TIR 08-11: An Act Relative to Tax Fairness and Business Competitiveness
This Technical Information Release (TIR) summarizes the major corporate tax reform provisions of An Act Relative to Tax Fairness and Business Competitiveness (the Act), signed into law by the Governor on July 3, 2008. St. 2008, c. 173.
For tax years beginning on or after
January 1, 2009, the Act institutes unitary combined reporting for
multi-state corporations and also adopts business entity classification
rules that broadly conform to the federal “check-the-box” rules
requiring companies to be classified as the same type of legal entity
for state and federal tax purposes. The Act includes corporate tax rate
reductions to be implemented over a period of years for business
corporations, S corporations, financial institutions, and financial
institutions that are S corporations. The Act also adopts some
additional tax provisions and makes technical changes, including
elimination of prior statutory distinctions between “domestic” and
“foreign” corporations by designating both to be “business
corporations,” and restating the tax rates so that they are accurately
described in the General Laws without reference to a decades-old surtax.
TIR explains these provisions in summary fashion and generally explains
what follow-up guidance the Department of Revenue intends to issue
concerning these provisions. As guidance is developed, taxpayers and
practitioners are urged to submit written comments to the Department
with questions and suggestions on specific issues raised by corporate
I. Combined Reporting for Multi-state Corporate Filers
the Act, Massachusetts will change from a separate company reporting
state to a combined reporting state for purposes of taxing corporations
that operate both within and without the state.
the current separate company reporting structure, each corporation with
nexus files a tax return that includes only the separately-determined
income and apportionment factors of that corporation. In combined
reporting, already in use in over 20 other states, each taxpayer member
is responsible for tax based on its apportioned share of the business
income of the combined group, together with that member’s own allocated
(non-business) income and its apportioned share of other business
income, including business income from any other combined group of
which the taxpayer is a member.
Effective for tax years
beginning on or after January 1, 2009, a corporation subject to chapter
63 that is engaged in a unitary business with one or more corporations
subject to combination must calculate its taxable net income derived
from this unitary business as its share of the apportionable income or
loss of the combined group engaged in the unitary business, determined
in accordance with a combined report.
Transactions between the member corporations are generally disregarded.
An apportionment formula for each member that has nexus in
Massachusetts is determined, and will vary depending on whether such
member is a business corporation, a manufacturing corporation, a
financial institution, a mutual fund service corporation or a utility.
Some of the major aspects of the combined reporting law are
described below. As expressly contemplated in the Act, the Department
intends to issue regulations and other guidance that will explain the
new law in greater detail and provide specific rules for its
Unitary Business. The term
“unitary business” is defined as the activities of a group of two or
more corporations under common ownership that are sufficiently
interdependent, integrated or interrelated through their activities so
as to provide mutual benefit and produce a significant sharing or
exchange of value among them or a significant flow of value between the
separate parts. The Act provides that “[t]he term unitary
business is to be construed to the broadest extent permitted by the
United States Constitution.”
For purposes of combined reporting, common ownership means that more
than 50 percent of the voting control of each member of the group is
directly or indirectly owned by a common owner or owners, either
corporate or non-corporate, whether or not the owner or owners are
members of the combined group. A group of corporations under
common ownership may be engaged in one or more unitary businesses.
Any business conducted by a partnership will be treated as the
business of the partners, whether the partnership interest is directly
held or indirectly held through a series of partnerships to the extent
of the partner’s distributive share of the partnership’s income,
regardless of the magnitude of the partner’s ownership interest or its
distributive share of partnership income.
A business conducted directly or indirectly by one corporation is
unitary with that portion of a business conducted by another commonly
owned corporation through its direct or indirect interest in a
partnership if the activities conducted by the former corporation and
the partnership are unitary regardless of the magnitude of the
partner’s ownership interest or its distributive or any other share of
Combined Group. The
combined group includes business corporations (both “C” corporations
and Subchapter S corporations), financial institutions, and utilities
that are subject to tax under G.L. c. 63, §§ 2, 2B, 32D, 39 or 52A or
that would be so subject to tax if doing business in the Commonwealth.
