Technical Information Release TIR 18-14: Impact of Selected Provisions of the Federal Tax Cuts and Jobs Act on Massachusetts Personal Income Tax under Chapter 62
Table of Contents
I. Introduction and Background
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act (“TCJA”), was signed into law. This Technical Information Release (“TIR”) explains the impact of selected provisions of the TCJA on the Massachusetts personal income tax under G.L. c. 62. The following provisions of the TCJA are discussed in this TIR:
Amendments to which Massachusetts conforms for purposes of G.L. c. 62:
- Internal Revenue Code (“IRC” or “Code”) § 163(j): Limitation on deductibility of business interest
- IRC § 165(d): Limitation on deduction of wagering losses for professional gamblers
- IRC § 529: Qualified tuition/college savings plans
- IRC § 529A: ABLE accounts
Amendments to which Massachusetts does not conform for purposes of G.L. c. 62:
- IRC §§ 61(a)(8) and 215(a): Repeal of deduction for alimony payments and repeal of inclusion in gross income for alimony received
- IRC § 83(i): Qualified equity grants
- IRC §§ 132(a)(6), (g) and 217: Suspension of moving expenses deduction and exclusion from gross income
- IRC § 199A: 20% deduction for “pass-through” businesses
- IRC § 274(a)(4): Disallowance of deduction for qualified transportation fringe benefit expenses provided to an employee of a taxpayer
- IRC § 461(l): Limitation on non-corporate taxpayer’s deduction of business losses
- IRC § 1031: Like-kind exchanges of real property
- IRC § 1061: Re-characterization of certain capital gains for partners in a partnership
For Massachusetts purposes, gross income means federal gross income as defined under the Code, with certain modifications required under G.L. c. 62, §§ 6F and 2(a). G.L. c. 62, § 2(a). G.L. c. 62 defines the term “Code” as the Internal Revenue Code as amended on January 1, 2005 and in effect for the taxable year, with certain exceptions. G.L. c. 62, § 1(c). Therefore, for purposes of determining Massachusetts gross income, Massachusetts generally follows the provisions of the Code as amended and in effect on January 1, 2005. In certain instances, Massachusetts specifically adopts provisions of the Code as currently in effect.
A. Amendments to which Massachusetts conforms for purposes of G.L. c. 62
I. IRC § 163(j): Limitation on Deductibility of Business Interest
Under the TCJA, IRC § 163(j) was amended to limit the deductibility of business interest for tax years beginning after December 31, 2017. As amended, this provision generally limits the deductibility of net interest expense to 30% of a taxpayer’s adjusted taxable income. The amount of net business interest expenses in excess of the current year limitation is carried forward and treated as business interest paid or accrued in the following year. Business interest is defined by the Code as any interest paid or accrued on debt that is “properly allocable to a trade or business” and does not include investment interest. IRC § 163(j)(5). The new limitation does not apply to taxpayers with average gross receipts of less than $25 million over the preceding three taxable years, or to taxpayers engaged in certain trades. IRC § 163(j)(3) and (7).
In the case of an individual taxpayer, Massachusetts follows the Code in effect for the taxable year with respect to trade or business deductions described in IRC § 62(a)(1), including IRC § 163. G.L. c. 62, § 1(c). Therefore, for Massachusetts purposes the limitation in IRC § 163(j) as amended by the TCJA would apply to limit the business interest expense deduction of a chapter 62 taxpayer. Amounts in excess of the current year limitation will be carried forward and treated as business interest paid or accrued in the following year.
II. IRC § 165(d): Limitation on Deduction of Wagering Losses for Professional Gamblers
Prior to the TCJA, a professional gambler could claim a deduction for losses from wagering transactions to the extent of the gains from such transactions. IRC § 165(d). A professional gambler was also allowed a deduction for gambling-related expenses, e.g. transportation, meals and lodging, or admission fees. These deductions for gambling-related expenses were not limited by the amount of gambling winnings.
Under the TCJA, effective for tax years beginning after December 31, 2017 and before January 1, 2026, IRC § 165(d) gambling losses are still limited to the extent of a taxpayer’s gambling winnings. However, the definition of “gambling losses” that are limited to the extent of winnings has been broadened to include gambling-related expenses.
