Technical Information Release

Technical Information Release TIR 99-20: Title 5 Septic System Expenditures Credit -- Calculation of Subsidy Deduction

Date: 12/17/1999
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax

1. Introduction
Massachusetts allows a credit to be taken against the personal income tax imposed pursuant to chapter 62 of the General Laws for certain expenditures associated with the repair or replacement of a failed cesspool or septic system on a taxpayer's property under certain conditions ("Title 5 credit"). G.L. c. 62, § 6(i). The rules for applying this credit are set forth in Technical Information Release 97-12, Personal Income Tax Credit for Failed Cesspool or Septic System Title 5 Expenditures, Technical Information Release 99-5, The Title 5 Credit and Federally Mandated Sewer Connections, and in the instructions to Schedule SC, Septic Credit, which is attached to tax Forms 1, 1-NR/PY, and 2.

The amount of Title 5 credit allowed is equal to forty percent of the taxpayer's expenditures for the design and construction of a septic system that is built in accordance with the provisions of 310 CMR 15.000 et seq., the State Environmental Code, Title 5, as promulgated by the Massachusetts Department of Environmental Protection in 1995. The expenditures are defined as the taxpayer's actual expenses or $15,000, whichever is less. G.L. c. 62, § 6(i). If a taxpayer has received a below market interest rate loan from the Commonwealth or another source, or a below market interest rate betterment from a municipality, the amount of credit that may be claimed is reduced by the amount of the interest subsidy the taxpayer has received at the time the credit is claimed. See TIR 97-12, II.(2). Section 281 of chapter 127 of the Acts of 1999 provides a new rule for computing the interest subsidy to be subtracted from the expenditures amount for arriving at the proper Title 5 credit. This Technical Information Release sets forth the new rule to be used in calculating the interest subsidy amount.

2. New method for determining the interest subsidy to be deducted from the septic credit
The interest subsidy to be deducted from the septic credit is defined as the difference between the amount of interest the taxpayer would have paid at the time the credit is claimed using the non-subsidized state interest rate and the amount of interest the taxpayer has actually paid using the below market interest rate (the subsidized rate). See TIR 97-12 II.(2). A below market interest rate loan is a low interest rate loan or betterment offered by the Department of Environmental Protection, the Massachusetts Housing Finance Authority, any city or town, or any other source, used for the repair and replacement of a failed septic system. The non-subsidized state interest rate, which is the state interest rate determined under G.L. c. 62C, § 32(a), is the federal short-term rate determined under § 6621(b) of the Internal Revenue Code, as amended and in effect for the taxable year, plus four percentage points, compounded daily.

The federal short-term rate is determined quarterly. I.R.C., § 6621(b)(1). The Department of Revenue announces the state interest rate, based on the federal short-term rate, through the issuance of quarterly Technical Information Releases. See G.L. c. 62C, § 32(d). The new rule for determining the interest subsidy requires that the non-subsidized state tax rate to be used in the interest subsidy calculation be an annual rather than a quarterly rate. St. 1999, c. 127, § 281. This annual rate will be the average of the four quarterly rates for the calendar year, that is, the sum of the four quarterly rates as determined under G.L. c. 62C, § 32 at the end of the calendar year for the previous four quarters divided by four. Schedule SC and the instructions to Schedule SC have been revised to use the annualized non-subsidized state tax rate. This change is effective for all tax years beginning on or after January 1, 1999.

Frederick A. Laskey,
Commissioner of Revenue

December 17, 1999
TIR 99-20

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