Non-profits (paying tax on unrelated business income), security
corporations, and insurance companies are generally excluded from the
combined group. “Captive” insurers, however, and also commonly-owned
real estate investment trusts (REITs) and regulated investment
companies (RICs) are included. Business income of the combined group is
calculated on the combined report as the sum of all members’ (including
non-taxpayer members’) individually determined net business incomes.
- Water’s edge combination generally; election to use worldwide combination. Unless a “worldwide” combination election is made, the combined group will be limited to the “water’s edge” (generally, corporations organized in the U.S. or doing business in the U.S.). Under the water’s edge method of combination, the income and apportionment factors of most non-U.S. corporations are excluded from the combination; certain categories of foreign corporations are included as described in the statute. If a “worldwide” election is made, each taxpayer member of the combined group will take into account the income and apportionment factors of all the worldwide members (whether organized in the U.S. or in foreign countries) includible in the combined group. In general, such an election is binding for and applicable to the taxable year for which it is made and all taxable years thereafter for a period of 10 years.
- Election to include all members of federal affiliated group, as modified by G.L. c. 63, § 32B(g).
A taxpayer may elect to include within its combined group generally all
corporations that are members of a federal affiliated group, as defined
in Internal Revenue Code § 1504, filing a federal consolidated return,
but with the group expanded as described in G.L. c. 63, § 32B(g) to
include all commonly-owned corporations that are organized in the U.S.
or that otherwise would be included in a water’s edge group in the
absence of an affiliated group election. The election will include
members of such affiliated group that are subject to tax or that would
be subject to tax if doing business in the state under G.L. c. 63, §§
2, 2B, 32D, 39 or 52A. Any such election must be made on an original,
timely filed return by any member of the combined group. In general,
such an election is binding for and applicable to the taxable year for
which it is made and for the next nine taxable years, and may be
renewed for additional ten-year periods.
Apportionment Formulas and Tax Rates. The Act generally retains the existing statutory tax rates and apportionment rules for different types of corporations, i.e., business corporations, manufacturers, financial institutions, mutual fund service corporations, utilities, etc.
Generally, each taxable member of the combined group will determine its
own share of the group’s over-all income, using its applicable
apportionment formula, and will pay tax on that income at the rate
applicable to that member. The statutory rules provide for certain
adjustments to the apportionment rules, e.g., to allocate among taxable members any Massachusetts-source sales of non-taxable members (to reflect the so-called Finnigan
approach to apportionment of unitary income), and to address situations
where a combined group includes one or more financial institutions and
one or more non-financial institutions.
Pre-2009 Combined Return.
The existing so-called “combined return” under the version of G.L. c.
63, § 32B prior to the Act is repealed. (Prior section 32B,
repealed for tax years beginning on or after January 1, 2009, offers
affiliated taxpayers doing business in the state the option to file
returns that the law refers to as “combined,” but these filings are not
“unitary” combined return filings like those required under the new
Deduction; FAS 109. The Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes,
establishes basic principles that apply when accounting for income
taxes for the purpose of preparing a company’s financial statements.
FAS 109 requires that the effects of income taxes resulting from
transactions occurring in the current and preceding years be reported
on an entity’s financial statements for current and future years. The
Act allows a deduction for certain combined groups that include
publicly traded companies where the enactment of combined reporting for
unitary businesses results in an increase to the combined group’s net
deferred tax liability, as defined in the Act.
If applicable, the deduction is prorated over the seven year period
beginning with the combined group’s taxable year that begins in 2012.
Any taxpayer intending to claim a deduction under this section must
file a statement with the Commissioner (including such calculations and
other information as the Commissioner may require) on or before July 1,
2009 specifying the total amount of the deduction which the taxpayer
Forthcoming Guidance.The Act contemplates
that the Department will issue regulations explaining the application
of the new law, including without limitation rules addressing the
- the elimination of
intercompany transactions, including but not limited to the payments of
dividends, between or among combined group members, and the elimination
or deferral of income, expenses, apportionment factors or other tax
items associated with those transactions and including any exceptions
to such eliminations or deferrals under rules analogous to those under
Internal Revenue Code § 1502;
- the sharing within the
combined group of credits that may be validly claimed by a taxpayer and
that are attributable to the combined group’s unitary business, to the
extent such sharing of credits by a particular member of the combined
group is consistent with the statutory requirements for claiming such
credits, taking into account the nature of such member’s business and
- the application of any carry
forwards, including the sharing of any net operating loss or tax credit
carry forwards that are attributable to the activities of the combined
group’s unitary business, but the carry forward of losses, credits or
other tax benefits that arise in tax years beginning before January 1,
2009 will be available only to the extent permitted by law as in effect
prior to the Act; and
- the relationship of sections 31Ito 31K, inclusive, to newly enacted section 32B.
other things, adoption of combined reporting for multi-state
corporations will result in changes in the amount and timing of
estimated tax payments for certain corporations and other business
entities, and the Department will be issuing guidance on the payment of
estimated taxes by affected entities.
