Current through Register 1531, September 27, 2024
(1)
Statement of Purpose, Effective Date.
(a)
Purpose of
Regulation. This regulation explains the calculation of the
economic opportunity area credit allowed by M.G.L. c. 62, § 6(g) and
M.G.L. c. 63, § 38N.
(b)
Effective Date. This regulation takes effect upon
promulgation and applies to costs incurred on or after January 1,
1993.
(2)
Definitions. For purposes of this regulation the
following terms shall have the following meanings:
Certified Project, a project that has
been approved by the Economic Assistance Coordinating Council for participation
in the economic development incentive program pursuant to the provisions of
M.G.L. c. 23A, § 3F.
Code, the Internal Revenue Code of the
United States, as amended and in effect for the taxable year, unless otherwise
specified.
Commissioner, the Commissioner of
Revenue or the Commissioner's duly authorized representative.
Corporations, all entities taxable
under M.G.L. c. 63.
Department, the Department of
Revenue.
Economic Assistance Coordinating
Council, the council established pursuant to M.G.L. c. 23A, §
3B.
Economic Opportunity Area, an area of
Massachusetts which is designated by the Economic Assistance Coordinating
Council as an economic opportunity area pursuant to M.G.L. c. 23A, §
3E.
Investment Tax Credit, the credit
allowed by M.G.L. c. 63, § 31A.
Lease, any transfer of use or
possession of real and tangible personal property for consideration, including
licenses and subleases.
Participants, any person or
corporation which as owner, lessor, or lessee of eligible property incurs costs
or makes expenditures in connection with the purchase or lease of such eligible
property in a certified project. A person or corporation does not qualify as a
participant solely by virtue of providing financing to participants in
connection with a certified project.
Persons, individuals and entities
taxable under M.G.L. c. 62.
(3)
Taxpayers Eligible for the
Credit.
(a)
Corporations. The credit may be applied against any
excise imposed by M.G.L. c. 63.
(b)
Persons. The credit may be applied against the income
tax imposed by M.G.L. c. 62.
(4)
Eligible
Property. Eligible property includes tangible personal property
and other tangible property, including buildings and structural components of
buildings, acquired, constructed, reconstructed or erected during the taxable
year and used exclusively in a certified project in an economic opportunity
area in Massachusetts and tangible personal property leased pursuant to an
operating lease and used exclusively by the lessee in Massachusetts in a
certified project in an economic opportunity area throughout the entire lease
term, subject to the following requirements:
(a) the property must not be taxable under
M.G.L. c. 60A (relating to motor vehicles);
(b) the property must be depreciable under
Section 167 of the Code and have a useful life of four years or more;
and
(c) Buildings and structural
components of buildings must be acquired by purchase as defined under Section
179(d) of the Code.
(5)
Availability of the Credit.
(a)
Owner. The
credit is available to the owner of eligible property. Where more than one
taxpayer participates in a certified project, the credit is available to each
participant only for eligible property owned by the participant. If eligible
property is owned by two or more participants, the credit shall be available to
each participant in proportion to its ownership interest in such property. For
purposes of this Regulation, an owner of eligible property is the taxpayer who,
under section 167 of the Code, is entitled to take a depreciation deduction
with respect to the eligible property.
1. If
property is leased to a taxpayer pursuant to a capital lease, the taxpayer
shall be treated as the owner of the property. A capital lease is any
transaction which the taxpayer properly treats as a purchase for federal income
tax purposes.
2. A lessee leasing
eligible property from a regional business development corporation or authority
authorized under M.G.L. c. 40D or a regional business development corporation
organized as a non-profit corporation under any special act shall be deemed to
be the owner of the property.
