(1)
(a)
Purpose of
Regulation. 830 CMR 62.17A.2, sets forth the rules that apply to S
corporations under the personal income tax provisions of M.G.L. c. 62, and
those that apply under the corporate excise provisions of M.G.L. c. 63. It
includes Massachusetts law based upon statutory changes and changes in other
legal authority since the effective date of the predecessor regulation,
830
CMR 62.17A.1, which was promulgated July 6,
1990.
For federal income tax purposes, a corporation may elect S
corporation status if it meets certain requirements under Internal Revenue Code
§§ 1361 through 1363, including that the shareholders must consent to
the election. Massachusetts recognizes federal S corporation status for
purposes of M.G.L. c. 62 and M.G.L. c. 63, and has no separate S corporation
election process. Among other things, 830 CMR 62.17A.2 explains the interaction
between Federal and Massachusetts S corporation law.
(b)
Outline. 830 CMR
62.17A.2 is organized as follows:
1. Purpose
of Regulation; Outline; Application of Regulation to Particular Tax
Periods;
2. Definitions;
3. General Rules;
4. Taxation of S Corporation Income to
Individual Shareholders under M.G.L. c. 62; Distributive Share
Income;
5. Shareholder Basis in S
Corporation Stock or Indebtedness;
6. Distributions from an S Corporation to its
Shareholders;
7. Post-termination
Transition Issues Applicable to S Corporation Shareholders;
8. S corporation Entity-level Taxation in
Massachusetts;
9. S corporations
that are Subject to Combined Reporting.
(c)
Application of Regulation to
Particular Tax Periods. 830 CMR 62.17A.2, is generally a
restatement of Massachusetts law based upon statutory changes and changes in
other legal authority since the effective date of the predecessor regulation,
830
CMR 62.17A.1, which was promulgated July 6,
1990. As such, to the extent that the individual provisions of 830 CMR 62.17A.2
reflect statutory changes occurring since the effective date of
830
CMR 62.17A.1, 830 CMR 62.17A.2 applies to all
periods relating back to the effective date of such statutory change. In
certain cases, 830 CMR 62.17A.2 relates back to an earlier public written
statement issued by the Department of Revenue, and in such cases the rules
apply as directed in the earlier statement. Rules relating to the taxation of S
corporations that were formerly taxed as corporate trusts, or subject to a
separate-entity tax as QSubs, or to S corporations that are financial
institutions, apply as of the effective date of St. 2008, c. 173, which is
generally applicable to tax years beginning on or after January 1, 2009.
See St. 2008, c. 173, § 101. For related provisions and
effective dates,
see
830 CMR
63.30.3:
Entity
Classification under St. 2008, c. 173.
The predecessor regulation,
830
CMR 62.17A.1: Massachusetts Taxation
of S Corporations and Their Shareholders, is hereby superseded. Rules
stated in
830
CMR 62.17A.1, such as transitional rules that
relate back to the original recognition of S corporations in Massachusetts in
1986, remain applicable to the extent they do not conflict with provisions of
830 CMR 62.17A.2, and to the extent they do not conflict with statutory
amendments enacted or Department of Revenue rules announced after the
promulgation date of
830
CMR 62.17A.1, namely July 6,
1990.
(2)
Definitions.
Accumulated Adjustments Account, or
AAA, an account similar to that described in Code
§ 1368(e), but as calculated under Massachusetts law. In general, the AAA
is a tracking mechanism for an S corporation's accumulated, undistributed
taxable income determined under M.G.L. c. 62. The AAA generally is increased by
the income that the S corporation reports to its shareholders as distributive
share income, and is decreased by the amount of distributions the S corporation
makes to its shareholders. The AAA is an account of the S corporation at the
entity level, and is not apportioned among the shareholders. With respect to an
entity that for any period was an S corporation for federal purposes, but was
not an S corporation for Massachusetts purposes, for example, a corporate trust
taxable under the now-repealed M.G.L. c. 62, § 8, the following rules
apply: the AAA for such entities generally includes the total amount of the
entity's undistributed income that was reported to shareholders federally as
distributive share income under
830 CMR 63.39.1,
as may be adjusted based on federal/state differences in calculating income,
but was not taxable as distributive share income to shareholders in
Massachusetts, and instead was actually taxed at the entity level. Income of
such an entity that was not taxed at the entity-level is not added to the AAA,
but depending on the circumstances, may be subject to inclusion in the
Massachusetts Earning and Profits account, as defined in 830 CMR
62.17A.2.
Business Corporation, any corporation,
or any other entity as defined in M.G.L. c. 156D,
§ 1.40, including an S corporation, whether the corporation or other
entity may be formed, organized, or operated in or under the laws of the
Commonwealth or any other jurisdiction, and whether organized for business or
for non-profit purposes, that is classified for the taxable year as a
corporation for federal income tax purposes.
Code, with respect to personal income
taxation under M.G.L. c. 62, the federal Internal Revenue Code, as modified in
M.G.L. c. 62, and particularly in M.G.L. c. 62, § 1(c); and with respect
to corporate level taxation under M.G.L. c. 63, the federal Internal Revenue
Code, in effect for the taxable year, as more fully defined in M.G.L. c.
63.
Commissioner, the Commissioner of the
Massachusetts Department of Revenue or the Commissioner's duly authorized
representative.
Common Ownership, for purposes of the
income measure of the corporate excise as determined under M.G.L. c. 63,
§§ 2B or 32D, when one or more S corporation shareholders own, in the
aggregate, directly or indirectly, more than 50% of the total combined voting
control or more than 50% of the total value of shares of two or more
corporations. Stock is owned by a person under Common
Ownership if the person owns the stock directly or if ownership
may be attributed to the person under the constructive ownership rules of Code
§ 318. Note: Common
Ownership differs in certain respects from the definition of the
term Common Ownership applied for purposes of combined
reporting under M.G.L. c. 63, § 32B. See830 CMR 63.32B.
2(2): Definitions: Common Ownership.
One significant difference between the two definitions is that for purposes of
combined reporting a single shareholder must either directly or indirectly own
50% or more of two or more corporations for there to be common ownership.
See
830 CMR
63.32B.2(2):
Definitions: Commonly Owned or Common
Ownership. This requirement applicable to combined reporting does
not apply to 830 CMR 62.17A.2(2): Common Ownership. In
addition, for purposes of 830 CMR 62.17A.2 both an owner's voting rights in
stock owned and the value of stock owned are relevant to the determination of
voting control, whereas in the context of combined reporting only voting rights
are considered. See 830 CMR
63.32B.2(2):
Definitions: Common Ownership.
Example (2.1). S Corporation X and S
corporation Y are owned by A, B, and C, with each owner having a a interest. S
Corporation X and S corporation Y exhibit common ownership within the meaning
of 830 CMR 62.17A.2. However, S corporation X and S corporation Y do not meet
the definition of
830 CMR
63.32B.2(2):
Definitions: Common Ownership,
because no single shareholder owns or is considered to own 50% or more of each
S corporation.
Example (2.2). Individual A owns 40%
of the stock of S corporation X, 30% of the stock of S corporation Y, and 40%
of the stock of S corporation Z. Individual B owns 20% of the stock of X, 40%
of the stock of Y, and no stock in Z. No other stockholder owns more than 5% of
the stock of each S corporation, X, Y, and Z. There is no other common
stockholder among X, Y, and Z, and there is no other constructive ownership of
the stock under Code § 318. X and Y exhibit common ownership because
together Individual A and Individual B own more than 50% of each of them. Z
does not share common ownership with X and Y because there is no combination of
owners that hold more than 50% of the stock of Z. While X and Y have common
ownership for purposes of 830 CMR 62.17A.2, there is no common ownership under
830 CMR 62.32B(2): Combined Reporting, since no single common
owner of X and Y directly or indirectly owns stock representing more than 50%
of the voting control of each corporation. See 830 CMR
63.32B.2(2):
Common Ownership.
Example (2.3). Husband owns 30% of the
stock of S corporation Y and 0% of the stock of S corporation Z. Wife owns 0%
of the stock of Y and 10% of the stock of Z. Unrelated Investor owns 30% of the
stock of Y and 41% of the stock of Z. No other stockholder owns more than 5% of
the stock of each S corporation Y and Z, with the result that there is no other
common owner between Y and Z. Y and Z are under common ownership under this
definition because of the application of the constructive ownership rules of
Code § 318. The stock holdings of Husband and Wife, although under
separate legal ownership, are considered as being owned by both spouses under
Code § 318. When combined, the voting power of Husband, Wife, and
Unrelated Investor is greater than 50% for both Y and Z. Y and Z are not under
common ownership for purposes of
830 CMR
63.32B.2: Combined
Reporting, because no single common owner of Y and Z owns stock
representing more than 50% of the voting control of each corporation.
Example (2.4). Shareholder A owns 60%
of the value of shares in S corporation X, but only holds 40% of the voting
control in X. Shareholder A owns 55% of the value of shares of S corporation Y,
but holds only 30% of the voting control of the corporation. X and Y meet the
requirement of common ownership under 830 CMR 62.17A.2, because greater than
50% of the value of shares is owned by the same owner or owners. However, X and
Y are not under common ownership through A's ownership interest in the context
of
830 CMR
63.32B.2
Combined Reporting,
because Shareholder A does not own more than 50% of the voting control in X or
Y.
Distributive Share, the shareholder's
aggregate daily portion of each item of income, loss, deduction, or credit
determined by the shareholder's daily percentage of ownership of shares of
stock in an S corporation.
DOR, the Massachusetts Department of
Revenue.
Financial Institution, an entity that
is a financial institution within the meaning of M.G.L. c. 63, § 1.
Gross Income, with respect to taxes
imposed under M.G.L. c. 63, gross income as defined in M.G.L. c. 63,
§§ 1 and 30.3; and with respect to taxes imposed under M.G.L. c. 62,
Massachusetts gross income as defined in M.G.L. c. 62, § 2.
Massachusetts Earnings and Profits, an
account that is increased and decreased based on the current and accumulated
earnings and profits of an S corporation, without regard to apportionment, for
any taxable year. As a general principle, the Massachusetts Earnings and
Profits account includes:
(a) corporate
earnings for any period where the S corporation was a C corporation for federal
and/or Massachusetts purposes;
(b)
in the case where an S corporation has acquired or merged with a C corporation
with the S corporation as the surviving entity, those corporate earnings
attributable to the former C corporation; and
(c) any other earnings and profits of any S
corporation for any taxable year, including, with respect to an entity that for
any period was an S corporation for federal purposes, but was not an S
corporation for Massachusetts purposes, for example, a corporate trust taxable
under the now-repealed M.G.L. c. 62, § 8, the entity's undistributed
pre-apportioned income that was not taxed in Massachusetts, including such
amounts that accrued under the circumstances described in
830 CMR
62.8.2(4)(b).