Massachusetts follows the current Code in effect for the taxable year with respect to trade or business deductions under IRC § 62(a)(1), including IRC § 165. G.L. c. 62, § 1(c). Therefore, for Massachusetts personal income tax purposes, a professional gambler’s gambling-related expenses are now limited in the same manner as gambling losses, consistent with amended IRC § 165(d).
III. IRC § 529: Qualified Tuition/College Savings Plans
Code § 529 provides preferential tax treatment with respect to participation in a qualified tuition program, often referred to as a “529 plan.” A “qualified tuition program” is defined under IRC § 529(b) as a program that is established and maintained by a state or agency or instrumentality thereof, or by one or more eligible education institutions that meet all of the requirements of that section. The plan must be established for the purpose of meeting the qualified higher education expenses of a designated beneficiary of the plan, and must meet all the other requirements of IRC § 529 to qualify for tax exemption.
Funds contributed to a 529 plan are deposited on an after-tax basis. As long as those funds are used to pay for qualified higher education expenses, the account earnings are tax exempt and distributions from the plan are not included in the gross income of a designated beneficiary. IRC § 529(c). “Qualified higher education expenses” are defined under IRC § 529(e)(3)(A)(i) as tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, in addition to other expenses as described in subsections (ii) and (iii) for special needs beneficiaries or certain computer equipment.
The TCJA amended IRC § 529 by adding subsection (c)(7), which provides that “expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school” are treated as “qualified higher education expenses.” The TCJA also amended IRC § 529(e)(3)(A), adding a reference to new subsection (c)(7) and providing that distributions from a 529 plan for elementary or secondary school expenses may not exceed $10,000 for a beneficiary during a taxable year. Pursuant to G.L. c. 62, § 1(c), Massachusetts adopts IRC § 529 as currently in effect. Therefore, Massachusetts adopts these amendments to IRC § 529.
Pursuant to G.L. c. 62, § 3(B)(a)(19), Massachusetts allows a deduction for contributions to specified 529 plans, effective for tax years beginning January 1, 2017 through January 1, 2021. The deduction is subject to recapture in the taxable year or years in which distributions or refunds are made from the 529 plans for any reason other than (i) to pay qualified higher expenses, as defined by IRC § 529(e)(3)(A); or (ii) the beneficiary’s death, disability or receipt of scholarship. Since Massachusetts follows IRC § 529 as currently in effect, including with respect to the meaning of “qualified higher education expenses,” contributions used to fund tuition expenses at an elementary or secondary institution would qualify for the Massachusetts deduction pursuant to G.L. c. 62, § 3.B(a)(19).
IV. IRC § 529A: ABLE Accounts
Code § 529A provides preferential tax treatment with respect to participation in a “qualified ABLE program.” A qualified ABLE program is a program established and maintained by a state or agency under which a person can set up an account to pay the disability-related expenses of an eligible beneficiary. IRC § 529A(b)(1)(A).
Code § 529A(a) provides that a qualified ABLE program is generally exempt from taxation. Additionally, distributions that do not exceed the qualified disability expenses of the designated beneficiary are not includible in gross income. IRC § 529A(c)(1)(B).
The TCJA made several amendments to IRC § 529A, including increasing the limitation on certain contributions for individuals with disabilities as referenced under IRC § 529A(b)(2)(B). With respect to IRC § 529A, Massachusetts follows the current Code and therefore adopts these changes. See G.L. c. 62, § 1(c) (as amended by St. 2018, c. 273 on October 23, 2018).
B. Amendments to which Massachusetts does not conform for purposes of G.L. c. 62
I. IRC §§ 61(a)(8) and 215(a): Repeal of Deduction for Alimony Payments and Repeal of Inclusion in Gross Income for Alimony Received
Prior to the TCJA, a taxpayer that paid alimony or “separate maintenance payments” to a former spouse could deduct the amount of such payments from gross income pursuant to IRC § 215(a), and the recipient of such payments was required to include them in gross income pursuant to IRC §§ 61(a)(8) and 71(a). The TCJA repealed both the deduction for alimony paid by a taxpayer and the inclusion of alimony in gross income for the recipient, and moved the definition of “divorce or separation instrument” to IRC § 121(d)(3). These changes apply to any divorce or separation instrument (as defined in IRC § 71(b)(2) as in effect before December 22, 2017) executed after December 31, 2018.
