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Technical Information Release

Technical Information Release TIR 20-9: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act

Date: 07/13/2020
Referenced Sources: Massachusetts General Laws

Table of Contents

A. Introduction

On March 27, 2020, Public Law No. 116-136, the federal “Coronavirus Aid, Relief and Economic Security Act,” also known as the CARES Act (the “Act”) was signed into law.  The Act contains a number of tax provisions, some of which have Massachusetts tax implications.  This Technical Information Release (“TIR”) explains the impact of selected provisions of the Act on Massachusetts taxation.[1]

This TIR addresses the following provisions of the Act:

Individual income tax provisions:

  • 2020 recovery rebates to individuals
  • Expansion of unemployment benefits
  • Tax-favored withdrawals from retirement funds
  • Loans from qualified employer retirement plans
  • Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
  • Allowance of partial above-the-line deduction for charitable contributions
  • Modification of limitation on charitable contributions during 2020
  • Exclusion for certain employer payments of student loans
  • Modification of limitation on losses for taxpayers other than corporations
  • Changes to health savings accounts, flexible spending accounts, and Archer medical savings accounts

Corporate and business tax provisions:

  • Small business loan forgiveness
  • Modifications to the limits on net operating losses
  • Modifications to limitation on business interest deduction
  • Technical amendments regarding qualified improvement property 
  • Modification of limitation on charitable contributions during 2020

For Massachusetts personal income tax purposes, gross income means federal gross income as defined under the Internal Revenue Code (“Code”), with certain modifications required under G.L. c. 62, §§ 6F and 2(a).[2] General Laws, chapter 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.[3]  Therefore, for purposes of determining Massachusetts gross income for personal income tax purposes, Massachusetts generally follows the provisions of the Code as amended and in effect on January 1, 2005.  In certain instances, however, Massachusetts specifically adopts provisions of the Code as currently in effect.  For Massachusetts corporate excise purposes, gross income means federal gross income as defined under the Code, with certain modifications, as amended and in effect for the taxable year.[4]

 

B. Individual Income Tax Provisions

(1)  2020 Recovery Rebates to Individuals

Section 2201 of the Act adds new Code § 6428, which, subject to certain limitations, provides a refundable credit to individual taxpayers against federal income taxes in an amount equal to the sum of $1,200 ($2,400 for taxpayers filing joint returns) plus $500 for each “qualifying child” as defined in Code § 24(c). The credit may be claimed for the 2020 taxable year (i.e., it will be claimed on returns filed in 2021), but will be refunded in advance in 2020. The credit is based on the adjusted gross income reported on the taxpayer’s 2019 or 2018 return and phases out at higher amounts of adjusted gross income.

Massachusetts gross income is federal gross income with certain modifications not relevant here.[5] Since the advance payment of a credit under the Act is not includable in federal gross income, it is not includable in Massachusetts gross income and thus not subject to the Massachusetts personal income tax.

(2)  Expansion of Unemployment Benefits

Sections 2101-2116 of the Act provide for an emergency expansion of unemployment benefits. Section 2102 temporarily extends benefits to individuals who are not otherwise eligible for state and federal unemployment benefits or who are unable to work as a direct result of the COVID-19 public health emergency, including self-employed individuals, independent contractors, and those with a limited work history.  Under sections 2102, 2104 and 2107, all recipients of state-paid unemployment compensation, including those who have otherwise exhausted the benefits they were entitled to under state or federal law, and those temporarily eligible under section 2102 of the Act, may collect unemployment compensation for a maximum of 39 weeks instead of the usual 26 weeks between January 27, 2020 and December 31, 2020.[6] Additionally, any unemployment compensation received between April 5, 2020 and July 31, 2020 will include a $600 per week increase under section 2104 of the Act.