For transition rules applicable to S corporations after the
enactment of St. 1986, c. 488, § 39, see830
CMR 62.17A.1(10)(c). The
Massachusetts Earnings and Profits account does not include distributive share
income for any period the entity was treated as an S corporation for
Massachusetts purposes under M.G.L. c. 62, § 17A. Massachusetts earnings
and profits include items that are required to be taken into account by the S
corporation, or that are otherwise attributed to the S corporation, under the
applicable Code sections, such as in a corporate acquisition under Code §
381, to the extent consonant with Massachusetts law.
Net Operating Loss (NOL), the amount
by which the deductions allowed to an S corporation under M.G.L. c. 63, §
30.4, including the dividends-received deduction allowed under M.G.L. c. 63,
§ 38(a)(1), and excluding any deductions for net operating loss, exceed
gross income for the taxable year under M.G.L. c. 63. A net operating loss does
not include a capital loss.
Pass-through Entity, an entity whose
income, loss, deductions and credits flow through to its members for
Massachusetts tax purposes, including:
(a) a general partnership;
(b) limited partnership;
(c) limited liability partnership;
(d) limited liability company that is treated
as a partnership for Massachusetts tax purposes;
(e) an S corporation;
(f) an estate not taxed at the entity level;
and
(g) a trust not taxed at the
entity level, including a grantor-type trust.
Q Sub, a federal qualified subchapter
S subsidiary, as defined in the Code, in effect for the taxable year.
S Corporation, an entity described at
Code § 1361 and in effect for the taxable year.
Tiered Structure, a pass-through
entity that has a pass-through entity as a member.
Total Receipts, gross receipts or
sales (including income) realized in a taxable year less returns and
allowances, including service charges, carrying charges, and any other charges
included in sales prices. Total receipts include sales taxes or other excises
where the sales tax or excise is imposed directly on the taxpayer, but not
where such taxes or excises are simply collected by the S corporation and
remitted to the taxing authority. Total receipts include dividends, interest,
all tax-exempt income, royalties, capital gain net income, gross rents, deemed
receipts, recognized built-in gain, other passive income, reimbursed costs, the
income includable in the taxable year that is attributable to an installment
transaction as defined in M.G.L. c. 62, § 63, the S corporation's
pro rata share of the total receipts of any pass-through
entity in which the S corporation holds an interest, and all other income.
Consistent with the above, total receipts include Category
one income, which generally refers to income to the S corporation
that is taxed at the entity level for federal income tax purposes, as defined
in 830 CMR 62.17A.2(8)(b)1., as well as Category two
income, as defined in 830 CMR 62.17A.2(8)(b)1. Similarly, total receipts
include both Massachusetts source income and non-Massachusetts source income.
The cost of goods sold or the cost of operations shall not be deductible in
determining total receipts. Total receipts include any deemed income that is
attributed under the Code to an S corporation that takes part in an election
under Code § 338(h)(10).
Unitary Business, a group of two or
more corporations related through common ownership, as defined in 830 CMR
62.17A.2, 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 term unitary business shall be construed
to the broadest extent permitted under the Constitution of the United States.
Unitary Business generally corresponds to the
definition of a unitary business as applied for purposes of combined reporting
under M.G.L. c. 63, §32B. See 830 CMR
63.32B.2(2):
Definitions: Unitary Business. Also,
this definition is further explained at
830 CMR
63.32B.2(3): Unitary
Presumptions and Inferences, except to the extent that the term
Common Ownership in 830 CMR 62.17A.2, differs from
830 CMR
63.32B.2(2):
Definitions: Common Ownership.
Example (2.5). A group of three
shareholders owns six S corporations, (S1 - S6), and as to each of the six
corporations this ownership meets the definition of common ownership. Each S
corporation operates as a separate franchise of a single restaurant chain. Each
of the restaurants maintains its own set of books and has a separate on-site
manager. The six corporations are presumed to be engaged in a unitary business,
because business activities conducted by corporations under common ownership
that are in the same general line of business will generally constitute a
unitary business. See
830 CMR
63.32B.2(3)(b):
Likely Unitary Situations.
(3)
General Rules.
(a)
Relationship Between Federal
S Corporation Provisions and Massachusetts Law. While
Massachusetts taxation of S corporations and their shareholders has many
parallels to the federal rules that apply income tax to S corporations and
their shareholders, Massachusetts has distinct rules that apply to shareholders
under the personal income tax provisions of M.G.L. c. 62, and that apply to the
corporate entity under the corporate excise provisions of M.G.L. c. 63. Under
Massachusetts law, S corporation shareholders pay an income tax determined by
the income of the S corporation, and in many cases the S corporation itself is
subject to a separate tax at the entity level. These two taxes are separate and
distinct obligations, and payment of one is not a substitute for payment of the
other.
(b)
S
Corporation Shareholder-level Taxation. The taxation of S
corporation shareholders for Massachusetts personal income tax purposes under
M.G.L. c. 62 is generally modeled on the federal rules that apply to S
corporations under the Code. S corporation income, losses, deductions, and
allowable credits are calculated by the entity using rules set forth under
M.G.L. c. 62, but then these items are passed through to shareholders as their
distributive share. The obligation to pay tax on a shareholder's distributive
share exists whether or not the entity actually makes a distribution of the
income to its shareholders. Non-resident shareholders of S corporations that
are doing business in Massachusetts are also obligated to pay an income tax on
their distributive share, as determined under
830 CMR
62.5A.1: Non-resident Income
Tax. Shareholders are subject to tax on their distributive share
income irrespective of whether the S corporation is subject to an entity-level
tax under M.G.L. c. 63.
(c)
S Corporation Entity-level Taxation. The application
of the entity-level taxation provisions of M.G.L. c. 63 varies depending on the
entity type. S corporations are most commonly taxable under M.G.L. c. 63,
§§ 39 and 32D. An S corporation that is a financial institution is
subject to the separate tax provisions under M.G.L. c. 63, §§ 2, 2A,
and 2B. An S corporation that is a security corporation is subject to the
entity-level excise under M.G.L. c. 63, § 38B. For general exclusions from
taxation under M.G.L. c. 63, §§ 39 and 32D, see
M.G.L. c. 63, § 68C. In every case, the S corporation's entity-level
taxation under M.G.L. c. 63 is separate from the S corporation's
shareholder-level taxation under 830 CMR 62.17A.2(3)(b).
(d)
Issues that Affect an S
Corporation that is Subject to Taxation on Its Income at Both the Shareholder
and the Entity Level. The taxation of S corporation income under
the personal income tax provisions of M.G.L. c. 62 and the entity-level
provisions of M.G.L. c. 63 is similar in that both statutes derive their
definition of gross income from the Code. Also, certain rules that apply to
determine income may be applicable both for purposes of shareholder taxation
and for purposes of entity-level taxation. Due to statutory differences between
M.G.L. c. 62 and M.G.L. c. 63, however, gross income determined under M.G.L. c.
62 may differ from gross income determined under M.G.L. c. 63. 830 CMR 62. 17A.
2 generally evaluates rules for shareholder taxation under M.G.L. c. 62 in
separate sections from rules that apply to an S corporation's entity-level
taxation under M.G.L. c. 63. Where practical or necessary, a rule may be stated
twice, under the shareholder-level taxation rules, and again under the
entity-level taxation rules. A statement or example identifying a rule in one
part of 830 CMR 62.17A.2, for example under the M.G.L. c. 62 provisions, but
not repeated in another part, for example, the M.G.L. c. 63 provisions, should
not be read to imply that the rule is not applicable in both places.
(e)
Tax Credits that are
Available under Both M.G.L. c. 62 and M.G.L. c. 63. There are
certain tax credits that are available both to M.G.L. c. 62 and to M.G.L. c. 63
taxpayers. No credit may be applied against both the entity-level and the
shareholder-level tax. An available credit amount may not be divided, with part
being used at the corporate level and another part being passed through to
shareholders. An S corporation that is eligible for such credits must choose in
each taxable year that it generates a credit whether the credit is to be passed
through to its shareholders under the provisions of M.G.L. c. 62, or instead to
be applied against the S corporation's corporate excise under M.G.L. c. 63.
Once an S corporation has made this choice for a given taxable year through its
filings and reporting to shareholders, that choice is binding with respect to
the credit amount attributable to that taxable year. Any unused credit amount
from that year must carry forward to the extent allowable with regard to the
statutory credit at issue, and be taken in future taxable years either by the
shareholders or by the entity according to the original filings and reporting
of the taxable year in which the credit was generated.
Example (3)(e). An S corporation (S)
has a project that qualifies for the Economic Development Incentive Program
(EDIP) credit, which is available for five years. In year one S places $100,000
of qualifying assets in service and generates $5,000 EDIP. S claims $3,000 of
the EDIP in year one and has a carryover to year two of $2,000. Because S
claimed the credit, none of the $2,000 can be claimed by the shareholders in
any taxable year. In year two, S places $120,000 of qualifying assets in
service and generates a credit of $6,000. The corporation chooses to pass
through to its shareholders this $6,000 credit, to be applied against their
individual income tax obligations under M.G.L. c. 62. S is eligible to use the
$2,000 of carryover from year one in year two against its corporate excise
obligations under M.G.L. c. 63, but it cannot use any of the $6,000 credit
generated in year two against its corporate excise. The shareholders may use
the $6,000 of EDIP in year two and in later years to the extent allowed under
general EDIP rules.
(f)
Taxable Year.
1.
S Corporation's Taxable Year for Entity-level
Taxation. Massachusetts generally follows the relevant federal
income tax rules for purposes of the determination of an S corporation's
taxable year for purposes of the S corporation's entity-level taxation under
M.G.L. c. 63. An S corporation that adopts or elects a taxable year under the
provisions of the Code is deemed to have adopted or elected the same taxable
year for Massachusetts purposes.
2.
S Corporation Shareholder's Taxable year. An S
corporation shareholder's taxable year is defined in M.G.L. c. 62, §§
one and 62. A shareholder of an S corporation shall take into account the
shareholder's distributive share of items of income, loss, deduction, or credit
for the shareholder's taxable year in which the taxable year of the S
corporation ends.