Massachusetts adopts the federal rules as they existed on January 1, 2005 with respect to the deduction for alimony payments and the inclusion of such payments in income. Therefore, subsequent to the TCJA, eligible Massachusetts taxpayers can still take a deduction under IRC § 215(a) for alimony payments made to a former spouse on their Massachusetts personal income tax return and recipients of such payments must still include them in gross income pursuant to IRC §§ 61(a)(8) and 71.
II. IRC § 83(i): Qualified Equity Grants
Code § 83 provides that property transferred as payment in connection with the performance of services is income to a service provider. Generally, the excess of the fair market value of the transferred property as of the first time that the transferee’s rights in the property are either transferrable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount paid for the property, is included in the service provider’s gross income for the taxable year. IRC § 83(a).
The TCJA added new subsection (i) to IRC § 83, which permits eligible private corporations to adopt qualified equity grant plans for issuing stock options or restricted stock units and also permits eligible employees to obtain qualified stock in exchange for the performance of services. Code § 83(i) also allows such eligible employees to defer the recognition of income with respect to such stock for up to 5 years in certain instances.
Massachusetts follows IRC § 83 as amended and in effect on January 1, 2005. Therefore, Massachusetts does not adopt new IRC § 83(i).
III. IRC §§ 132(a)(6), (g) and 217: Suspension of Moving Expenses Deduction and Exclusion from Gross Income
Prior to the TCJA, IRC § 217 provided for a deduction for moving expenses paid or incurred during the taxable year in connection with the commencement of work by a taxpayer as an employee or as a self-employed individual at a new principal place of work. Also, IRC § 132(a)(6) provided an exclusion from gross income for any qualified moving expense reimbursement. Qualified moving expense reimbursement was defined as an amount received (directly or indirectly) by an individual from an employer as a payment or reimbursement of expenses that would be deductible as moving expenses under IRC § 217 if paid or incurred by the individual. See IRC § 132(a)(6) and (g).
For taxable years 2018 through 2025, the TCJA suspended both the exclusion from gross income allowed under IRC § 132(a)(6) and (g) and the deduction from income allowed under IRC § 217.
Massachusetts adopts both IRC §§ 132 and 217 as amended and in effect on January 1, 2005. Therefore, for Massachusetts purposes, both the exclusion from gross income afforded under IRC § 132(a)(6) and (g) and the deduction allowed under IRC § 217 are still allowable for eligible Massachusetts taxpayers.
IV. IRC § 199A: 20% Deduction for “Pass-through” Businesses
The TCJA added IRC § 199A, which provides eligible taxpayers with a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. The deduction has two components. First, eligible taxpayers may be entitled to deduct up to 20 percent of “qualified business income” from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate; and second, eligible taxpayers may also be entitled to deduct up to 20 percent of their combined qualified real estate investment trust dividends and qualified publicly traded partnership income.
Massachusetts generally follows the IRC as amended and in effect on January 1, 2005. Pursuant to G.L. c. 62, § 1(c), Massachusetts adopts IRC § 62(a)(1), pertaining to certain trade and business deductions, as currently in effect. The IRC § 199A deduction is in the nature of a trade or business deduction described in IRC § 62(a)(1), which Massachusetts typically follows as currently in effect. However, flush language added by the TCJA to the end of IRC § 62(a), provides that “any deduction allowed by IRC § 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection,” including subsection (1). Accordingly, since the deduction allowed under IRC § 199A is not treated as a deduction under IRC § 62(a)(1), the deduction is not allowed under Massachusetts law.
V. IRC § 274(a)(4): Disallowance of Deduction for Qualified Transportation Fringe Benefit Expenses Provided to an Employee of a Taxpayer
Qualified transportation fringe benefits are generally excluded from an employee’s federal and Massachusetts gross income up to a monthly maximum, as determined under IRC § 132(f). Prior to the TCJA, expenses incurred by an employer for such benefits were deductible federally and in Massachusetts by the employer as trade or business expenses under IRC § 62(a)(1).
The TCJA amended IRC § 274, Disallowance of Certain Entertainment, Etc., Expenses, by adding subsection (a)(4) providing that no deduction is allowed for qualified transportation fringe benefits provided to an employee of the taxpayer.