Under the 2005 Code (and under current Code), federal gross income includes unemployment compensation.[7]  No provision of the Act excludes these payments from federal gross income.  Therefore, all payments of unemployment compensation, including amounts authorized under the Act, are includable in both federal and Massachusetts gross income and subject to Massachusetts personal income tax.

(3)  Tax-favored Withdrawals for Retirement Plans

The Act establishes tax-favorable rules for withdrawals from certain retirement plans.[8]  Under Code § 72(t), early distributions from certain retirement plans generally are subject to an additional 10% tax.  The Act exempts from the additional tax any early distribution that is a “coronavirus-related distribution.”[9]  A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.[10] The Act also provides for coronavirus-related distributions to be included in a taxpayer’s income ratably over a three-year period unless a taxpayer elects otherwise.[11]

Massachusetts gross income is federal gross income with certain modifications not relevant here.[12] Therefore, coronavirus-related distributions will be included in Massachusetts gross income at the same time and in the same amounts as they are included in federal gross income. The exemption from the additional 10% tax under Code § 72(t) has no practical Massachusetts tax impact. Although Massachusetts conforms to the Code as currently in effect with respect to section 72, there is no Massachusetts analog to the Code § 72(t) penalty.

(4)  Loans from Qualified Employer Retirement Plans

The Act modifies the rules applicable to loans from qualified employer retirement plans.  Pursuant to Code § 72(p), a loan to an employee from such a plan is treated as a distribution for tax purposes unless it falls under one of several exceptions.  Under one such exception, a loan is generally not treated as a distribution to the extent that the loan does not exceed a certain dollar amount. The Act increases that threshold from $50,000 to $100,000 for loans made during the 180-day period beginning on March 27, 2020.[13]  In addition, where a qualified individual with an outstanding loan from a qualified employer plan has a loan due date that occurs during the period beginning on March 27, 2020 and ending on December 31, 2020, such due date will be delayed for one year.[14]

Massachusetts adopts the current Code with respect to federal retirement provisions, specifically Code §§ 72, 401 through 420, and 457. Therefore, for Massachusetts purposes a loan from a qualified employer plan will be treated as a distribution to the extent it is so treated for federal purposes.

(5)  Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts

The Act amends Code §§ 401 and 402, to waive temporarily minimum distribution requirements and rules, and associated penalties, for rollover distributions for certain retirement plans, including individual retirement plans, annuities and deferred compensation plans, for 2020.[15] 

Massachusetts adopts the current Code with respect to federal annuities under Code § 72 and other retirement provisions, specifically Code §§ 401 through 420, and 457, excluding 402A and 408(q).  However, because Massachusetts has no analog to the federal penalties at issue, these changes have no practical Massachusetts tax impact.

(6)  Allowance of Partial Above-the-Line Deduction for Charitable Contributions

Code § 170 provides a deduction for charitable contributions. Prior to the Act, the federal deduction could be claimed by an individual only if the individual itemized deductions. The Act amends Code § 62(a) by adding new paragraph (22), which allows  an individual who does not itemize to deduct up to $300 of qualified charitable contributions for taxable years beginning after December 31, 2019.[16]  

Massachusetts does not adopt the addition of subsection (22) to Code § 62(a) because Massachusetts generally follows Code § 62(a) as in effect on January 1, 2005, with the exception of Code § 62(a)(1).  However, for tax years beginning on or after January 1, 2021, Massachusetts law separately allows a deduction for charitable contributions, with no itemization requirement.[17] The forthcoming Massachusetts charitable deduction remains in effect and is unaffected by the Act.

(7)  Modification of Limitation on Charitable Contributions During 2020

In general, the deduction for charitable contributions by an individual taxpayer may not exceed 50% of the taxpayer’s adjusted gross income, with certain modifications.[18]  The Act temporarily eases that limitation with respect to certain cash contributions to charitable organizations made during calendar year 2020.[19] With regard to individuals, a deduction for 2020 cash contributions will be allowed up to the amount of the taxpayer’s contribution base less all other charitable contributions allowed.[20]

For individuals, Massachusetts follows Code § 170 as amended and in effect on January 1, 2005. Therefore, Massachusetts does not follow the Act’s temporary easing of the limitation in Code § 170 for personal income tax purposes.  The forthcoming Massachusetts charitable deduction remains in effect and is unaffected by the Act.