Example (3)(f). Shareholder A disposes
of her interest in an S corporation in the middle of a taxable year. All
affected shareholders, within the meaning of Code § 1377(a)(2)(B),
generally Shareholder A and those who acquire his or her shares, consent under
the method described in Code § 1377(a)(2)(A). The entity continues in
existence as an S corporation. As under federal law the S corporation's taxable
year for purposes of M.G.L. c. 62 is treated as two taxable years, the first of
which ends on the date of termination. In such a case, each affected
shareholder's distributive share is calculated as provided under the Code for
each short year, as such distributive share may be modified under M.G.L. c. 62.
See Code § 1377(a). In contrast, note that for purposes
of the entity-level excise applicable to the S corporation under M.G.L. c. 63,
there is only one taxable year on the facts in this example.
3.
Taxable Year Accounting in the
Case of a Decedent Shareholder. In filing a return on behalf of a
shareholder of an S corporation who dies before the end of the S corporation's
taxable year, the filer shall take into account the shareholder's distributive
share of the S corporation's items of income, loss, or deduction by multiplying
those items by a ratio of the number of days to the date of death to the number
of days in the year. Upon the death of an S corporation shareholder, the estate
may be treated as a successor shareholder under the provisions of Code §
1361(b)(1)(B). An estate shareholder in an S corporation shall account for its
distributive share of income, loss, or deduction of the S corporation from the
date of death.
(g)
Accounting Method. The accounting method applicable to
S corporations with respect to calculating tax liability under M.G.L. c. 62,
including the distributive share of income of its shareholders, is the method
detailed in M.G.L. c. 62, § 62. The accounting method applicable to S
corporations with respect to calculating tax liability under M.G.L. c. 63, is
the method of accounting that the S corporation has adopted or elected under
the provisions of the Code.
(h)
Relation to Former Corporate Trusts That are Now S
Corporations. Prior to tax years beginning on or after January 1,
2009, Massachusetts applied special rules for the taxation of certain S
corporations that were treated in Massachusetts as corporate trusts, under the
now-repealed M.G.L. c. 62, § 8. In particular, the corporate trust's
income generally was taxed at the entity level and not passed through as
taxable income to the shareholders. The separate taxation rules for corporate
trusts were repealed in Massachusetts with the passage of St. 2008, c. 173,
§ 19, generally effective for taxable years beginning on or after January
1, 2009. St. 2008, c. 173, § 101. As a result, distributive share income
of S corporations that were formerly taxed under M.G.L. c. 62, § 8 is
subject to shareholder-level tax in Massachusetts notwithstanding the legal
form of the entity's organization.
(4)
Taxation of S Corporation
Income to Individual Shareholders under M.G.L. c. 62; Distributive Share
Income.
(a)
In
General. The Massachusetts rules that attribute S corporation
income to shareholders, particularly under M.G.L. c. 62, § 17A, are
similar to the federal rules that require an S corporation to calculate income
or loss, using the corporation's items of income, loss and deduction, and then
attribute that income or loss to its shareholders. Shareholders pay the
personal income tax under M.G.L. c. 62 based on the amount of taxable income
that is earned by the S corporation, attributed to the shareholder as
distributive share income. The S corporation shareholder is taxed on this
income whether or not any amount is actually distributed to the shareholder.
Shareholders are allowed to claim certain tax credits against
their personal income tax liabilities. See830 CMR
62.17A.2(4)(g). Such allowable credits are calculated by the S corporation at
the entity level, and are reported to shareholders to be used in determining
the shareholders' personal income tax liabilities. See830 CMR
62.17A.2(3)(e) (credits may be taken at the individual shareholder level, or
the S corporation entity level, but not at both levels).
The taxation of an S corporation shareholder under M.G.L. c. 62
is separate and distinct from the taxation of an S corporation at the entity
level under M.G.L. c. 63. An S corporation shareholder is taxable on its
distributive share regardless of any S corporation entity-level tax obligation
in Massachusetts.
(b)
Determining a Shareholder's Distributive Share of
Income. An S corporation shareholder's distributive share of
income is calculated under the general rules that apply to the taxation of
income under M.G.L. c. 62. The starting point for determining distributive
share income is the S corporation's federal items of ordinary income (or loss),
capital gains, and other income. Massachusetts then requires state-specific
adjustments as described in 830 CMR 62.17A.2(4). The shareholder's distributive
share of the S corporation's items of income, loss, or deduction is passed
through to the shareholder as if such items were realized directly by the
shareholder.
(c)
Character of Pass-through Items. The character of any
item of income, loss, deduction, or credit of an S corporation included in a
shareholder's distributive share is determined under the provisions of M.G.L.
c. 62 as if realized or incurred directly by the shareholder.
With respect to a non-resident S corporation shareholder, the
character of an item does not determine the source of the income for purposes
of determining whether the item is subject to Massachusetts tax. For the
sourcing rules that apply to non-resident shareholders, see830
CMR 62.17A.2(4)(i).
Example (4)(c). S corporation X
provides professional services, does business only in Massachusetts, and has a
taxable year that is a calendar year. During its taxable year X earns $10
million from the provision of professional services; buys a capital asset on
January 30th that it sells it at a profit on
November 1st; and, sells a second capital asset that
it has held for more than one year. Under the provisions of M.G.L. c. 62,
§ 2, the earnings from X's provision of its professional services are Part
B income (see M.G.L. c. 62, § 2(b)(2)), and are reported
and taxable to X's shareholders as Part B income. The gain from the sale of the
capital asset that X purchased on January 30th and
sold on November 1st is Part A income (see
M.G.L. c. 62, § 2(b)(1)), and is reported to and taxable to X's
shareholders as Part A income. The gain from the sale of the capital asset held
for more than one year is Part C income (see M.G.L. c. 62,
§ 2(b)(3)), and is reported to and taxable to X's shareholders as Part C
income.
(d)
Treatment of Capital Gains. Capital gains and losses
that flow through to the shareholders of an S corporation and are taxable under
M.G.L. c. 62 shall be taken into account by the shareholders in proportion to
each shareholder's ownership share in the S corporation. The member's ownership
share is determined under the Code.
(e)
Deductions Taken in
Determining a Shareholder's Distributive Share, and Limitations of
Losses.
1.
General
Rule. In calculating a shareholder's distributive share, an S
corporation is allowed only those expense deductions that a sole proprietor
would be allowed. M.G.L. c. 62, § 2(d)(1). Deductions that are itemized by
an individual for federal income tax purposes are not allowed. M.G.L. c. 62
§ 2(d). Also, a deduction for a net operating loss carryover is not
allowed in calculating a shareholder's distributive share. M.G.L. c. 62, §
2(d)(1)(C).
Example (4)(e)(1). S Corporation A is
not engaged in a trade or business, and has an investment interest expense
deduction that is allowed for federal tax purposes. The investment interest
expense deduction of A as it may be allowed under federal law must be
disregarded in computing the Massachusetts tax liability of A's shareholders
since investment interest does not qualify as a deductible business expense
under M.G.L. c. 62.
2.
Passive Investment Income and Built-in Gains. If an S
corporation is taxed at the entity level on income under Code §§ 1374
and 1375, such income is also taxed at the entity level under Massachusetts
law. See830 CMR 62.17A.2(8)(b)1. ( Category one
income). When calculating a shareholder's distributive share,
such income is reduced by the entity-level tax paid at the federal and state
level that is attributable to the shareholder's portion of the income so taxed.
This rule is similar to that set forth at Code § 1366(f).
3.
Limitation on Losses and
Deductions for Shareholder-level Taxation Under M.G.L. c. 62.
a.
Net Operating Losses
(NOLs). Under the personal income tax provisions of M.G.L. c. 62,
a net operating loss carryforward is not allowed, and therefore must be
disregarded in computing distributive share income. For treatment of NOLs with
respect to the entity-level tax under M.G.L. c. 63, §§ 32D and 39,
see830 CMR 62.17A.2(8)(c)3.
b.
Deductions Limited by
Shareholder Basis in Stock. The deductions computed under M.G.L.
c. 62 that can be taken into account by the shareholder of an S corporation may
not exceed the sum of the adjusted Massachusetts basis of the shareholder's
stock in the S corporation and the shareholder's adjusted basis in any
indebtedness of the S corporation to the shareholder. 830 CMR
62.17A.2(4)(e)3.b. is similar to the rule set forth at Code §
1366(d).
(f)
Treatment of Installment Sales.
1.
Effect of an Installment Sale
by the S Corporation. The determination of whether a sale or a
deemed sale by an S corporation is treated as an installment sale is made at
the S corporation entity level, and is binding on all shareholders. Once a
transaction is determined to be treated as an installment sale, the installment
transactions statute, M.G.L. c. 62, § 63 and
830 CMR
62.63.1, govern the responsibilities of the S
corporation and its shareholders. In particular,
830 CMR 62.63.1(10)
states the installment transaction rules
that apply to flow-through entities, including S corporations and their
shareholders.
With respect to a non-resident shareholder, two different rules
apply depending on the residence of the shareholder at the time of the sale or
deemed sale by the S corporation that is treated as an installment sale. If the
non-resident shareholder was a Massachusetts resident at the time of the sale
or deemed sale, then the shareholder is treated as a resident with respect to
income derived from such sale or deemed sale. Pursuant to the authority in
M.G.L. c. 62, § 5A(b), such a shareholder is not permitted to apportion
the income from the sale or deemed sale, but rather must report the full amount
of such income as taxable Massachusetts source income, and is entitled to its
proportionate share of the credit for taxes paid to another jurisdiction as it
directly relates to such income, and under the terms that apply to credits for
taxes paid to another jurisdiction, as set forth in 830 CMR
62.17A.2(4)(g)2.
In the case of a non-resident shareholder who was a
non-resident at the time of the sale or deemed sale, where income derived from
an installment sale is subject to apportionment, the apportionment percentage
that applies to such income in each year that it is taxable, irrespective of
the year in which payment is actually received, is the S corporation's
apportionment percentage from the year of the sale. The S corporation's
apportionment percentage is determined under M.G.L. c. 62, §
17A(b).
Example (4)(f)(1). S corporation S is
a calendar-year corporation that does business in multiple taxing jurisdictions
and is 100% owned by M, a Massachusetts resident. On December 15, 2010, S sells
off the majority of its assets and realizes a gain of $100 million. S elects
installment sale treatment. Because S has elected installment sale treatment,
$40 million of its realized gain is taken into account in its taxable year
ending December 31, 2010. The remaining $60 million in gain is to be taken into
account ratably over the next three years. On January 1, 2011, M changes her
residency to Florida. Because M was a resident at the time of the sale of S's
assets, M is treated as a resident with respect to all income that is derived
from the sale. Thus, 100% of the income that is taken into account ratably over
the period that M is a Florida resident is taxed in Massachusetts. M is
entitled to take her proportionate share of the credit for taxes paid to
another jurisdiction that directly relates to the income that derives from the
installment sale income for the transaction dated December 15, 2010, under the
terms that apply to credits for taxes paid to another jurisdiction, as set
forth in 830 CMR 62.17A.2(4)(g)2.