II. Massachusetts Will Conform With Federal Business Entity Classification (Check-the-Box) Rules
Businesses can be legally organized in different ways, e.g., as corporations, limited liability companies (LLCs), partnerships, business trusts, etc.
The form of legal organization can affect how the business is
treated for tax purposes. In general, either the entity itself
pays tax on its income (as in the case of most corporations) or the
income of the entity is attributed to the owners, who pay the tax (as
in the case of most partnerships).
There has been a partial mismatch between the Massachusetts and federal
rules in this area. While state and federal treatment of many
business entities is the same, the treatments of others such as
Massachusetts business trusts ("corporate trusts") and certain
partnerships have long differed. In the mid-1990s, the
differences increased when new federal “check-the-box” rules allowed
many unincorporated businesses to elect whether for federal tax
purposes they would be taxed as corporations, treated as
partnerships, or in some cases, disregarded altogether as entities
separate from a sole owner.
The Act generally eliminates
the differences between Massachusetts and federal entity classification
rules. For tax years beginning on or after January 1, 2009, the filing
status for business entities in Massachusetts must conform to their
filing status for federal tax purposes. Under federal regulations
implementing the so-called “check-the-box” rules, entities that are not
required to be treated as corporations are allowed to elect their
filing status. U.S. Treas. Reg. § 301.7701-3. An
unincorporated entity with two or more members (such as partners or
other owners) may elect to file as a corporation or a
partnership. An unincorporated entity that has a single member
may elect to file as a corporation, or to be disregarded as an entity
separate from its owner, thus being treated as a branch or division of
its owner. For Massachusetts purposes, these federal rules will
apply to partnerships, LLCs, corporate trusts, and other unincorporated
Conformity to the federal check-the-box rules will result in many state filing changes:
Corporate Trusts. The Act repeals the separate taxation provisions that formerly applied to corporate trusts. As of 2009, there will be no separate corporate trust tax classification and no corporate trust returns.
Businesses previously taxed in Massachusetts as corporate trusts will
be treated either as corporations (filing corporate returns), as
partnerships (filing partnership information returns), or as
disregarded entities (filing no returns separate from the return of a
sole shareholder or member), depending on the federal treatment elected
by the entity.
Subchapter S Corporations. Under
the Act, the rules for the taxation of S corporations are
changed. The Massachusetts entity-level tax on large S
corporations remains in effect, subject to changes in tax rates
described below. Federal S corporations organized as corporate
trusts or partnerships must file Massachusetts returns as S
corporations in the same manner as if they were organized as
corporations. Qualified subchapter S subsidiaries (QSUBs) will be
disregarded for all Massachusetts corporate tax purposes and will not
file separate returns, including any return with respect to the
non-income measure. The parent S corporation will be the sole
entity responsible for filing. The parent S corporation will
include the income and take into account the activities of all QSUBs
for purposes of calculating excise due under G.L. c. 63, §§ 32D and 39.
of S corporations that were previously treated as corporate trusts in
Massachusetts will be taxed on their distributive share of the S
corporation’s income. This departs from the former rules where
the trust paid all the tax and its distributions were generally not
taxed to the shareholders.
Financial Institution that is an S Corporation.
A new category of financial institution S corporation is created
for entities that are S corporations for federal and Massachusetts
income tax purposes and are defined as financial institutions at G.L.
c. 63, § 1.
Financial institution S corporations will be taxed under G.L. c. 63, §
2B similarly to other S corporations, but at different rates and
without a non-income measure tax.
