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Corporate income and franchise taxes

Taxable income

How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?

The Massachusetts Corporation Excise Tax is imposed on a taxpayer’s apportioned ‘net income’ (Mass. G.L. c. 63, § 39). “The starting point for calculating the corporate excise tax in Massachusetts is Federal gross income” (PMAG, Inc. v. Comm’r of Revenue, 429 Mass. 35, 39 (1999)). The Massachusetts statutes define ‘gross income’ as “gross income as defined under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year” with statutory adjustments (G. L. c. 63, § 30(3)).

Once a corporation's gross income is determined, its ‘net income’ must then be calculated. Net income is defined in G. L. c. 63, § 30(4) ... as 'gross income less the deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code.’ 

(Farrell Enters., Inc. v. Comm’r of Revenue, 46 Mass. App. Ct. 564, 567-568 (1999)).  

As noted in the previous paragraph, there are several statutory modifications that may increase or decrease the tax base. 

How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?

General business corporations use a three-factor apportionment formula consisting of a property, payroll, and double-weighted sales factor. Manufacturing corporations and mutual fund service corporations use single-sales factor apportionment.

Nexus

How is nexus determined for corporate income tax purposes?

Generally, the Massachusetts statutes impose tax on “every business corporation, organized under the laws of the commonwealth, or exercising its charter or other means of legal authority, or qualified to do business or actually doing business in the commonwealth, or owning or using any part or all of its capital, plant or any other property in the commonwealth” (Mass. G.L. c. 63, § 39). The Massachusetts Department of Revenue asserts that the provision permits a corporation to be subject to tax to the fullest extent permissible under the Constitution. The Massachusetts Supreme Judicial Court has upheld assessments based on nexus against corporations with no physical presence in Massachusetts. 

Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?

Massachusetts does not have an affiliate nexus statute, but the Department of Revenue will assert nexus to the fullest extent permissible under the Constitution. 

Rates

What are the applicable corporate income tax rates?

One element of the Massachusetts Corporation Excise Tax is a net income tax component. The rate of tax for this component is currently 8% of net income.

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

Massachusetts generally conforms to federal taxable income as the starting point in computing state taxable income. Consequently, deductions available federally are generally available in Massachusetts—unless a specific statutory modification to federal taxable income exists. 

Typical statutory adjustments to federal taxable income include certain addbacks of royalties or interest paid to a related party and, in some cases, interest paid to third parties that is acquisition indebtedness. 

Also, Massachusetts generally permits a 95% dividends-received deduction with some exceptions.

Regarding net operating losses, Massachusetts guidance provides that Massachusetts allows a deduction only for:  

  • carrying over net operating loss in the first five years of a business, starting from the date the corporation was organized;
  • losses sustained in taxable year prior to January 1, 2010: net operating losses sustained in any taxable year can be carried forward for no more than five years and cannot be carried back; or
  • losses generated during a taxable year beginning January 1, 2010 or later: net operating losses sustained can be carried forward for no more than 20 years and cannot be carried back.

Other additions to tax include:

  • losses sustained in other taxable years, except for the net operating losses;
  • taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state; and
  • amounts related to accelerated depreciation under I.R.C. 168(k).

Important credits available in Massachusetts include the following:

  • Economic Development Incentive Program Credit – This program consists of an annual pool of funds available for distribution as credits on a competitive basis. A ‘but for’ test applies, meaning that the credit is generally awarded if the economic development would not occur ‘but for’ the credit awarded. Factors considered in awarding the credits include:
  • the number of jobs to be created;
  • the timing of the job creation;
  • the size of the capital investment;
  • the wages and categories of proposed jobs, including whether there are healthcare options available and/or some type of pension/401K/IRA;
  • the industry of the applicant;
  • the profile of the community where it will be located;
    • whether or not there is local municipal support;
    • the level of out-of-state sales;
    • the competitiveness of the situation;
    • whether the headquarters are in Massachusetts; and
    • any commitment to local procurement.
  • Investment Tax Credit – To qualify, a corporation must be defined under Massachusetts law as a manufacturing corporation, research and development corporation, or a corporation primarily engaged in agriculture or fishing. The credit relates to purchases or lease of qualifying tangible properties. The maximum amount of credits, otherwise allowable to a corporation in any taxable year, may not exceed 50% of its excise.
  • Life Sciences Credits – Five different credits are available for life sciences companies. 
  • Research Credit – This credit is generally available to business corporations subject to the corporate excise that incurred ‘Massachusetts qualified research expenses’ in Massachusetts.  The credit closely parallels the federal research credit and has been modified in recent years to be more accessible and efficient for companies.

Filing requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

Massachusetts provides for combined reporting of unitary groups. The default rule is water’s edge combined reporting. Taxpayers may make a worldwide election. They may also make an affiliated group election, which is “an election by a taxable member on behalf of itself and its affiliates to treat as its combined group all corporations that are members of its Massachusetts affiliated group.”

Corporate franchise tax

Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?

Yes, the Massachusetts Corporation Excise Tax, which is the general tax on corporations, consists of a net income and a franchise tax component.  

If your state imposes a corporate franchise tax, please stipulate:

(a) The applicable tax base.

If the corporation is a tangible property corporation, then the tax is imposed on the value of tangible property. If the corporation is an intangible property corporation, then the corporation is an intangible property corporation.

(b) Tax rates.

$2.60 per $1,000 value of either:

  • specified and allocated tangible personal property; or
  • specified and allocated net worth (depending on the applicable franchise tax base).

(c) Any exemptions or deductions.

Per the Massachusetts statute, ‘net worth’ is calculated as follows:

(a) the book value of its total assets on the last day of the taxable year shall be reduced by the sum of (1) its liabilities on said date, (2) the book value of its tangible property situated in the commonwealth on said date and subject to local taxation, less the interest of any mortgagee therein, and (3) the book value on said date of its investment in subsidiary business corporations which represent 80 per cent or more of the voting stock of said subsidiary business corporations or, in the case of a subsidiary business corporation which does not have voting stock, the book value of its investment in such business corporation which represents 80 per cent or more ownership interest; (b) the amount determined in (a) shall be multiplied by such corporation's income apportionment percentage….

(d) Filing formalities.

The tax return is combined with the Massachusetts corporate income tax return.

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