Example (4)(f)(2). Same facts as in
Example (4)(f)(1), except that on December 15, 2010, the date of the sale that
is subject to installment sale treatment, M is a non-resident residing in
Florida. All of M's income that is attributable to the installment sale is
subject to the allocation and apportionment rules at 830 CMR 62.17A.2(4)(i).
The determination of whether any gain should be reported to Massachusetts by M
is based on the facts and circumstances in the year of the sale. If the income
was Massachusetts source income in the year of the sale it will remain
Massachusetts source income in subsequent years. Allocable items of income are
determined based on the allocation rules that apply in the year of the sale and
are reportable in their entirety to M as Massachusetts source income. Items
subject to apportionment are apportioned to Massachusetts and are taxable to M
using S's apportionment percentage for the year of the sale. With respect to
both Example (4)(f)(1) and Example
(4)(f)(2), because the total receipts derived from the installment
sale under these facts exceed the $6 million threshold for income measure
taxation at the entity level for each year from 2010 through 2013, S is subject
to entity-level taxation on the gain from the installment sale in each of those
years, under 830 CMR 62.17A.2(8).
2.
Applicability to the Sale of a
Shareholder's Stock in an S Corporation. 830 CMR 62.17A.2(4)(f)
does not apply to a shareholder's sale of S corporation stock, except where
such a sale is treated as a deemed sale of assets by the S corporation, as in a
transaction described at Code § 338(h)(10).
(g)
Credits Available to S
Corporation Shareholders.
1.
General Rule. A shareholder of an S corporation may be
entitled to a proportionate share of the Massachusetts personal income tax
credits under M.G.L. c. 62, § 6 that are calculated by the S corporation.
Some Massachusetts tax credits are allowed both to corporate-level taxpayers
under M.G.L. c. 63, and to personal income taxpayers under M.G.L. c. 62.
However, 830 CMR 62.17A.2(3)(e) applies, namely that a credit may not be
applied against both an entity-level and a shareholder-level tax, and a credit
may not be divided, part being used at the corporate level, and part being
passed through to the S corporation's shareholders to be used at the individual
level.
Example (4)(g)(1). S corporation S is
eligible for the Economic Development Incentive Program (EDIP) credit for its
taxable year. The EDIP credit set forth in M.G.L. c. 62, § 6(g) and M.G.L.
c. 63, § 38N, is among those credits that may be taken either by S's
shareholders and applied against a shareholder's income tax under M.G.L. c. 62,
or by S itself to apply against its entity-level tax. Therefore this credit is
subject to the general rule at 830 CMR 62.17A.2(3)(e). If the EDIP credit is
taken by individual shareholders, all amounts relevant to the calculation of
the credit are attributed to S's shareholders and are taken into account in
determining the shareholders' credit for the taxable year during which the
taxable year of S ends. If S's shareholders take the credit with respect to
property, S must maintain adequate records to specifically identify that
property and to distinguish it from property with respect to which S has taken
any credit. If S's shareholders take the credit and do not use the full amount
of the credit generated in a taxable year, the shareholders may carry over the
unused amount of the credit to succeeding taxable years. Amounts carried over
by a shareholder may be applied only to offset that shareholder's tax
liability. If recapture of the credit is later required, each shareholder that
took the credit must recapture. For rules related to the EDIP credit that may
be taken against S's corporation's entity-level tax, see830
CMR 62.17A.2(8)(a).
2.
Credits for Taxes Paid to Another Jurisdiction.
a. A resident shareholder may claim the
credit under M.G.L. c. 62, § 6(a) for taxes paid to another jurisdiction
for a taxable year if the S corporation pays a tax during the shareholder's
taxable year and if the conditions set forth in 830 CMR 62.17A.2(4)(g)2.a.i.
through iv. and 830 CMR 62.17A.2(4)(g)2.b, are met. For the credit to apply:
i. The tax must be imposed by another state,
territory, or possession of the United States, or the Dominion of Canada or its
provinces;
ii. The tax must be
measured by income earned by the S corporation, the distributive share of which
is required to be included in the shareholders' Massachusetts gross income. For
the credit to be allowed, the income tax paid by the S corporation must be
based on an item of Massachusetts gross income and the tax must be imposed on
the apportionable net income of the entity that flows through to the
Massachusetts shareholders, subject to all other requirements and limitations
described in M.G.L. c. 62, § 6(a) and 830 CMR 62.17A.2(4)(g). Individuals
are not allowed a credit for gross receipts-based taxes paid to another
jurisdiction either by the S corporation or by the shareholder, because these
taxes are not based on net income, as required under M.G.L. c. 62, § 6(a);
Example (4)(g)(2)(a). S corporation M
does business in Massachusetts and owns an office building in State A. State A
fully allocates the rental income of $100,000 to itself, and M's shareholders
pay their proportionate share of the tax attributable to that rental income to
State A. The total amount of such tax paid on this rental income to State A is
$10,000. Massachusetts residents own 60% of the total value of shares of M. The
rental income is included in the Massachusetts income reported to M
shareholders as distributive share income. Massachusetts resident M
shareholders are allowed to take the credit for taxes paid to the other
jurisdiction, each member taking his or her proportionate share of the credit,
in accordance with 830 CMR 62.17A.2(4)(g)2.b. The total credit taken by all
Massachusetts resident shareholders may not exceed $6,000, that is 60%
(representing total share ownership of Massachusetts resident shareholders)
multiplied by the total amount of tax paid to State A, namely $10,000. In
accordance with 830 CMR 62.17A.2(4)(g)2.d., non-resident M shareholders are not
allowed the credit, but rather pay tax as determined after the application of
the allocation and apportionment rules set forth at 830 CMR 62.17A.2(4)(i), and
in the Non-resident Income Tax regulation,
830 CMR
62.5A.1(6).
iii. The S corporation must not deduct any
portion of the tax paid to another jurisdiction in computing distributive share
income for Massachusetts purposes; iv. The S corporation must provide each
shareholder with the names of each applicable jurisdiction to which an income
tax was paid, the amount income that was subject to an income tax in the other
jurisdiction, and the amount of income tax that was paid to that
jurisdiction.
b. A
resident shareholder seeking to claim the credit under M.G.L. c. 62, §
6(a) must apply the same proportionate share percentage the S corporation uses
in calculating that shareholders distributive share of income to the income tax
amount that was paid to the foreign jurisdiction. Thus, the total credit amount
that can be taken by the resident shareholders is limited to the residents'
total proportionate share percentage multiplied by the total tax amount paid to
other jurisdictions.
Example (4)(g)(2)(b). S corporation
has five resident shareholders and five non-resident shareholders. Each
shareholder owns a 10% interest in the S corporation. The S corporation pays
taxes measured by its income in several other states, for a total tax paid to
other jurisdictions of $10,000. Each resident shareholder is allowed a credit
in an amount that represents a 10% share of the total eligible tax paid to the
other jurisdictions. Thus each resident shareholder is allowed a credit of
$1,000.
c. An eligible
resident shareholder must include with the shareholder's return the information
from the S corporation listing the amount of the shareholder's distributive
share of each tax paid by the S corporation for which a credit for taxes paid
to another jurisdiction is allowable under M.G.L. c. 62, § 6(a), as well
as the name of the taxing jurisdiction to which each tax was paid.
d. Non-residents are not eligible for the
credit for taxes paid to another jurisdiction, but rather are taxed on
Massachusetts source income, as more fully set out in 830 CMR 62.17A.2(4)(i)
and
830 CMR
62.5A.1.
(h)
State and Federal Differences
Relating to an S Corporation Shareholder's Distributive Share
Income. The definition of Massachusetts gross income in M.G.L. c.
62, § 2 is based on the definition of gross income in the Code. As a
general rule, M.G.L. c. 62, § 1(c) refers to the Code in effect on a
specific date, but for certain other purposes, M.G.L. c. 62 refers to the Code
as amended and in effect for the current tax year. In addition, Massachusetts
has its own items of loss, deduction, and credit, which may not correspond to
those of the Code. Thus, distributive share income may be calculated
differently for state and federal purposes. The following provisions state
Massachusetts rules and also provide illustrations of differences between the
state and federal calculation of shareholder distributive share income. It is
not a comprehensive statement of state and federal differences.
1.
Bonus Depreciation
Decoupling. Massachusetts personal income tax provisions are
decoupled from the federal bonus depreciation rules at Code § 168(k), and
thus the distributive share calculation shall not take into account the federal
depreciation allowance under Code § 168(k). See M.G.L. c.
62, § 2(d)(1)(N).
2.
Interest on Government Bonds. Interest income received
by an S corporation from U.S. debt obligations is included in taxable
distributive share income to shareholders for federal purposes. This interest
income is not taxable in Massachusetts to S corporation shareholders. M.G.L. c.
62, § 2(a)(2)(A). In contrast, non-Massachusetts state and municipal bond
interest is not taxed to S corporation shareholders by the
U.S. government, but is taxable in Massachusetts to S corporation shareholders.
M.G.L. c. 62, § 2(a)(1)(A). See also Code § 103. An
S corporation must adjust its net income figure to be reported to shareholders
to reflect these differences.
3.
Qualified Production Activities. Under federal law, an
S corporation passes through to its shareholders the deduction for qualified
production activities under Code § 199. Massachusetts law decouples from
the qualified production activities income deduction. Thus, the deduction that
is passed through to shareholders for federal purposes is not passed through in
computing the distributive share for Massachusetts purposes. M.G.L. c. 62,
§ 2(d)(1)(O).
(i)
Taxation of Non-resident and Part-year Resident Shareholders of
Massachusetts S Corporations.
1.
General Rule of Non-resident Shareholder Taxation.
Except as otherwise provided, a non-resident shareholder of an S corporation is
subject to tax under M.G.L. c. 62, § 5A on the shareholder's distributive
share of the S corporation's income, loss, deductions, or credits from sources
within Massachusetts, including all items allocated to Massachusetts, and all
income apportioned to Massachusetts. M.G.L. c. 62, § 17A(b);
see
830 CMR
62.5A.1. The activities of the S corporation
are attributed to all its shareholders, whether or not they are residents.