The Department will issue additional guidance to taxpayers
affected by these changes. The Department intends to provide
rules addressing estimated tax payments, the tax consequences of the
transition to a different entity classification, how to treat potential
disparities between state and federal basis calculations, the methods
by which previously untaxed earnings and profits of a former corporate
trust will be taxed to the entity or to its successor or owner, and
III. Corporate Excise Rate Reductions
Act includes various corporate excise rate cuts to be implemented over
a period of years: reductions for business corporations,
reductions for financial institutions, reductions for S corporations,
and reductions for financial institutions that are S corporations.
These provisions are described in greater detail below.
A. Business Corporations (other than S Corporations); G.L. c. 63, § 39
tax years beginning on or after January 1, 2009, subject to the rate
reduction schedule set out below, the corporate excise tax imposed on a
business corporation is the greater of the amounts described in G.L. c.
63, § 39(a) or (b):
(a) An amount equal to the sum of:
(1) $2.60 per $1,000 upon the value of (i) its tangible property as determined to be taxable under § 30(7) if a tangible property corporation; or (ii) its net worth as determined to be taxable under § 30(8) - (9) if an intangible property corporation; and
(2) 9.5 percent of its net income determined to be taxable under chapter 63.
The current net income measure of the corporate excise of 9.5
percent applicable to business corporations is reduced over three years according to the following schedule:
For tax years beginning on or after January 1, 2010, but before January 1, 2011: 8.75 percent
For tax years beginning on or after January 1, 2011, but before January 1, 2012: 8.25 percent
For tax years beginning on or after January 1, 2012: 8.0 percent.
B. Financial Institutions (other than S Corporations); G.L. c. 63, § 2
For tax years beginning on or after January 1, 1995, but before January
1, 2010, the financial institution excise rate is 10.5 percent of net
income. A minimum excise of $456 applies.
Rate Reduction. The current financial institution excise rate of 10.5 percent of net income is reduced over three years according to the following schedule:
For tax years beginning on or after January 1, 2010, but before January 1, 2011: 10.0 percent
For tax years beginning on or after January 1, 2011, but before January 1, 2012: 9.5 percent
For tax years beginning on or after January 1, 2012: 9.0 percent.
C. Subchapter S Corporations; G.L. c. 63, § 32D
Under current law, Massachusetts imposes an entity-level tax of
4.5 percent on the net income of any S corporation with total receipts
of $9 million or more, or 3 percent on such net income if total
receipts are at least $6 million but less than $9 million (total
receipts being determined on an aggregate basis in the case of certain
Section 32D only modifies the net-income measure of the corporate
excise. In general, S corporations remain subject to the tangible
property or net worth portion of the tax and to the $456 minimum excise
in the same manner as any other corporation subject to the corporate
excise. In addition, the shareholders of an S corporation are
subject to the personal income tax on their pro rata share of the S
Rate Reduction. Effective
for taxable years beginning on or after January 1, 2009,an S
corporation having $9 million or more in total receipts is subject to
tax on its net income at a rate equal to the regular business
corporation (i.e., non-S corporation) rate on net income for the
year minus the Part B personal income tax rate at G.L. c. 62, § 4(b)
for the year. The net income tax rate for S corporations with at least
$6 million but less than $9 million in total receipts will equal
two-thirds of the tax rate applicable to larger S corporations. For
tax years beginning on or after January 1, 2009 but before January 1,
2010, application of the statutory formula yields the following rates
on net income of an S corporation:
(1) if total receipts for the taxable year are at least $6,000,000 but less than $9,000,000,
2/3 x 4.2 percent = 2.8 percent; and
(2) if total receipts for the taxable year are $9,000,000 or more,
9.5 percent - 5.3 percent= 4.2 percent
D. Financial Institution that is a Subchapter S Corporation; G.L. c. 63, § 2B
Effective for taxable years beginning on or after January 1, 2009, a
financial institution that is an S corporation will be taxed similarly
to other S corporations, but at financial institution S corporation
rates under new G.L. c. 63, § 2B and without a non-income measure tax. A minimum excise of $456 applies.
Applicable Rates. Effective
for taxable years beginning on or after January 1, 2009, a financial
institution that is an S corporation having $9 million or more in total
receipts is subject to tax on its net income at a rate equal to the
regular financial institution (non-S corporation) tax rate for the year
minus the Part B personal income tax rate at G.L. c. 62, § 4(b) for the
year. The net income tax rate for a financial institution that is an S
corporation with at least $6 million but less than $9 million in total
receipts will equal two-thirds of the tax rate applicable to larger
financial institution S corporations.
