Summary of the New Massachusetts Corporate Tax Law

An Act Improving Tax Fairness and Business Competitiveness

Target Audience: Business Owners, Financial Managers, Accounting Consulting Firm Advisement Interest, MA State Tax System Interest, Multi-national Corporations, Unitary Business Operations with Affiliations, Foreign Operators, Global Growth Strategists, S Corporations, Public and Private Companies

On July 3, 2008 Massachusetts Governor Deval Patrick signed into law An Act Improving Tax Fairness and Business Competitiveness, effective for tax years beginning on or after January 1, 2009.

The intention is to bring tax fairness, modernization and improved competitiveness to the MA state tax system while gradually reducing corporate rates from 9.5% to 8%, starting in the year 2010. However, during the next five years tax revenues will still increase by more than $1 billion.

This law does contain some ambiguity so we will be updating you periodically as issues are clarified. If you would like to know whether you will be affected, contact a F&D state tax specialist or call 1 (888) 875-9770. We can help you identify where the planning opportunities are.

Reduction in Corporate Rates:

A reduction in the business corporation income tax rate of 9.5% will be phased in over three years. Years beginning after:
January 2010 8.75%
January 2011 8.25%
January 2012 8.0%

Concern exists that a prolonged economic downturn will create additional fiscal pressure on the state resulting in a delay in the tax rate reductions. 

Combined Reporting:

The new law requires corporations that are engaged in unitary business operations to file combined returns with their affiliates (applies to companies with more than 50% direct or indirect common control). This method replaces the separate return filing structure and restricts the ability of affiliated corporations to shift taxable income out of the state. 

Corporations are required to use a waters edge method unless a world wide election is made for income apportionment. The best method will depend on the significance of the U.S. operations as compared to foreign operations and the respective levels of profitability. Due to the ten year election requirement, taxpayers will need to consider their global growth strategy to determine the best election.

The waters edge method includes unitary affiliates incorporated in the US and also certain foreign affiliates with average property, payroll and sales factors within the US of 20% or more. Any unitary affiliate formed outside the US that derives more than 20 percent of its income from intercompany transactions with the taxable group members will also be included.

Alternatively, an election can be made to use the federal affiliated group instead of the unitary group. This election may be attractive if certain group members have losses or if there is a desire to eliminate uncertainty on the determination of which entities would be included in the unitary group. This is also a ten year election.

It is not clear how net operating loss and credit carryovers from separate return years will be carried into combined reporting returns. In addition, the special rules for apportionment methods for manufacturers and financial institutions are retained but non taxable (no nexus) members sales into MA will be included in the sales apportionment numerator for taxable members. These two areas contain ambiguity that may create problems for computing tax accrual provisions for the third quarter 2008 financial statements, and thereafter, until sufficient guidance is provided by the DOR.

Pass Through Entities & Federal Conformity:

MA will now require conformity with respect to federal entity classification elections, known as check the box rules (corporation versus partnership tax status). This eliminates certain planning structures, which could potentially lower the corporation’s state taxes.

Qualified Subchapter S Subsidiaries (QSSB) will now be taxed at the parent S Corporation level (same as federal) rather than taxed on a separate company basis for purposes of the sting tax.

The MA sting tax rate (currently 4.5% on S Corporations with revenues exceeding $9m) levied on S Corporations will be adjusted downward to reflect the new state corporate tax rates.

MA Corporate Trust (Massachusetts Business Trust):

This new law also eliminates the special tax treatment for MA Corporate Trusts (MBT) which may have elected S Corporation status for federal purposes but only paid tax to MA at the individual tax rate of 5.3%. Taxpayers utilizing a MBT structure may want to consider restructuring options. 

Public Company Deduction:

A new special deduction for public companies has been created with the intention of mitigating the impact of the new law, which could potentially increase the combined groups net deferred tax liability balance sheet account (FAS 109). The special deduction is claimed over seven years beginning in the year 2012. Due to the fact that only public companies are eligible for to this deduction, there may be challenges to the provision from private companies. 

Public Law 86-272 Changes:

Public Law 86-272 provides protection from income taxes for companies who’s only activity in a state is the solicitation of sales. The new law repeals Public Law 86-272 protection under the net worth/property measure of the corporate excise tax. This will require a lot more corporations who are merely soliciting sales in MA to file returns and pay at least the minimum $456 excise liability.

Find out how our Boston CPA Firm can add value to your business. Email us or call us at 1 (888) 875-9770.

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