Thus, if a non-resident has an ownership interest in an S corporation that is
engaged in the conduct of a trade or business in Massachusetts, or derives
income from the ownership of real or tangible personal property in
Massachusetts or otherwise receives income taxable to a non-resident under
M.G.L. c. 62, § 5A, the non-resident is treated as if conducting those
activities in his or her individual capacity. The S corporation must inform
each non-resident shareholder at year-end of the shareholder's distributive
share of income, losses, deductions, or credits apportioned to and taxable in
Massachusetts, as well as each shareholder's proportionate share of allocable
income.
2.
Allocable
Income. Other than with respect to income derived from real or
tangible personal property, as stated in 830 CMR 62.17A.2(4)(i)4., where an S
corporation recognizes an allocable item of income, as that term is defined in
830 CMR
63.38.1(2), that income is
allocated to Massachusetts (i.e., and not apportioned to the
state) if the S corporation's commercial domicile is in Massachusetts.
See
830 CMR
63.38.1(3)(c):
Treatment of an Allocable Item of Income. If the corporation's
commercial domicile is not in Massachusetts, the allocable income is neither
allocated nor apportioned to Massachusetts.
3.
Apportionment of S Corporation
Distributive Share Income of Non-resident S Corporation
Shareholders.
a.
In
General. An S corporation with non-resident shareholders that does
business both within and without Massachusetts and that realizes income from
sources within Massachusetts that are derived from or effectively connected
with a trade or business, must calculate its income to be apportioned according
to the applicable statutory formula, such as that under M.G.L. c. 63,
§§ 2A, 38, and 42, or other applicable statutory apportionment
formula.
b.
No Further
Apportionment at the Non-resident Shareholder Level. The allocated
or apportioned income, as described in 830 CMR 62.17A.2(4)(i), that is reported
to a non-resident S corporation shareholder is the Massachusetts source income
amount that must be reported on the return. This amount is not subject to any
other apportionment method that might otherwise apply to the non-resident under
830 CMR
62.5A.1.
4.
Income Derived From Real or
Tangible Personal Property. Income of an S corporation that is
derived from the ownership or disposition of an interest in real or tangible
personal property located in Massachusetts is taxable in Massachusetts. If the
real or tangible personal property is part of the trade or business of the S
corporation, it is includible in the S corporation's income that is subject to
apportionment, and is passed through to shareholders as distributive share
income. If the real or tangible personal property is not part of the trade or
business of the S corporation, the income derived from the property is
allocated, not apportioned, to Massachusetts, and is reported to the S
corporation's shareholders as such. A non-resident shareholder is taxable in
Massachusetts on the full amount of such allocated income. See
830 CMR
62.5A.1(3)(d).
5.
Non-resident Shareholder Sale
of S Corporation Shares. A non-resident shareholder who sells
shares in an S corporation may be subject to tax in Massachusetts on the income
from the sale. See e.g.,
830 CMR
62.5A.1(3)(c)3.:
Shares of Stock Issued by a Corporation as Compensation, and
830 CMR
62.5A.1(3)(c)8.:
Sale of a Business or an Interest in a Business.
6.
Filing Requirements for
Part-year Residents that are S Corporation Shareholders. If during
the taxable year a shareholder of an S corporation that is subject to taxation
in Massachusetts changes status from a non-resident to a resident, or from
resident to non-resident, the shareholder is required to account separately for
each period.
a.
Determination of
Income for Portion of the Year that the Shareholder is a Resident.
The shareholder's items of income, loss, deduction, or credit for the portion
of the taxable year that the shareholder is a resident are calculated on a
daily basis. An S corporation may approximate the amount of distributive share
income for the part-year period of residency by multiplying the shareholder's
distributive share for the full taxable year by a ratio of the number of days
of residency to the number of days in the shareholder's taxable year.
b.
Determination of Income for
Portion of the Year that the Shareholder is a Non-resident. The
shareholder's items of income, loss, deduction, or credit for the portion of
the taxable year that the shareholder is a non-resident are determined by
multiplying the shareholder's distributive share of those items by a ratio of
the number of days of non-residency to the number of days in the shareholder's
taxable year, and then applying the S corporation's apportionment ratio to the
extent such income is subject to apportionment under 830 CMR 62.17A.2(4)(i).
Example (4)(i). S corporation Y has
income of $5,000,000 for the taxable year. Y has a Massachusetts apportionment
percentage of 60% for the taxable year. Shareholder B has a 20% ownership
interest in Y. B resides in Massachusetts from January
1st through March 31st of
the taxable year, then moves out of state. B's distributive share income from Y
is $1,000,000 for the taxable year. The calculation of B's Massachusetts tax
liability for the taxable year is as follows:
For the period of residency, January
1st through March 31st,
the income taxable to Massachusetts is based on the formula at 830 CMR
62.17A.2(4)(i)6.a., namely, first determining the portion of the distributive
share income that is attributable to the period of residency, in this case 90
days divided by 365 = 24.66%. Then, B's distributive share of $1,000,000 is
multiplied by 24.66% to yield $246,600, B's distributive share income that is
taxable to Massachusetts for the period of residency.
For the period of non-residency, April
1st through December
31st, the income taxable to Massachusetts is based
on the formula at 830 CMR 62.17A.2(4)(i)6.b., namely, first determining the
portion of the distributive share income that is attributable to the period of
non-residency, in this case 275 days divided by 365 = 75.34%. Then, B's
distributive share of $1,000,000 is multiplied by 75.34% to yield $753,400, B's
Massachusetts source income for the period of non-residency, which must then be
multiplied by Y's apportionment percentage of 60%, to yield $452,040 of
Massachusetts source income taxable to B during the period of
non-residency.
(5)
Shareholder Basis in S
Corporation Stock or Indebtedness.
(a)
S Corporation Shareholder
Basis in S Corporation Stock, in General. An S corporation
shareholder's basis in the S corporation's stock is generally determined by
taking into account the provisions of the Code, including, without limitation,
§§ 1012, 1014, 1015, and 1367, except as modified by statute or
regulation, or other public written statement. As more specifically explained
in 830 CMR 62.17A.2(5) and (6) (concerning the effect of S corporation
distributive share and distributions on a shareholder's basis in the S
corporation's stock), a shareholder's basis is generally increased by the
shareholder's distributive share of the S corporation's income and is generally
decreased by distributions from the S corporation to the shareholder.
(b)
Initial Basis Adjustment in
Shares to Account for Periods Before the Enactment of St. 1986, c. 488, §
39. Shareholders of entities that were S corporations for federal
purposes before the recognition in Massachusetts of S corporation status in
1986 were required to adjust their stock basis to reflect the difference in
basis that resulted from federal S corporation basis adjustments for pre-1986
taxable years, which adjustments would have been inapplicable in Massachusetts
during the pre-1986 period. See830
CMR 62.17A.1(8). Entities to
whom this adjustment applies must use the rules in St. 1986, c. 488, § 39,
as codified at M.G.L. c. 62, § 17A, and in
830
CMR 62.17A.1(8).
(c)
Current Basis
Adjustments. A shareholder's Massachusetts basis in the stock of
an S corporation must be adjusted at least annually to the extent that the S
corporation's items of income, loss, or deduction are included in the
shareholder's computation of income taxable under M.G.L. c. 62 for the taxable
year. Items of income, loss, or deduction are calculated under M.G.L. c. 62,
and thus may differ from income, loss or deduction as calculated under the Code
for federal purposes. Once items of income, loss, or deduction are determined
under Massachusetts law, a shareholder must apply the rules at Code §
1367, which state the mechanics for determining current basis adjustments, to
determine Massachusetts basis adjustments on accounts of such items.
1.
Effect on Basis of Certain
Federal Deductions that are Disallowed in Massachusetts. Certain
items are deductible by an S corporation for federal purposes when calculating
distributive share income and are not deductible when calculating distributive
share income under M.G.L. c. 62. In cases where a federal deduction is not
allowed in Massachusetts, the federally-allowed deduction that results in a
decrease in basis in a shareholder's stock for federal purposes will also
result in a decrease in basis of a shareholder's S corporation stock for
Massachusetts purposes.
2.
Effect on Basis of Certain Federal Deductions where Massachusetts
Permits a Similar Deduction, but on a Different Schedule. Certain
items that are deductible by an S corporation for federal purposes when
calculating distributive share income represent amounts for which Massachusetts
generally allows a deduction, but on a different schedule. In such a case, the
federally-allowed deduction that results in a decrease in basis in a
shareholder's stock for federal purposes will not result in a decrease in basis
of a shareholder's S corporation stock for Massachusetts purposes. To
illustrate, as stated in 830 CMR 62.17A.2(4)(h)1., Massachusetts personal
income tax provisions are decoupled from the federal bonus depreciation rules
at Code § 168(k). The depreciation amount represents an expenditure that
is capitalized for both federal and state purposes and recovered over time, but
on a different schedule for federal and state tax purposes. The taking of the
bonus depreciation deduction at the federal level will not result in a decrease
in the Massachusetts basis in shares for an S corporation shareholder. Instead,
basis for Massachusetts purposes will be adjusted based on the depreciation
timetable permitted under Massachusetts law. See M.G.L. c. 62,
§ 2(d)(1)(N).
(d)
Transfers of Stock or Indebtedness. In a transaction
in which the basis of the stock or indebtedness to the transferee carries over
from the transferor, the adjustments and modifications to Massachusetts basis
described in 830 CMR 62.17A.2(5) and (6) as to any part of a shareholder's
interest in such stock or indebtedness of the S corporation continue to
apply.
(e)
Special
Rules for Adjustment to Basis in Indebtedness. An S corporation
shareholder may have made loans to the S corporation and in such a case will
have a basis in his or her interest in the indebtedness to the S corporation.
Massachusetts generally follows the federal rules for adjustment to basis in
indebtedness under Code § 1367(b)(2). See also Treas.
Reg. § 1.1367-2. However, to the extent that there are federal and
Massachusetts differences in calculating income or loss,
see830 CMR 62.17A.2(4)(h), that would have an effect on the
basis adjustment, an S corporation shareholder's basis in an S corporation's
indebtedness may differ from his or her federal basis.
(f)
Special Rules for
Shareholders in S Corporations that were Formerly Taxed as Corporate Trusts
under the Repealed M.G.L. c. 62, § 8. Certain S corporations
were formerly taxed as corporate trusts under M.G.L. c. 62, § 8, which has
been repealed. See St. 2008, c. 173, § 19. The relevant
tax provisions of M.G.L. c. 62, § 8 last applied to corporate trusts for
tax years beginning on or before December 31, 2008. Shareholders of S
corporations that were formerly taxed under the repealed provisions of M.G.L.
c. 62, § 8 are required to make a basis calculation as to their shares for
periods commencing on the first day the entity became subject to taxation under
M.G.L. c. 63, following the rules in
830 CMR
63.30.3(3)(d)4.a. (which
applies particularly to the treatment of tax-free earnings and profits of the
former corporate trust). Shareholders of an entity that formerly was treated as
a corporate trust under M.G.L. c. 62, § 8, but that was simultaneously an
S corporation for federal income tax purposes will often have a Massachusetts
basis in their shares that differs, possibly significantly, from their federal
basis. See
830 CMR
63.30.3(4)(a)2.