(b)
Lessor. The
credit is generally not available to the lessor of eligible property. However,
the credit is available to a lessor for eligible property, other than tangible
personal property, leased to a lessee provided the relationship between the
lessor and the lessee is:
1. an individual and
a corporation if such individual owns, directly or indirectly, 100 percent of
the outstanding stock in the corporation;
2. a corporation and a partnership if the
same persons own, directly or indirectly, 100 percent of the outstanding stock
in the corporation and 100 percent of the capital interest or profit interest
in the partnership;
3. a
corporation and another corporation if the same persons own, directly or
indirectly, 100 percent of the outstanding stock in each corporation;
4. the fiduciary of the trust that holds the
leased property and the sole grantor of the trust;
5. the fiduciary of the trust that holds the
leased property and the fiduciary of another trust if the same person is the
sole grantor of both trusts;
6. the
fiduciary of the trust that holds the leased property and the sole beneficiary
of such property;
7. the fiduciary
of the trust that holds the leased property and a corporation if the trust, the
sole grantor of the trust, or the sole beneficiary of the trust owns, directly
or indirectly, 100 percent of the outstanding stock in the
corporation.
(c)
Owner Leasing a Portion of Eligible Property. If an
owner, as lessor, leases a portion of eligible property, the credit is
available to the owner only with respect to that portion of the property that
is not leased. If the owner claims a credit with respect to property and
subsequently leases a portion of the property to another, the lease shall be
treated as a disposition triggering the recapture rules under 830 CMR
63.38N.1(11) with respect to the portion of the property leased unless the
relationship between the lessor and the lessee is described in 830 CMR
63.38N.1(5)(b)1 -7.
(d)
Lessee. The credit is available to a lessee of
tangible personal property leased pursuant to an operating lease. The credit is
not available to a lessee for real property leased pursuant to an operating
lease. An operating lease is any transaction which the taxpayer properly treats
as a lease for federal income tax purposes.
1.
Limitation on Credit Available to Lessee. The credit is not available to a
lessee if the lessor has previously received an economic opportunity area
credit or the investment tax credit with respect to the property, except as
follows:
a. if a lessor, who has previously
received an economic opportunity area credit with respect to tangible personal
property, subsequently leases the property to another pursuant to an operating
lease, the lease shall be treated as a disposition triggering the recapture
rules under 830 CMR 63.38N.1(11) with respect to the property leased. The
lessee will be allowed credits which cumulatively shall not exceed the amount
the lessor was required to, and did in fact, recapture pursuant to 830 CMR
63.38N.1(11).
b. if a lessor, who
has previously received an investment tax credit with respect to tangible
personal property, subsequently leases the property to another pursuant to an
operating lease, the lease shall be treated as a disposition triggering
recapture of the investment tax credit with respect to the property leased. The
lessee will be allowed credits calculated pursuant to 830 CMR 63.38N.1(6)(b),
below.
2.
Documentation. The lessor and lessee must maintain
documentation adequate to substantiate the credit claimed by the lessee.
Without limitation, such documentation shall include a written statement signed
by the lessor and stating the following:
a.
the lessor's adjusted tax basis in the leased property at the beginning of the
lease term;
b. the useful life of
the property being used by the lessor for depreciation purposes and the
remaining useful life at the commencement of the lease;
c. that the lessor has not claimed an
economic opportunity area credit or investment tax credit with respect to the
leased property, or if it has done so, the dollar amount of tax that it has
recaptured (or will recapture in the tax year in which the lease commences)
with respect to the leased property.
(6)
Calculation of the
Credit.
(a)
Computation of Credit for Owner. The credit shall be
equal to five percent of the basis of the property for federal tax purposes
after deduction therefrom of any federally authorized tax credit taken with
respect to such property acquired, constructed, reconstructed, or erected. In
instances where multiple parties are entitled to the credit with respect to the
same property, the total amount of credit generated with respect to any
property shall not exceed five percent of the cost of such property.
If a portion of eligible property is leased pursuant to an
operating lease, the cost attributed to the portion of property not under lease
shall be the basis of property for federal tax purposes (after deduction
therefrom of any federally authorized tax credit taken with respect to such
property) minus the adjusted basis of the portion of property which is leased
pursuant to an operating lease (after deduction therefrom for any portion of
any federally authorized tax credit attributed to that portion of
property).