For tax years beginning on or after January 1, 2009 but before January
1, 2010, application of the statutory formula yields the following
rates on net income of a financial institution that is an S corporation:
(1) if total receipts for the taxable year are at least $6,000,000 but less than $9,000,000,
2/3 x 5.2 percent = 3.5 percent; and
(2) if total receipts for the taxable year are $9,000,000 or more,
10.5 percent - 5.3 percent = 5.2 percent
Streamlining and Clarification of Chapter 63 and Certain Related
Provisions – Revised Terminology and Restatement of Rates (Eliminating
Separate Statutory Surtax)
The Act contains numerous
provisions that eliminate the distinction between "foreign
corporations" and "domestic corporations." Effective for tax
years beginning on or after January 1, 2009, both foreign and domestic
corporations will be treated as “business corporations” and taxed under
G.L. c. 63, § 39. See, in particular, G.L. c. 63, § 30, as amended by the Act.
to the Act, the tax rate for certain taxpayers subject to chapter 63
(including certain insurance companies) and chapter 63A (certain
entities engaged in the sale of alcoholic beverages) was calculated by
applying an uncodified 14 percent surtax to the codified rates. Under
the Act, effective for taxable years beginning on or after January 1,
2009, the rates and the 14 percent surtax have been combined into
single codified rates; the actual combined rates are codified in
chapters 63 and 63A and the 14 percent surtax has been repealed.Although
the tax rates in chapters 63 and 63A have been modified to compensate
for repeal of the 14 percent surtax, there is no tax increase as a
result of repealing the surtax and restating the rates.
to the Act, there were two sections numbered 38T in chapter 63 of the
General Laws. The Act makes a technical correction to renumber the
provisions relating to the film credit from G.L. c. 63, § 38T to § 38X.
In addition, there is a technical correction whereby G.L. c. 63§ 32E,
dealing with the refund of a film credit, was amended to reference §
The Act also makes a technical correction to renumber the provisions
relating to the unrelated business taxable income for certain exempt
corporations from G.L. c. 63, § 38T to § 38Y.
V. Non-income Measure and Minimum Excise Not Affected by Public Law 86-272
In general, federal Public Law 86-272
provides that no state has the power to impose a net income tax on the
income derived within such state by any person from interstate commerce
if the only business activities within such state by or on behalf of
such person during such taxable year are limited to the solicitation of
orders for sales of tangible personal property and where (i) orders are
sent outside the state for approval or rejection, and (ii) if approved,
the orders are filled by shipment or delivery from a point outside the
As explained above, the Massachusetts corporate
excise includes both an income measure and a non-income measure, as
well as a minimum corporate excise of $456. The Act provides that
corporations protected from the income measure of the corporate excise
by Public Law 86-272 may nevertheless be subject to the greater of the
non-income measure or the minimum tax of $456.
VI. Corporate Tax Basis Adjustment
Act clarifies Massachusetts law concerning differences in corporate tax
basis that may arise because of differing Massachusetts and federal tax
law. The Act adds new Section 31M to chapter 63 of the General Laws,
which provides detailed basis adjustment rules.
VII. Sales Factor Modification
for taxable years beginning on or after January 1, 2009, the Act amends
the definition of “sales” for purposes of determining the sales factor
of the corporate apportionment formula in G.L. c. 63, § 38.In general,
the sales factor is a fraction, the numerator of which is the total
sales of the corporation in Massachusetts during the taxable year, and
the denominator of which is the total sales of the corporation
everywhere during the taxable year.
Certain items are excluded from “sales” in making this determination.
Under the Act, in the case of a sale or deemed sale of a business, the
term “sales” will not include receipts from the sale of the business
“goodwill” or similar intangible value, including, without limitation,
“going concern value” and “workforce in place.”
VIII. Personal Income Tax; Earned Income Credit
refundable earned income credit is available to certain low-income
individuals who have earned income and meet federal requirements for
the federal earned income credit. The taxpayer must qualify for
and claim the federal earned income credit allowed under Internal
Revenue Code § 32 as amended and in effect for the taxable year.
