|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Corporate Excise/Personal Income Tax
A new provision of the Internal Revenue Code, I.R.C. § 448, added by the Tax Reform Act of 1986 prohibits the use of the cash method of accounting for certain taxpayers and requires them to change to the accrual method in the tax year beginning after December 31, 1986. This new requirement applies to C corporations, partnerships with C corporations as partners, and tax shelters (as that term is defined in Code § 448(d)(3)) with average annual gross receipts (calculated as set out in § 448(c)) or more than $5,000,000 for tax years beginning after December 31, 1985. Among Massachusetts taxpayers affected by Code § 448 will be certain C corporations and S corporations, as well as certain partnerships and corporate trusts. This Technical Information Release explains how taxpayers affected by Code § 448 must report for Massachusetts tax purposes any adjustments to income required as a result of the change in accounting methods.
The Federal Provisions
In many cases, the change in accounting methods required by new Code § 448 will result in the omission or duplication of taxable income and deductions for federal tax purposes. Code § 481 requires any taxpayer changing accounting methods (whether or not required by § 448) to make adjustments to obtain a fairer picture of taxable income. Section 481(a) requires a taxpayer to adjust its income in the year of the change to prevent amounts from being duplicated or omitted as a result of the change.
Taxpayers may have a choice of ways to mitigate the impact of these adjustments in the year of the change. Under Code § 481(b), a taxpayer with income adjustments in excess of $3,000 may allocate those adjustments to prior tax years and limit its federal tax liability to the sum of the resulting tax increases for those years. Alternatively, under Rev. Proc. 84-74, a taxpayer may, in certain cases, take the adjustments into income over the course of up to six (6) tax years. Code § 448(d)(7), however, specifically limits the spread period for § 448-required changes to a maximum of four (4) years. See Temp. Treas. Reg. § 1.448-1T(g)(2).
The Change in Accounting Methods for Massachusetts C Corporations and S Corporations
Massachusetts C corporations and S corporations determine taxable income for Massachusetts tax purposes by referring to their federal gross income for the taxable year. G.L. c. 63, §§ 30 (C corporations), 32D (S corporations). As a result, such Massachusetts corporations required to change from the cash to accrual basis for federal tax purposes will also be required to make the change in accounting methods for Massachusetts tax purposes. These taxpayers will take the resulting adjustments into income over the period allowed under Code § 448(d)(7) and Temp. Treas. Reg. § 1.448-1T(g)(2) for Massachusetts tax purposes, provided that they use the same period to spread out the adjustments for federal tax purposes. Code § 481(b) relief is not available for Massachusetts purposes, because it involves a calculation of the federal tax liability and a forgiveness of tax, rather than a determination of federal gross income. If a taxpayer chooses Code § 481(b) relief for federal tax purposes, that taxpayer must report all § 481(a) adjustments as income in the year of the change for Massachusetts tax purposes.
The Change in Accounting Methods for Massachusetts Partnerships and Corporate Trusts
Massachusetts corporate trusts determine their taxable income for Massachusetts tax purposes by referring to their federal gross income for the taxable year as defined under the Internal Revenue Code as amended on January 1, 1985 and in effect for the taxable year. G.L. c. 62, §§ 1, 8. Massachusetts partnerships, whose income is taxable to the individual partners, also determine taxable income by referring to federal gross income for the taxable year as defined by the Internal Revenue Code as of January 1, 1985. G.L. c. 62, §§ 1, 17. When these entities change from the cash to the accrual method of accounting for federal tax purposes, they must make a similar change for Massachusetts purposes.
Under G.L. c. 62, § 62, they must request permission from the Commissioner to change accounting methods for Massachusetts tax purposes. Ordinarily, Massachusetts Form 14 (Application for Permission to Return on Accrual Basis) is required when a taxpayer requests permission to change accounting methods in the taxable year in which they change accounting methods for federal tax purposes under Code § 448, however, Massachusetts partnerships ad corporate trusts will request permission to change from the cash to the accrual method of accounting by filing their annual return using the accrual method and noting at the top, "Filed in compliance with TIR 87-14." The Commissioner will be deemed to have approved such requests, and his permission will allow these partnerships and corporate trusts to spread adjustments required by the change as they do federally under Code § 448(d)(7) and Temp. Treas. Reg. § 1.448-1T(g)(2). As with C corporations and S corporations, Massachusetts partnerships and corporate trusts using Code § 481(b) relief for federal tax purposes must take the change-related adjustments into income in the year of the change for Massachusetts tax purposes.
/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue
December 17, 1987