(6)
Distributions from an S
Corporation to its Shareholders.
(a)
General Rule Regarding
Distributions From an S Corporation to its Shareholders. Unless
otherwise excluded from gross income, actual distributions of cash or property
by an S corporation with respect to its stock are included in the income of
shareholders in a manner similar to that described in Code § 1368. Income,
losses and deductions computed according to M.G.L. c. 62 are used to adjust
Massachusetts basis, Massachusetts accumulated adjustments accounts, and
Massachusetts Earnings and Profits. A taxable distribution is included in a
shareholder's Massachusetts gross income in the taxable year it is received or
constructively received.
(b)
Massachusetts Accumulated Adjustments Accounts. Every
S corporation must maintain a Massachusetts accumulated adjustments account
(AAA) as defined in 830 CMR 62.17A.2(2) for purposes of determining the proper
tax treatment of distributions, whether or not it is required to do so under
Code § 1368. Except as to those S corporations that are subject to the
rules otherwise provided in
830
CMR 62.17A.1, on the first day of the first
taxable year for which the corporation is an S corporation for Massachusetts
purposes, the balance of the AAA is the balance of the AAA for federal
purposes.
(c)
Massachusetts Earnings and Profits. Every S
corporation must maintain a Massachusetts Earnings and Profits account as
defined in 830 CMR 62.17A.2(2) for purposes of determining the proper tax
treatment of distributions during taxable years that an entity is treated as an
S corporation for Massachusetts purposes, and also for taxable years it was not
treated as such.
(d)
Overview of the Tax Consequences of Distributions and the
Application of Distributions Against S Corporation Massachusetts Accounts and
Stock Basis. The general effect of a distribution from an S
corporation to a shareholder is to require the application of a cascading set
of rules that determine whether and how the distribution is taxable to the
shareholder, and the effect of the distribution on the shareholder's basis in
his or her stock.
As explained in more detail in the specific rules below, an S
corporation's distribution to its shareholders is taken first from the S
corporation's AAA, which account contains amounts that have been previously
reported to the S corporation's shareholders as distributive share income and
that has been taxed to such shareholders. Because such amounts have been
previously taxed, have not been distributed to the S corporation's
shareholders, and have increased such shareholders' basis in the S corporation
stock, distributions from the AAA are tax-free to these shareholders, and
correspondingly decrease the shareholders' basis in the S corporation stock.
Distributions from AAA in excess of basis are generally treated as a taxable
gain from the sale or exchange of property.
An S corporation may also have earnings and profits that derive
from a period that the S corporation was previously a C corporation or from an
acquisition by the S corporation of a C corporation that has earnings and
profits. After the AAA is fully depleted, the next distributions from the S
corporation to its shareholders are taken from the Massachusetts Earnings and
Profits account. These distributions are taxable to the S corporation
shareholders as dividends and have no effect on basis. In such cases, once the
Massachusetts Earnings and Profits account is fully depleted, the same rules
apply to shareholders of S corporations that have no Earnings and Profits
account: further distributions from the S corporation to its shareholders are
made tax-free to the shareholders to the extent of the shareholders' basis in
shares, and the distributions reduce the shareholders' basis in the shares.
Once an S corporation shareholder's basis in shares is fully depleted, any
further distribution from the S corporation to its shareholders is treated as
taxable gain from the sale or exchange of property.
(e)
Specific Rules on the
Consequences of Distributions From an S Corporation to its
Shareholders. Unless a distribution occurs in a post-termination
transition period as defined in 830 CMR 62.17A.2(7) and the post-termination
transition rules require otherwise, each distribution of property (including
cash) from an S corporation shall be applied to reduce the AAA, the
Massachusetts Earnings and Profits account, and Massachusetts adjusted
shareholder basis in the S corporation shares according to rules set forth
below. For adjustment to basis in a post-termination transition year,
see830 CMR 62.17A.2(7). For S corporations that were formerly
treated as corporate trusts,
see830 CMR 62.17A.2(6)(f).
1.
S Corporations with No
Massachusetts Earnings and Profits. Each distribution of property
(including cash) from an S corporation that has no Massachusetts Earnings and
Profits shall have the following tax consequences and shall be applied to
reduce the Massachusetts accumulated adjustments account and Massachusetts
adjusted shareholder basis in shares, in the following order:
a. The distribution shall not be included in
the shareholder's gross income to the extent that it does not exceed the
shareholder's Massachusetts adjusted basis in the S corporation stock, as
determined under 830 CMR 62.17A.2(5) and (6); the Massachusetts adjusted basis
of the stock and the AAA shall be reduced by the amount of the
distribution.
b. If the amount of
the distribution exceeds the shareholder's Massachusetts adjusted basis in the
S corporation stock, such excess is treated as gain from the sale or exchange
of property.
2.
S Corporations with Massachusetts Earnings and
Profits. Each distribution of property (including cash) from an S
corporation that has Massachusetts Earnings and Profits shall have the
following tax consequences and shall be applied to reduce the AAA, the
Massachusetts Earnings and Profits account, and the shareholder's Massachusetts
adjusted basis in the S corporation stock, in the following order:
a. The portion of the distribution that does
not exceed the Massachusetts accumulated adjustments account shall not be
included in gross income to the extent it does not exceed the shareholder's
Massachusetts adjusted basis in the S corporation stock. The Massachusetts
adjusted basis in the S corporation stock and the Massachusetts accumulated
adjustments account shall be reduced by the amount of the
distribution;
b. In the event that
a distribution exceeds Massachusetts adjusted basis but does not exceed the
Massachusetts Accumulated Adjustment Account, the amount of such distribution
shall be treated as taxable gain on the sale or exchange of property;
c. To the extent a distribution exceeds the
AAA but such excess distribution does not exceed accumulated Massachusetts
Earnings and Profits, the amount of such excess distribution shall be taxable
as a dividend to the extent of the Massachusetts Earnings and Profits account.
The Massachusetts Earnings and Profits account to the extent thereof will be
reduced by the amount of the distribution;
d. After applying the rules in 830 CMR
62.17A.2(6)(e)(2) a. through c., where the AAA and the Massachusetts Earnings
and Profits account are fully depleted, but the shareholder has an adjusted
basis in the S corporation shares that is greater than zero, further amounts
distributed are tax-free to the extent of any remaining shareholder's
Massachusetts adjusted basis in the S corporation stock; such basis shall be
reduced by the amount of the distribution; and
e. After applying the rules in 830 CMR
62.17A.2(6)(e)(2) a. through d., where the AAA and the Massachusetts Earnings
and Profits account are fully depleted, and the shareholder has a zero basis in
the S corporation shares, all additional amounts distributed shall be treated
by the shareholder as gain from the sale or exchange of
property.
3.
Massachusetts generally follows the federal election to treat certain
distributions as dividends, as provided in Code § 1368(e)(3); this
election may not be made solely for Massachusetts purposes.
(f)
Rules for S
Corporations That Were Formerly Treated as Corporate Trusts. Prior
to tax years beginning on or after January 1, 2009, certain entities were
subject to taxation as corporate trusts under the now-repealed M.G.L. c. 62,
§ 8. See St. 2008, c. 173. Entities that were formerly
taxed as corporate trusts at the entity level are subject to special rules with
respect to the taxation of their tax-free earnings and profits.
See830 CMR 62.17A.2(3)(h),
830 CMR
63.30.3(3)(d):
Corporate Trusts. Rules for recognizing income to S
corporation shareholders that derives from these tax-free earnings and profits
are set forth in
830 CMR
63.30.3(3)(d), (4)(a),
(4)(a)2., (4)(c)2. The tax-free earnings and
profits amounts attributable to each S corporation shareholder do not become a
part of the AAA or the Massachusetts Earnings and Profits account. Rather,
distributions from the S corporation are treated first as paid from tax-free
earnings and profits until this account is exhausted. Such payments are taxable
to shareholders as described in
830 CMR
63.30.3: Entity Classification Under
St. 2008, c. 173, and neither reduce nor increase the AAA or the
Massachusetts Earnings and Profits account. The effect of such distributions on
a shareholder's basis is explained in
830 CMR
63.30.3: Entity Classification Under
St. 2008, c. 173, particularly at 830 CMR 63.30(3)(d)4. and (4)(a)2:
Change from a Corporate Trust to a
Corporation.
(7)
Post-termination Transition Issues Applicable to S Corporation
Shareholders.
(a)
Post-termination Transition Period. If an S
corporation ceases to qualify as an S corporation, Massachusetts follows the
federal rules that allow distributions from the former S corporation to be
treated under the distribution rules for S corporations for a period of time.
See e.g., Code §§ 1371(e), 1377(b).
1.
Timing of Pass-through Items
in the Post-termination Transition Period. A shareholder of an
entity that ceases to qualify for S corporation treatment under Code §
1362 is subject to tax under M.G.L. c. 62 on the S corporation's items of
income, loss, or deduction as provided under the rules of Code § 1366(a)
and 830 CMR 62.17A.2(4). The shareholder shall recognize and report such items,
in the shareholder's taxable year in which the taxable year of the S
corporation ends.
2.
Cash Distribution in the Post-termination Transition
Period. Under the rules of Code § 1371(e), any distribution
of money by an S corporation with respect to its stock during the
post-termination transition period shall reduce the shareholder's Massachusetts
adjusted basis to the extent of the Massachusetts accumulated adjustments
account. Distributions other than of cash during the post-transition period
must follow the rules that apply to distributions from C corporations, and are
not given special treatment.
(b)
Effect on a Shareholder's
Basis in the S Corporation Stock From a Distribution by the S Corporation in a
Post-termination Period. If the AAA is not fully depleted at the
end of a post-termination transition period, as defined at 830 CMR
62.17A.2(7)(a), it has no further effect, and is treated as part of the
successor C corporation's paid-in capital. Any distributions from the entity
after the end of the post-termination transition period are subject to the
rules for distributions from the C corporation successor. No additional basis
adjustment to the S corporation shareholder's shares is required or allowed
when the undistributed Massachusetts accumulated adjustments account balance is
added to paid-in capital.