(8)  Exclusion for Certain Employer Payments of Student Loans

The Act expands the definition of “educational assistance” excludible from gross income under Code § 127(c) to include qualified education loan payments (as defined in Code § 221(d)(1)) made by an employer after March 27, 2020 and before January 1, 2021. The exclusion applies to payments by an employer of principal or interest on any qualified education loan incurred by an employee for the education of the employee.[21]  The Act also amends Code § 221(e)(1) to disallow a deduction for interest paid on such qualified loan by the employee on an amount that is excluded from gross income under the Act.[22] 

Massachusetts follows Code §§ 127 and 221 as amended and in effect on January 1, 2005.[23] Consequently, Massachusetts does not conform to the revisions made by the Act.  Therefore, qualified education loan payments made by an employer are not excluded from an employee’s Massachusetts gross income. Likewise, Massachusetts does not conform to the disallowance of the deduction for interest paid by an employee on such loans.

(9)  Modification of Limitation on Losses for Taxpayers Other than Corporations

For tax years beginning after December 31, 2017 and before January 1, 2026, P.L. 115-97, commonly known as “The Tax Cuts and Jobs Act” (“TCJA”) limited the deductions attributable to any business of a non-corporate taxpayer under new Code § 461(l).[24]  The Act suspends those limitations. [25]

For personal income taxpayers, Massachusetts follows Code § 461 as amended and in effect on January 1, 2005.  Consequently, Massachusetts does not adopt Code § 461(l) as enacted in the TCJA. Therefore, the suspension of the limitation has no impact for Massachusetts tax purposes.[26]

(10)  Use of Health Savings Accounts, Flexible Spending Accounts, and Archer Medical Savings Accounts for Telehealth Services and Over-the-Counter Medical Products

In general, a taxpayer may deduct amounts contributed to, and exclude from gross income reimbursements from, his or her Health Savings Account (“HSA"), Flexible Spending Account (“FSA”), or Archer Medical Savings Account (“Archer MSA”) for certain health care costs.  Under the  Act, Code §§ 106(f), 220(d)(2)(A), and 223(d)(2) were amended to allow amounts paid or expenses incurred for medicine or drugs without a medical prescription to be covered by an HSA, FSA, or Archer MSA.  These changes apply to amounts paid or expenses incurred after December 31, 2019.  The Act also amended Code § 223(c)(2) to allow, for plan years beginning on or before December 31, 2021, high-deductible health plans with an HSA to cover telehealth and other remote care services, even if the taxpayer fails to have a deductible for such services.  This change became effective upon the enactment of the Act on March 27, 2020.

With respect to Code §§ 106 and 223, Massachusetts follows the Code as currently in effect and therefore excludes from gross income reimbursements from an HSA or FSA for medicine or drugs without a prescription and allows a deduction for contributions to, and excludes from gross income reimbursements from, an HSA in relation to certain remote care services for plan years beginning prior to or on December 31, 2021.[27]  However, because Massachusetts follows Code § 220 as amended and in effect on January 1, 2005, Massachusetts does not exclude reimbursements for these expenses when paid by an Archer MSA.

C. Corporate and Business Tax Provisions

(1)  Small Business Loan Forgiveness

Section 1106 of the Act provides loan forgiveness to small businesses for certain loans made pursuant to the Paycheck Protection Program (“PPP”) under the Small Business Act.[28]  A borrower is eligible for loan forgiveness equal to the amount spent (but not exceeding the principal amount of the loan) by the borrower during an 8-week period after the origination date of the loan on the following items:

  • payroll costs;
  • interest payments on mortgage obligations incurred before February 15, 2020;
  • payments of rent on any lease in force before February 15, 2020; and
  • utility payments, for which service began before February 15, 2020.