Massachusetts specifically adopts IRC §§ 62(a)(1) as currently in effect, but follows IRC §§ 132 and 274(a) as amended and in effect on January 1, 2005. See G.L. c. 62, § 1(c). Accordingly, for personal income tax purposes, Massachusetts does not adopt the new disallowance in IRC § 274(a). Employers subject to tax under G.L. c. 62 may still be eligible for a deduction for qualified transportation fringe benefits expenses paid on behalf of their employees.
VI. IRC § 461(I): Limitation on Non-Corporate Taxpayer’s Deduction of Business Losses
Code § 461(j) limits a non-corporate taxpayer’s deductions attributable to a farming business. Pursuant to the TCJA, the limitation in IRC § 461(j) is suspended and shall not apply for tax years beginning after December 31, 2017 and before January 1, 2026. Instead, for those tax years, under new subsection (l) of IRC § 461, a limitation is imposed on the deductions attributable to any business of a non-corporate taxpayer. The amount of any deductions disallowed in a given tax year due to the operation of IRC § 461(l) will be treated as a net operating loss under IRC § 172 and carried forward to the next taxable year.
Massachusetts follows IRC § 461 as amended and in effect on January 1, 2005. Consequently, Massachusetts does not follow the new limitation in IRC § 461(l), and the application of IRC § 461(l) for federal income tax purposes will not generate a net operating loss in Massachusetts. The limitation in IRC § 461(j) remains in effect in determining Massachusetts net income.
VII. IRC § 1031: Like-Kind Exchanges of Real Property
Prior to the TCJA, IRC § 1031 allowed a taxpayer to defer recognition of gain or loss on the sale of investment or business property if the taxpayer replaced that property with qualified “like-kind” property. The amendments to IRC § 1031 have replaced the word “property” throughout with “real property,” meaning that the deferral is now available only on exchanges of real property.
Property that can no longer be exchanged without current recognition of gain or loss includes intangibles, such as broadband spectrums, fast-food restaurant franchise licenses and patents, aircraft, vehicles, machinery and equipment, railcars, boats, livestock, artwork and collectibles. Transition rules permit an exchange of property other than real property to be eligible for deferral treatment if the exchanged property was disposed of or the replacement property was acquired by the taxpayer before December 31, 2017.
Massachusetts adopts IRC § 1031 as amended and in effect on January 1, 2005. Therefore, Massachusetts does not adopt the changes to IRC § 1031. For Massachusetts purposes, personal property is still eligible for deferral treatment if all other requirements are met, which could result in the gain or loss on such property being recognized at a different time than for federal purposes.
VIII. IRC § 1061: Re-characterization of Certain Capital Gains for Partners in a Partnership
The TCJA amended IRC § 1061 by increasing the required holding period for long-term capital gain treatment with respect to partnership interests held by investment and fund managers. Under amended IRC § 1061, if a taxpayer holds an “applicable partnership interest” during the tax year, the taxpayer’s net capital gain with respect to such interest is treated as long-term capital gain only if the taxpayer has held the “applicable partnership interest” for more than three years—instead of more than one year. If the three-year holding period is not satisfied, the gain is treated as short-term capital gain, which is subject to the same tax rates applicable to ordinary income.
Under amended IRC § 1061, an “applicable partnership interest” means any interest in a partnership that is transferred to or held by the taxpayer in connection with the performance of substantial services by the taxpayer in a business of raising or returning capital and (1) either investing or disposing of specified assets or (2) developing specified assets. “Specified assets” means securities, commodities, real estate held for rental or investment, cash or cash equivalents, and options or derivative contracts with respect to the foregoing.
Massachusetts does not conform to amended IRC § 1061. The definition of net long-term capital gain in G.L. c. 62, § 2 is tied to the definition of that term in IRC § 1222 as currently in effect. Also, whether gain from the sale or exchange of a capital asset constitutes Part A or Part C income depends upon whether the asset was held for more than one year. Accordingly, the three-year holding period requirement imposed by amended IRC § 1061 does not apply under G.L. c. 62.
/s/Christopher C. Harding
Christopher C. Harding
Commissioner of Revenue
May 9, 2019