(8)
S Corporation Entity-level
Taxation in Massachusetts.
(a)
General. An S corporation that meets the requisite
jurisdictional requirements is subject to a corporate excise at the entity
level in Massachusetts. The components of the excise differ based on whether
the entity is taxed as a corporation subject to M.G.L. c. 63, §§ 32D
and 39, a financial institution subject to M.G.L. c. 63, § 1 through 2B,
or an entity subject to another provision of M.G.L. c. 63.
Each of the various statutory sections under which an S
corporation may be taxed at the entity level under M.G.L. c. 63 has its own
requirements. Except as otherwise provided by statute or 830 CMR 62.17A.2,
rules that apply to C corporations with respect to calculating the entity-level
excise generally also apply to S corporations. For example, the determination
of the Massachusetts basis of an S corporation in its assets generally follows
the same rules as the determination of the Massachusetts basis of a C
corporation in its assets. See M.G.L. c. 63, §
31N.
For S corporations that are subject to the entity-level excise
under M.G.L. c. 63, §§ 32D and 39, each of the three components of
the excise potentially apply, namely the income measure, the non-income
measure, and the minimum excise. For S corporations that are financial
institutions and that are subject to the entity-level excise under M.G.L. c.
63, § 1 through 2B, the two components of the financial institution excise
potentially apply, namely the income measure and the minimum excise.
S corporations that are not subject to the entity-level excise
at M.G.L. c. 63, §§ 1 through 2B or 32D and 39 are otherwise subject
to an entity-level excise under M.G.L. c. 63, for example, security
corporations, which are subject to M.G.L. c. 63, § 38B.
An S corporation is generally allowed to use credits against
its entity-level excise in the same manner and subject to the same limitations
that other corporations taxable under the various provisions of M.G.L. c. 63
are allowed to use such credits. However, as stated in 830 CMR 62.17A.2(3)(e),
no credit may be applied against both the entity-level excise and the
shareholder-level tax. Similarly, an available credit may not be divided, part
being used at the entity level and part being used at the shareholder
level.
The taxation of an S corporation at the entity level is
separate and distinct from the taxation of an S corporation's shareholders on
their distributive share income, as set forth in M.G.L. c. 62, § 17A, and
830 CMR 62.17A.2(1) through (7). Payment of an entity-level corporate excise
does not satisfy the obligation of an S corporation's shareholders to pay an
income tax on their distributive share of income, and
vice-versa.
(b)
Rules Generally Applicable to Entities Taxable Under M.G.L. c. 63,
§§ 1 and 2B (Financial Institutions) and 32D and 39 (Certain Business
Corporations) for Determining the Income Measure of the Excise.
1.
Two Categories of Income, with
Separate Rules for Each. There are two categories of income that
are subject to the income measure of the excise as measured under M.G.L. c. 63,
§§ 2B and 32D.
Category one income is that income of
an S corporation that is taxable at the entity level under the Code; for
example, built-in gains of an S corporation taxable under Code § 1374, or
excess net passive income of an S corporation that has accumulated earnings and
profits for a taxable year and that has gross receipts more than 25% of which
are passive investment income, taxable under Code § 1375. Category 1
income is taxed at the rate that would apply if the S corporation were a C
corporation. M.G.L. c. 63, §§ 2B(a)(1) and 32D(a)(i).
Category two income is that income of
an S corporation that is not Category one income. Category two income is
subject to the income measure excise as calculated under M.G.L. c. 63, §
2B(a)(2) through (5) or § 32D(a)(ii). This income is subject to the income
measure excise only if the total receipts of the S corporation (and certain
affiliates of the S corporation) are $6 million or greater.
See M.G.L. c. 63, §§ 2B(a)(2) through (5),
32D(a)(ii). With respect to this income, the rate of tax depends on the level
of receipts; one rate of tax applies to an entity with receipts of at least
$6,000,000 and below $9,000,000, and another rate of tax applies to an entity
with receipts of $9,000,000 or more. When computing its tax, the S corporation
must generally calculate its income in the same manner as other corporations
subject to M.G.L. c. 63, §§ 1 through 2A (financial institutions) and
§§ 30 and 39 (certain categories of business corporations), and must
subtract its Category one income from its Category two net income.
The following sections state additional rules that apply to the
taxation of Category two income.
2.
Method for Determining Total
Receipts, Aggregation Rules. In order to determine whether an S
corporation must pay an entity-level excise measured by Category two income,
the S corporation must first determine whether its total receipts meet the $6
million total receipts threshold for such taxation. For purposes of this
calculation, if the S corporation owns one or more QSubs, its total receipts
must be computed by combining them with those of its QSubs, irrespective of
whether the S corporation and its QSubs are engaged in a unitary business.
Also, if the S corporation is engaged in a unitary business with one or more
other S corporations or pass-through entities (such as an LLC or partnership),
its total receipts must be aggregated with the receipts of:
a. such other S corporations, including any
QSubs owned by them; and
b. other
pass-through entities with which the S corporation is engaged in a unitary
business, including entities that are owned by other pass-through entities in a
tiered-ownership or similar structure. However, the total receipts of two or
more corporations, including one or more entities subject to the aggregation
rules of 830 CMR 62.17A.2(8)(b)2. shall not include receipts derived from
intercompany transactions between such entities.
Further, an S corporation's total receipts must be aggregated
with the receipts of any other corporation with which the S corporation is
engaged in a unitary business, including any C corporation that the
Commissioner finds was established for the purpose of avoiding the total
receipts thresholds of $6,000,000 and $9,000,000. The Commissioner will presume
that any entity created after the formation of the S corporation was organized
to reduce the total receipts of an S corporation with which it has common
ownership and with which it engages in a unitary business.
The aggregate total receipts of all such entities as set forth
in the previous paragraphs is the total receipts amount that is attributed to
each entity individually to determine whether and at which rate each S
corporation in the group is subject to the excise on Category two income.
See830 CMR 62.17A.2(8)(c).
Example (8)(b). Husband and Wife own S
Corporation that produces and markets computer software designed to organize
hospital patient records. Husband and Wife also own a Partnership that studies
the methodology used in various Massachusetts hospitals for patient record
keeping, with a goal of finding the most efficient methods and for translating
these to computer code. Receipts in the S corporation are less than six million
dollars. However, S Corporation and Partnership are engaged in a unitary
business. The receipts of both S Corporation and Partnership must be combined
in order to determine whether S Corporation is subject to the entity-level
excise under M.G.L. c. 63, § 32D.
3.
Taxable Year Issues Related to
Group Members When Determining Total Receipts.
a.
Choosing a Principal Group
Member. It is possible that a group of entities that is required
to combine the total receipts of each group member in order to determine
whether and at what rate an S corporation each member of the group is subject
to the entity-level excise will have different taxable years. In such cases the
group must perform its total receipts calculation based on the taxable year of
one group member (the "principal group member").
The principal group member is the group member that the group
reasonably expects will have the largest amount of total receipts subject to
the income measure excise under M.G.L. c. 63, §§ 2, 2B or 32D and 39
on a recurring basis. Once the group identifies the principal group member,
that group member is the principal group member for as long as that member is
subject to the income measure excise.
b.
Method for Determining Total
Receipts for a Group of Entities. Where more than one entity in a
group must combine its total receipts and the taxable year differs as to one or
more group members, those members' accounting periods must be adjusted,
generally following the principles of fiscalization that apply in the context
of combined reporting as set forth at
830 CMR
63.32B.2(12): Tax
Returns; Taxable Year; Fiscalization; Mid-year Entry or Departure. The
group must use this method in a reasonable and consistent way, such that it
will not materially distort the total receipts of the group members. The
Commissioner reserves the right to adjust the method of fiscalization used by
the group.
4.
Determining an S Corporation's Total Receipts in a Short Taxable
Year.
a.
Annualized
Method. Except as allowed under 830 CMR 62.17A.2(8)(b)4.b., in
computing its total receipts for a taxable year consisting of fewer than 12
months, an S corporation must annualize its total receipts for the taxable year
by taking the average income for the number of months in the short taxable
year, and multiplying the result by 12.
b.
Actual 12-month Receipts
Method. In the case of a company that terminates its business, for
example, by sale or dissolution, and as a result has a taxable year consisting
of fewer than 12 months, such taxpayer may elect to count actual receipts of
the corporation for the 12-month period ending on the closing date of the short
taxable year.
(c)
Rules Specific to Calculating
the Income Measure of the Excise for Category Two Income for Corporations
Subject to M.G.L. c. 63, §§ 32D and 39.
1.
General. An S
corporation subject to the entity-level tax under M.G.L. c. 63, §§
32D and 39 must pay an excise on its Category two income if its total receipts
for the taxable year are $6 million or more. It must calculate the income
measure using the following rules.
2.
Rate of Excise Under M.G.L. c.
63, § 32D(a)(ii). There are two rates that apply to the
taxation of an S corporation's Category two income measured under M.G.L. c. 63
§ 32D(a)(ii):
a. If the S corporation's
actual and deemed total receipts for the taxable year are $9,000,000 or more,
the income measure rate is derived by subtracting the rate applicable to Part B
taxable income for that taxable year pursuant to M.G.L. c. 62, § 4(b) from
the income measure rate applicable to C corporations under M.G.L. c. 63, §
39(a)(2).
b. If the S corporation's
total receipts for the taxable year are at least $6,000,000 but less than
$9,000,000, the rate is b of the rate set forth in 830 CMR
62.17A.2(8)(c)2.a.
3.
Net Operating Loss Carryforward Deduction with Respect to S
Corporations Subject to Tax under M.G.L. c. 63, §§ 32D and
39.
a.
S
Corporations are Generally Allowed to Take Net Operating Loss (NOL)
Carryforward Deductions, Subject to Some Restrictions. An S
corporation subject to tax under M.G.L. c. 63, §§ 32D and 39 pursuant
to 830 CMR 62.17A.2(8)(c) is generally allowed to deduct, on a carryforward
basis, a net operating loss (NOL) incurred in a prior taxable year from its
Category two income (but not from its Category one income), under M.G.L. c. 63,
§ 30.5. See generally
830 CMR
63.30.2. The deduction is available to the
extent that it would be allowed to a C corporation under the provisions of
M.G.L. c. 63, § 30.5 and
830 CMR
63.30.2: Net Operating Loss
Deductions and Carryover. NOL carryforwards have no effect on, and
shall not be taken into account in, the calculation of a shareholder's
distributive share income or loss under M.G.L. c. 62. See830
CMR 63.17A.2(4)(e)3.a. Further, an S corporation that is subject to tax under
M.G.L. c. 63, § 2 shall not be entitled to deduct an NOL carry forward. In
no case can an NOL deduction be carried back.
b.