Under the Act, any amount of cancelled indebtedness that would otherwise be includable in the gross income of the borrower under the Code for federal income tax purposes is excluded from gross income.[29] In addition, no deduction is allowed for an expense that is otherwise deductible if both (1) the payment of the expense results in forgiveness of a loan made under the PPP and (2) the income associated with the forgiveness is excluded from gross income pursuant to the Act.[30]

For purposes of personal income tax, Massachusetts generally follows the Code as amended and in effect on January 1, 2005.  Therefore, for a borrower subject to Massachusetts personal income tax, any amount forgiven under § 1106 of the Act is includable in gross income and subject to tax, and there is no disallowance of deductions attributable to the payment of expenses resulting in the forgiveness of the loan.  For purposes of the corporate excise, Massachusetts follows the Code as currently in effect. Therefore any amount forgiven for a corporate borrower under § 1106 of the Act would be excluded from Massachusetts gross income, and any deductions disallowed in accordance with IRS Notice 2020-32 would likewise be disallowed for Massachusetts tax purposes. Costs and expenses paid using PPP loan amounts that are ultimately forgiven are not eligible for any of the credits that may be claimed under either G.L. c. 62 or G.L. c. 63.

(2)  Modifications to the Limitations on Net Operating Losses

The Act suspends several limitations on the amount of net operating loss (“NOL”) that can be claimed by a business under Code § 172, including the rule limiting the NOL deduction to 80% of taxable income.[31]  In addition, the Act allows federal NOLs incurred in 2018 through 2020 to be carried back and deducted in prior years.[32]

Massachusetts does not conform to the NOL rules under Code § 172 in computing taxable income.  For corporations, the NOL deduction is determined under G.L. c. 63, §§ 30.4(ii) and 30.5.  Additionally, Massachusetts does not allow an NOL deduction for personal income tax purposes.[33]  Therefore the suspension of Code § 172 limitations has no impact for Massachusetts tax purposes. Further, Massachusetts does not allow NOLs to be carried back and deducted under any circumstances.[34]

(3)  Modifications to Limitation on Business Interest Deduction

Code § 163(j) limits the deductibility of business interest for tax years beginning after December 31, 2017.[35]  This provision generally limits the deductibility of net interest expense to 30% of a taxpayer’s adjusted taxable income.[36]  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.[37]  The 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.[38]

Section 2306 of the Act amends Code § 163(j) by inserting a special rule for tax years 2019 and 2020 that potentially increases a taxpayer’s current year business interest deduction (1) by increasing the limitation on the deduction to 50% of adjusted taxable income (with special rules for partnerships), and (2) by allowing an election to use 2019 adjusted taxable income in calculating the limitation for tax year 2020.

Massachusetts adopts the current Code with respect to Code § 163 for both personal income tax and corporate excise purposes. Therefore, Massachusetts adopts these changes subject to the rules outlined in TIR 19-17.

(4)  Technical Amendments Regarding Qualified Improvement Property

The Act makes changes to the depreciable life of “qualified improvement property” (“QIP”) as defined in Code § 168(e)(6)(A).[39]  Prior to the Act, the depreciable life of QIP was 39 years. Under the Act, QIP is assigned a 15-year depreciable life under MACRS, the modified accelerated cost recovery system, and a 20-year depreciable life under ADS, the alternative depreciation system.[40] The change under MACRS makes QIP eligible for bonus depreciation under Code § 168(k).  In addition, the definition of QIP was modified by the Act to include only improvements “made by the taxpayer.”[41] The changes apply to QIP placed in service after December 31, 2017.

