|Referenced Sources:||Massachusetts General Laws|
Corporate/Personal Income Tax
The Tax Reform Act of 1986 (P.L. 99-514) amended the Internal Revenue Code by adding new Code § 448, which restricts the use of the cash method of accounting for certain taxpayers and requires affected taxpayers to change from the cash to the accrual method in the tax year beginning after December 31, 1986. Among taxpayers that new § 448 may affect are banks and utilities having average annual gross receipts (calculated as set out in § 448(c)) of more than $5,000,000 for tax years beginning after December 31, 1985. This Technical Information Release explains how a bank or utility affected by Code § 448 must report on its Massachusetts excise return (Form 63BTC for a bank and Form P.S.-1 for a utility) any adjustments to income required as a result of the change. (The term "bank" is used broadly in this TIR and includes banking associations, trust companies, saving and loans, and cooperative banks, just as in G.L. c. 63, § 1. "Utility" as used in this TIR has the same meaning as "utility corporation" under G.L. c. 63, § 52A(1)(a).)
In many cases, the change in accounting methods that § 448 requires will result in the omission or duplication of certain items of taxable income and deductions for federal tax purposes. Code § 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. For federal tax purposes, the bank or utility changing accounting methods under Code § 448 will be able to take these adjustments into account over the course of up to four (4) years. See I.R.C. § 448(d)(7); Rev. Proc. 84-74.
In determining their Massachusetts excise liability, banks and utilities use "net income" as a base. G.L. c. 63, §§2, 52A(2). For a bank, net income is gross income from all sources, less certain federal deductions. G.L. c. 63, § 1. Taxable net income of a utility is defined similarly: gross income from all sources, less certain dividends and federal deductions. G.L. c. 63, § 52A(1)(b). Neither the bank nor the utility excise is dependent upon federal gross income.
If a bank or utility required to change accounting methods under Code § 448 also changes accounting methods for Massachusetts tax purposes, the Department has determined that it must make adjustments like those required by Code § 481(a) to reflect more accurately taxable income and deductions in the year of the change in methods. It may take those adjustments into income over the period allowed under Code § 481(c), Rev. Proc. 84-74 and Code § 448(d)(7) for purposes of the excises under G.L. c. 63, §§ 2 and 52A(2), as long as it is using those same provisions to spread out the adjustments for federal tax purposes.
For federal tax purposes, a bank or utility may be using Code § 481(b), which allows a taxpayer changing accounting methods to allocate the adjustments to prior tax years and limit its federal tax liability in the year of the change to the sum of the tax increases for those years. Section 481(b), unlike § 481(c) and Rev. Proc. 84-74, involves a calculation of the federal tax liability and a forgiveness of tax. As a result, the federal tax relief of Code § 481(b) is not available for Massachusetts purposes. In addition, if a taxpayer chooses § 481(b) relief for federal tax purposes, it may not take advantage of the provisions of § 481(c), Rev. Proc. 84-74, and § 448(d)(7) for Massachusetts tax purposes, but must report all § 481(a) adjustments in the year of the change.
Some banks affected by Code § 448 may have received distributions under St. 1985, c. 405, § 25, in the same tax year that they change accounting methods. Because of the change in accounting methods, these banks may find that such distributions would be omitted from their taxable income for the year were it not for the adjustments required by Code § 481(a). Banks pay a special excise on such distributions, under St. 1985, c. 405, § 34. Unlike § 481(a) adjustments attributable to income taxed under G.L. c. 63, § 2, banks may not take adjustments attributable to such distributions into income over the period allowed under Code § 481(c), Rev. Proc. 84-74 and Code § 448(d)(7). Rather, a bank receiving these distributions must pay the excise under St. 1985, c. 405, § 34, on the whole distribution in the year the bank receives it. See Letter Ruling 87-5.
/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue
December 17, 1987