Limitation on NOL Carryforward
Deduction Where an S Corporation Has Category One Income. Category
one income is a net-income amount of the S corporation determined under the
Code. M.G.L. c. 63, § 32D(a)(i). From this net income figure certain
federal loss carryforward amounts have already been deducted.
See Code §§ 1374(b), (d), Treas. Reg. §
1.1374-5. To the extent that an S corporation's Massachusetts NOL carryforward
includes one or more amounts that were previously deducted from Category one
income under Code § 1374(b), (d), and Treas. Reg. § 1.1374-5, such
NOL amounts may not be deducted by the S corporation from its Category two
income.
c.
i.
Specific Rules for Carrying
Forward NOL Deductions. An S corporation that is entitled to
deduct carryforward NOLs is allowed to carry forward an NOL for a prior taxable
year, subject to the general rules that apply to carry forwards, whether or not
the S corporation was subject to the entity-level excise on Category two income
in such year. The determination as the amount to carry forward must be made
using the carryforward calculation set forth in 830
CMR 62.17A.2(8)(c)3.c.ii. A net operating loss shall not be carried back; thus,
for example, a taxpayer that sustains a loss in a taxable year may not amend a
prior year's return to claim that loss.
ii.
carryforward
calculation. In order to properly determine the allowable NOL
carryforward amount that an S corporation may use, the S corporation must
calculate its apportioned net income or loss for each relevant taxable year,
whether or not it is subject to the income measure on its Category two income
for such year. Any loss amount carried forward must be reduced by the S
corporation's post-apportionment positive income amounts in succeeding taxable
years for the carryforward period as determined under M.G.L. c. 63, §
30.5, and increased by its post-apportionment loss amounts incurred in such
succeeding taxable years.
Example (8)(c)(3). In year one, S
corporation S is subject to M.G.L. c. 63, § 32D and has total receipts of
$3 million, and is not subject to the income measure excise. S has no Category
one income. S performs a pro forma calculation of its income
measure as if it were subject to the income measure as calculated under M.G.L.
c. 63, §§ 32D and 39, and arrives at a post-apportioned loss figure
of $100,000. In years two and three, S corporation continues to have total
receipts below $6 million, and thus is not subject to the income measure for
those years. The pro forma calculation for year two results in a
post-apportioned loss figure of $20,000. The pro forma
calculation for year three results in a postapportionment income figure of
$70,000. In year four, S has total receipts of $7 million, and is thus liable
for the income measure excise as calculated under M.G.L. c. 63, §§
32D and 39. The cumulative loss amount of S for the period year one through
year three that may be carried forward to year four is $50,000, calculated as
follows: $100,000 (year one loss) plus $20,000 (year two loss) minus $70,000
(year three income).
d.
Carryforward Rules When an S
Corporation Acquires a C Corporation. The following rules apply
when an S corporation acquires a C corporation. 830 CMR 62.17A.2(8)(c)3.d. is
unrelated to the rules that apply to an S corporation merger or restructuring
that results from the application of St. 2008, c. 173, relating to changes in
entity classification under Massachusetts law.
See
830 CMR
63.30.3:
Entity Classification Under
St. 2008, c. 173.
i.
S
Corporation Acquires a C Corporation, Elects QSub status for the Acquired
Corporation. Where an S corporation acquires a C corporation and
elects to treat the acquired entity as a QSub, the transaction is treated as a
liquidation of the C corporation into the parent S corporation. In such a case,
the net operating losses attributable to the former C corporation cannot be
carried forward, and therefore are not available to the S
corporation.
ii. S corporation
acquires a C corporation, with no QSub election. Where an S corporation
acquires a C corporation and does not elect to treat the acquired entity as a
QSub, the net operating losses attributable to the acquired C corporation
continue to reside with and are available to the C corporation, to the extent
otherwise allowed under Massachusetts law.
4.
Treatment of Income Derived
From a Code § 338(h)(10) Election. An S corporation that is
subject to an election made under Code § 338(h)(10) recognizes gain or
loss with respect to the transaction as if it sold all of its assets in a
single transaction. The S corporation in such a case will make a final return
for the period ending as of the close of the date of the sale. All income
attributable to the deemed sale of assets is reportable by the S corporation as
income subject to the entity-level excise under M.G.L. c. 63, §§ 32D
and 39.
(d)
Rules Specific to Calculating the Income Measure Excise for
Category Two Income for Financial Institutions Subject to M.G.L. c. 63,
§§ 2B(a)(2) Through (4).
1.
General. An S
corporation that is a financial institution and thus is subject to the
entity-level tax under M.G.L. c. 63, §§ 2B(a)(2) through (4) must pay
an excise on its Category two income if its total receipts for the taxable year
are $6 million or more. It must calculate the income measure using 830 CMR
62.17A.2(8)(d)2. Financial institutions are not eligible to deduct losses
incurred in prior years.
2.
Rate of Excise Under M.G.L. c. 63, §§ 2B(a)(2) Through
(4). There are two rates that apply to the taxation of an S
corporation's Category two income taxable under M.G.L. c. 63, § 2B(a)(2)
through (4):
a. If the S corporation's total
receipts for the taxable year are $9,000,000 or more, the income measure rate
is derived by subtracting the rate applicable to Part B taxable income for that
year in M.G.L. c. 62, § 4(b) from the rate applicable to financial
institutions in that taxable year in M.G.L. c. 63, § 2.
b. If the S corporation's total receipts for
the taxable year are at least $6,000,000 but less than $9,000,000, the income
measure rate is b of the rate set forth in 830 CMR 62.17A.2(8)(d)2.a.
3.
Treatment of Income
Derived From a Code § 338(h)(10) Election. An S corporation
that is subject to an election made under Code § 338(h)(10) recognizes
gain or loss with respect to the transaction as if it sold all of its assets in
a single transaction. The S corporation in such a case will make a final return
for the period ending as of the close of the date of the sale. All income
attributable to the deemed sale of assets is reportable by the S corporation as
income subject to the entity-level excise under M.G.L. c. 63, §§ 1
through 2B.
(9)
S Corporations That Are Subject to Combined Reporting.
(a)
Income Measure Filing
Requirements. An S corporation (including its QSubs) that is doing
business in Massachusetts is subject to combined reporting within the meaning
of M.G.L. c. 63, § 32B when it is engaged in a unitary business with one
or more other corporations, including one or more S corporations that are
subject to combined reporting.
See generally
830 CMR
63.32B.2:
Combined
Reporting;
see also
830 CMR
63.32B.2(4)(a):
General. In such cases, if the S corporation is subject to the
income measure excise, it is required to be included in the combined report and
to compute its net income subject to tax and its income measure consistent with
the rules for combined reporting.
See generally 830 CMR
63.32B.2(7):
Apportionment of Income Computation; Tax Computation Where No
Apportionment, and (7)(l):
Example 8
(discussing the rules that apply when an S corporation is to file as a member
of a combined group).
Where an S corporation is not itself subject to the income
measure excise, it is nonetheless required to be included in a combined report
if it is engaged in a unitary business with one or more other corporations that
are subject to the income measure excise and any member of such group that is a
C corporation. In contrast, in any instance where an S corporation is engaged
in a unitary business only with one or more other S corporations, and the
aggregate gross receipts of such corporations is less than $6 million (that is,
no corporation in the combined group is liable for the income measure excise),
the group is not required to file a combined report.
An S corporation is not subject to combined reporting unless it
is engaged in a unitary business with one or more other corporations.
Therefore, in any case in which an S corporation owns one or more QSubs but is
not engaged in a unitary business with one or more other corporations apart
from its ownership of these QSubs, the S corporation is not subject to combined
reporting, because a QSub is not treated as an entity separate from its parent
for Massachusetts corporate excise purposes.
(b)
Net Operating Loss Issues in
the Case of an S Corporation Member of a Combined Group.
1.
General Rules with Respect to
NOLs Where a Combined Group Contains One or More S Corporations.
An S corporation subject to M.G.L. c. 63, § 32D included in a combined
report can share NOL carry forwards with other members of the combined group,
to the extent such sharing would be allowed if the taxpayer were a C
corporation. See
830 CMR
63.32B.2(8): Net
Operating Loss Carry Forwards. In such cases, the NOL attributable to
and carried forward by the S corporation member of the combined group must be
calculated according to the carryforward calculation rules set forth at 830 CMR
62.17A.2(8)(c)3. However, an S corporation that is a financial institution
subject to M.G.L. c. 63, § 2B is not allowed to carry forward an NOL or to
use an NOL carryforward where the loss being carried forward was generated by
another combined group member.
2.
Restrictions on Loss Sharing with Respect to Category One
Income. An S corporation in combined reporting is generally able
to share NOL carryforward losses of other group members in the manner of a C
corporation under
830 CMR
63.32B.2(8): Net
Operating Loss Carry Forwards, and the sharing rules at
830 CMR
63.32B.2(8)(b):
Sharing of NOL Carry Forwards, however, an S corporation
member of a combined group may not take an NOL carryforward deduction when
computing its income measure excise on Category one income. See 830 CMR
62.17A.2(8)(c)3.a. See also Code § 1374(b), (d), Treas.
Reg. § 1.1374-5.
(c)
Non-income Measure; Minimum Excise. An S corporation
that is included in a combined report is subject in its own right to the
non-income measure excise or the minimum excise, as applicable, and must file
accordingly. See M.G.L. c. 63, §§ 32D and
39.
(d)
Effect of a
Combined Report on an S Corporation's Calculation of its Shareholders'
Distributive Share Income. An S corporation included in a combined
report cannot apply the provisions related to combined reporting at
830 CMR
63.32B.2: Combined
Reporting or 830 CMR 62.17A.2(9) for purposes of determining a
shareholder's distributive share of income. See830 CMR
62.17A.2(4). Rather, the income or loss for such a shareholder is determined by
the S corporation using the provisions of M.G.L. c. 62 and the Code, without
regard to the entity's combined reporting obligations. See830
CMR 62.17A.2(4). The amount of such income to be apportioned to Massachusetts
in the case of a non-resident shareholder taxable under M.G.L. c. 62, § 5A
is also determined without reference to the combined reporting provisions.
See generally
830 CMR
63.32B.2(7):
Apportionment of Income Computation; Tax Computation Where No
Apportionment, and (7)(l): Example 8
(discussing the rules that apply as to the taxation of S corporation
shareholders, including non-resident shareholders, when an S corporation is to
file as a member of a combined group).