Massachusetts follows the current Code with respect to Code § 168, except for § 168(k), for purposes of both the personal income tax and corporate excise. Therefore, Massachusetts adopts the changes made by the Act with respect to the depreciable life of QIP for property placed in service after December 31, 2017. However, Massachusetts is decoupled from the bonus depreciation rules in Code § 168(k). Consequently, the Massachusetts depreciation deduction for QIP must be calculated under Code § 168 without regard to § 168(k).

(5)  Modification of Limitation on Charitable Contributions During 2020

In general, the deduction for charitable contributions by a corporate taxpayer may not exceed 10% of the corporation’s taxable income, with modifications.[42]  The Act temporarily eases that limitation with respect to certain cash contributions made to charitable organizations during calendar year 2020.[43] With regard to corporations, the Act allows a deduction for 2020 cash contributions in an amount up to 25% of the taxpayer’s taxable income less the amount of all other charitable contributions allowed.[44]

Massachusetts follows the Code as currently in effect for purposes of the corporate excise. Therefore, Massachusetts adopts the temporary easing of the charitable contribution limitation for corporate excise purposes.

 

                                                                                    /s/Geoffrey E. Snyder
                                                                                    Geoffrey E. Snyder
                                                                                    Commissioner of Revenue

 

GES:RHF:dt

July 13, 2020

TIR 20-9

[1] This TIR does not contain an exhaustive list of the Massachusetts tax implications of the Act. The changes discussed in this TIR are those identified by the Department of Revenue as most likely to be of interest to taxpayers and their advisers.

[2] G.L. c. 62, § 2(a).  

[3] G.L. c. 62, § 1(c). 

[4] G.L. c. 63, § 30(3).

[5] G.L. c. 62, § 2(a). 

[6] Act, §§ 2102(a)(3)(A)(i) and (c)(2).

[7] Code § 85.

[8] Act, § 2202(a).

[9] Id. at § 2202(a)(1).

[10] Id. at § 2202(a).

[11] Id. at § 2202(a)(5).

[12] G.L. c. 62, § 2(a).

[13] Act, § 2202(b)(1).

[14] Id. at § 2202(b)(2).

[15] Id. at § 2203(a)(I)(i).

[16] Id. at § 2204.

[17] See G.L. c. 62, § 3B(a)(13). 

[18] Code § 170(b)(1).

[19] Act, § 2205(a).

[20] Id. at § 2205(a)(2)(A)(i).

[21] Id. at § 2206(a).

[22] Id. at § 2206(b).

[23]  G.L. c. 62, § 1(c). 

[24] TCJA § 11012.

[25] Act, § 2304.

[26] See TIR 18-14: Impact of Selected Provisions of the Federal Tax Cuts and Jobs Act on Massachusetts Personal Income Tax under Chapter 62.

[27] See G.L. c. 62, § 1(c). 

[28] See 15 U.S.C. § 636(a)(36). 

[29] Act, § 1106(i).

[30] IRS Notice 2020-32.

[31] Act, § 2303.

[32] Id.

[33] G.L. c. 62, § 2(d)(1)(C). 

[34] See G.L. c. 63, §§  30.4, 30.5.   

[35] TIR 18-14: Impact of Selected Provisions of the Federal Tax Cuts and Jobs Act on Massachusetts Personal Income Tax under Chapter 62 and TIR 19-17: Application of Code § 163(j) Interest Expense Limitation to Corporate Taxpayers.

[36] The business interest deduction cannot exceed the sum of (A) the business interest of such taxpayer for such taxable year, (B) 30% of the adjusted taxable income, and (C) the floor plan financing interest. See Code § 163(j)(1). Adjusted taxable income is defined under Code § 163(j)(8).

[37] Code § 163(j)(5).

[38] Id. at §§ 163(j)(3) and (7).

[39] Act, § 2307.

[40] Id. at § 2307(a).

[41] Id

[42] Code § 170(b)(2)(A).

[43] Act, § 2205(a).

[44] Id. at § 2205(a)(2)(B)(i).

Referenced Sources:
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