer's qualified research expense for the taxable year.

Further guidance regarding this change, including the method for making and effect of an election on subsequent tax years, will be provided in an amendment to 830 CMR 63.38M.1.

II.  Sales/Use tax exemption for Qualifying Limited Partnerships Engaged in Research Activities

Section 66 of the Act added subsection (d) to G.L. c. 63, § 42B.  Solely for the purpose of claiming the sales tax exemption available to research and development corporations under chapters 64H and 64I, §§ 6(r) and 6(s), this change allows a limited partnership that is not a business corporation, but that would otherwise qualify as a research and development corporation under § 42B, to be considered a research and development corporation when all partners are corporations.  This exemption only applies to purchases by such limited partnerships, and does not apply to purchases by LLCs or entities in other forms of organization where the entity is not a business corporation.  Thus, for example, the exemption does not apply to a general partnership or to LLCs that elect to be treated as a partnership.  This provision became effective on passage.  Since sales/use taxes are transactional taxes, this provision applies to sales/exempt uses occurring on or after August 13, 2014.

III.  Changes to the Economic Development Incentive Program (EDIP) Annual Cap

Sections 56, 56A and 125 of the Act made the following changes to G.L. c. 63, § 38N:^[5]  The $25 million annual cap on the amount of credit that may be awarded was increased from $25 million to $30 million.  The increase takes effect upon enactment.  The $30 million annual cap on the amount of credit that may be awarded is scheduled to later decrease from $30 million to $25 million.  The decrease in the annual cap takes effect 1/1/2019.

IV.  Expansion of EDIP Provisions to Include Certified Job Creation Project

Sections 41 and 55 of the Act made the following changes to G.L. c. 62, § 6(g) and  G.L. c. 63, § 38N: The EDIP credit provisions were expanded to include “certified job creation projects” as defined in section 3A and 3F of chapter 23A.  The amount of the credit awarded may be up to $1,000 per job created (up to $5,000 in a Gateway Community as defined in section 3A of chapter 23A or within a city or town whose average seasonally adjusted unemployment rate, as reported by the executive office of labor and workforce development, is higher than the average seasonally adjusted unemployment rate of the commonwealth). The total award per project may not exceed $1,000,000.  The credit for a certified job creation project is allowed only for the year subsequent to that in which the jobs are created.  This amendment is effective upon enactment and will apply to tax years beginning on or after January 1, 2015.

V.  Changes to the Certified Housing Development Tax Credit Cap

A key component of the Certified Housing Development Program, G.L. c.62, § 6(q); G.L. c.  63, § 38BB, established by St. 2010, c. 240, is the tax credit for certain qualified rehabilitation expenditures with respect to a certified housing development project.  Sections §§ 45, 46, 47, 48, 60, 61, 62, 122 and 125 of the Act made the following changes.  The $5 million annual cap on the amount of credit that may be awarded has been increased from $5 million to $10 million.  The annual cap for the certified housing development tax credit is part of an over-all cap imposed on the Economic Development Incentive Program credit authorized pursuant to G.L. c. 62, 6(g); G.L. c. 63, 38N.  The increase in the annual cap takes effect on 1/1/2015.  The annual cap is reduced from $10 million back to $5 million effective 1/1/2019.

VI.  New Farming and Fisheries Personal Income Tax Credit

Section 50 of the Act creates a small farms and fisheries personal income tax credit, G.L. c. 62, § 6(s), similar to the investment credit available to manufacturing, R&D corporations and corporations primarily engaged in agriculture or commercial fishing.  The new credit applies to personal income taxpayers who are primarily engaged in agriculture, farming or commercial fishing.[6] The amount of the credit is 3% of the cost or other basis for federal income tax purposes of qualifying property acquired, constructed or erected during the tax year.  Qualifying property is defined as tangible personal property and other tangible property including buildings and structural components thereof which are located in Massachusetts, used solely in farming, agriculture or fishing, and are depreciable with a useful life of at least 4 years. 

The Act allows the same credit to lessees calculated as follows: 3% of a lessor’s adjusted basis in qualifying property for federal income tax purposes at the beginning of the lease term, multiplied by a fraction, the numerator of which is the number of days of the tax year during which the lessee leases the qualifying property and the denominator of which is the number of days in the useful life of the property.  Where the lessee is eligible for the credit, the lessor is generally not eligible, with the exception of “equine-based businesses where care and boarding of horses is a function of the agricultural activity”.  

There is a recapture provision, i.e., if the property on which a credit is taken is disposed of or ceases to be in qualified use prior to the end of its useful life, the difference between the credit taken and allowed for actual use must be added back as additional taxes due in the year of disposition, unless the property has been in qualified use for more than 12 years.  This credit is effective for tax years beginning on or after January 1, 2015.

VII.  Change in Transferability of Historic Credit for Certain Personal Income Tax Taxpayers

Section 53 of the Act, amending G.L. c. 62, sec. 6J(b)(1)(i), provides that a taxpayer who acquires a qualified historic structure is allowed to receive any tax credits for qualified rehabilitation expenditures previously awarded to the transferor of the qualified historic structure if:  (A) the rehabilitation was not placed in service by the transferor; (B) no credit has been claimed by anyone other than the acquiring taxpayer as verified by the Department of Revenue to the Historical Commission; (C) the taxpayer completes the rehabilitation and obtains certification from the Historical Commission; and, (D) the taxpayer complies with all other requirements under the Historic Rehabilitation Tax Credit statute and related regulations and rules.  In the case of a multi-phase project, tax credits may be transferred for any phase that meets the criteria in subsections (A) through (D).  This change is effective August 13, 2014.

VIII.  2014 Sales Tax Holiday

Section 109 of the Act created the 2014 Sales Tax Holiday weekend on August 16^th and 17^th, 2014.  See TIR 14-7.

 

Amy Pitter
Amy Pitter
Commissioner of Revenue
 

AP:MTF:el:wrd

October 29, 2014

TIR 14-13

[1]  The “base amount” is now defined as “[t]he product of (i) the average annual gross receipts of the taxpayer for the 4 taxable years preceding the credit year”; and (ii) a 'fixed base ratio'."

[2]  The “fixed-base ratio” is no longer tied to a corporation’s aggregate Massachusetts qualified research expenditures for a fixed 5 year period during the 1980s.  It is now defined as “[t]he percentage which the average aggregate qualified research expenses for the taxpayer for the third and fourth taxable years preceding the credit year is of the annual average gross receipts for those years, provided, however, that the fixed base ratio shall not exceed 16 per cent”.

[3]  Note:  The language governing 2018, 2019 and 2020 did not repeat all of the language used to describe the first phase-in period for calculation the amount of the credit. The provisions for these later years require that the amount of the credit should equal 7½ percent of the taxpayer’s average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined, but it omitted the following: “that exceeds 50% of the taxpayer’s average qualified research expenses for 3 taxable years” (preceding the taxable year for which the credit is being determined).  The Department understands the omission of the italicized language with respect to the 2018, 2019, and 2020 years to be a technical drafting error.

[4]  The provision for calendar year 2021 and later states only that the taxpayer’s credit “shall be equal to 10%,” and omits the following: “of the taxpayer’s qualified research expenses for the taxable year that exceeds 50 per cent of the taxpayer’s average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.” The Department understands the omission of the italicized language with respect to the 2021 and later years to be a technical drafting error.

[5]  The cap in G.L. c. 63, § 38N applies to both chapter 62 and 63.

[6]  The Act provides that the term “engaged in commercial fishing” includes “only those landing a minimum of 5,000 pounds of fish per year and possessing either a state or federal fishing permit.”