Act clarifies that the credit applies only with respect to that portion
of earned income of non-residents that is derived from Massachusetts
sources. Under the Act, where a taxpayer is a nonresident for all or
part of the taxable year, the credit is limited to 15 percent of the
federal credit multiplied by a fraction the numerator of which is the
earned income of the nonresident from Massachusetts sources and the
denominator of which is the earned income of the nonresident from all
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
August 15, 2008
St. 2008, c. 173, § 48, amending G.L. c. 63 by repealing existing G.L. c. 63, § 32B and inserting new § 32B.
St. 2008, c. 173, § 48, amending G.L. c. 63 to insert new § 32B.
The Act makes clear that business conducted by any corporation through a partnership is treated as conducted directly by that corporation, to the extent of the corporation’s distributive share of the partnership income. Given the application of the new check-the-box rules this is true whether the partnership is a general partnership, a limited partnership, an LLC or any other entity treated as a partnership.
St. 2008, c. 173, § 48, amending G.L. c. 63 to insert new § 32B(c)(3).
St. 2008, c. 173, § 95.
The income of Subchapter S corporations is taxable to the shareholders, and is also subject to certain entity-level income taxes under G.L. c. 63, § 32D. In general, all business corporations, whether “C” corporations or Subchapter S corporations, are subject to a non-income measure and minimum tax under G.L. c. 63, § 39.
See generally St. 2008, c. 173, §§ 11 - 17, 19 - 25, 28 - 32, 37, 38, 42, 46, 49 – 53, 57, 84, 85, 96.
St. 2008, c. 173, § 19, repealing G.L. c. 62, § 8.
St. 2008, c. 173, § 23, amending G.L. c. 62C, § 6.
St. 2008, c. 173, § 32, amending G.L. c. 63 to insert new § 2B.
St. 2008, c. 173, § 96.
St. 2008, c. 173, § 84, amending G.L. c. 63, § 39.
St. 2008, c. 173, §30, amending G.L. c. 63, § 2.
G.L. c. 63, § 32D.
G.L. c. 62, § 17A.
St. 2008, c. 173, § 51, amending G.L. c. 63, § 32D.
 The current Part B personal income tax rate is 5.3%. However, it is possible that this rate could decrease by 0.05 percent per year based on statutory adjustments in G.L. c. 62, § 4, depending on the inflation adjusted growth in baseline taxes for the previous year. See G.L. c. 62, § 4.
St. 2008, c. 173, § 32, amending G.L. c. 63 by adding new § 2B.
See footnote 17, above, regarding a potential change in the Part B personal income tax rate.
See generally St. 2008, c. 173, § 37 – 41 amending G.L. c. 63, § 30; St. 2008, c. 173, §§ 47, 84 amending G.L. c. 63 by repealing § 32 and amending § 39. See also St.2008, c. 173,c. § 55 repealing G.L. c. 63, § 33.
St. 2008, c. 173, §§ 92, 93 repeal the surtax at St. 1969, c. 546, §§ 18 and 21. For sections of the Act restating the tax rates previously subject to the 14 percent surtax, see St. 2008, c. 173, § 33 amending G.L. c. 63, § 22; St. 2008, c. 173, § 34 amending G.L. c. 63, § 23; St. 2008, c. 173, § 35 amending G.L. c. 63, § 29A; St. 2008, c. 173, § 36 amending G.L. c. 63, § 29E; St. 2008, c. 173, § 44 repealing G.L. c. 63, § 31B; St. 2008, c. 173, § 49 – 53 amending G.L. c. 63, § 32D; St. 2008, c. 173, § 84 amending G.L. c. 63, § 39; and St. 2008, c. 173, § 90 amending G.L. c. 63A, § 2.
St.2008, c. 173, § 82.
St.2008, c. 173, § 54.
St.2008, c. 173, § 83.
15 U.S.C. §§ 381 - 384.
St. 2008, c. 173, § 84, amending G.L. 63, § 39.
St.2008, c. 173, § 46 amending G.L. c. 63 to insert new § 31M.
G.L. c. 63, § 38(f).
St. 2008, c. 173, § 60 amending G.L. c. 63, § 38.
St. 2008, c. 173, § 18, amending G.L. c. 62, § 6(h).