(b)
Computation of Credit for lessee. The lessee's credit
for tangible personal property shall be five percent of the lessor's adjusted
basis for federal tax purposes at the beginning of the taxable year, multiplied
by a fraction, the numerator of which is the number of days of the taxable year
during which the lessee leases the tangible personal property and the
denominator of which is the number of days remaining in the useful life of such
property at the beginning of the taxable year. Such useful life is the same as
that used by the lessor for depreciation purposes when computing federal income
tax liability. The maximum cumulative credit shall not exceed five percent of
the lessor's adjusted basis for federal tax purposes at the beginning of the
lease term. The lessee calculates and claims the credit annually during the
term of the operating lease.
(c)
Eligible Cost. For purposes of computing the credit
for owners and lessees, the credit available with respect to a particular
project is limited to:
1. the cost incurred
on or after the date the project is certified pursuant to the provisions of
M.G.L. c. 23A, § 3F or
2. the
cost incurred prior to the date a project is certified but only cost incurred
on or after the date the taxpayer has notified the municipality in writing of
its intention to have the project certified. Eligible cost does not include any
cost incurred prior to the date of written notice to the municipality. The
requirement in 830 CMR 63.38N.1(6)(c)2 that the notice be in writing is
effective prospectively on July 13, 2007.
(d)
Accounting
Rules. For purposes of this regulation, in determining when a cost
is incurred, the method of accounting used by the taxpayer taking the credit
shall be the same method of accounting properly used by that taxpayer for
federal income tax purposes.
(7)
Limitations on the
Credit.
(a)
Fifty
Percent Limitation. The maximum amount of credits otherwise
allowable in any taxable year shall not exceed fifty percent of the excise
imposed by M.G.L. c. 62 or c. 63. For purposes of applying the fifty percent
limitation, excise liability is determined before the application of any
credits. For corporations subject to tax under M.G.L. c. 63, § 32 or
§ 39, the corporate excise liability includes amounts due under both the
income and non-income measures of the corporate excise.
(b)
Minimum Excise
Limitation. Notwithstanding the fifty percent limitation set forth
in 830 CMR 63.38N.1(7)(a), above, the credit may not be applied to reduce the
minimum excise imposed under any provision of M.G.L. c. 63.
(8)
Interaction with
Investment Tax Credit. The economic opportunity area credit may
not be taken for any property if the investment tax credit has been taken with
respect to the same property.
(9)
Ordering. Taxpayers that can claim both the economic
opportunity area credit and any other credit for a taxable year may apply the
economic opportunity area credit in any order they desire with respect to such
other allowable credits.
(10)
Carry Over of Unused Credit.
(a)
General. A
taxpayer that does not use the full amount of the credit generated in a taxable
year may carry over the unused amount of the credit as follows:
1.
Unlimited Carry
Over. Credits that are not used in a taxable year because of the
fifty percent limitation described by 830 CMR 63.38N.1(7)(a), above, may be
carried over to any succeeding taxable year, subject to the provision contained
in 830 CMR 63.38N.1(10)(a)3, below.
2.
Ten Year Carry
Over.
a. Credits that are not
used in a taxable year because they exceed the taxpayers tax liability for the
taxable year may be carried over to the next taxable year for a maximum of ten
successive taxable years, subject to the provision contained in 830 CMR
63.38N.1(10)(a)3, below.
b. Credits
that are not used in a taxable year because of the minimum excise limitation
described by 830 CMR 63.38N.1(7)(b), above may be carried over to the next
taxable year for a maximum of ten successive taxable years, subject to the
provision contained in 830 CMR 63.38N.1(10)(a)3, below.
3.
Five Year
Limitation. No credit can be carried over to a taxable year
beginning more than five years after the certified project or economic
opportunity area ceases to qualify as such under provisions of M.G.L. c.
23A.
(b)
Accounting for Unused Credit. Taxpayers must keep
records distinguishing amounts of unused credit eligible for unlimited carry
over from amounts of the credit eligible for ten year carry over. In addition,
taxpayers must keep records of the amount of the credit eligible for carry over
generated in each previous taxable year and the amount of such credit that was
carried over and used in succeeding taxable years.
(c)
Effect of Merger on Credit
Carry Over. In the event of a merger of two or more corporations
or corporate trusts, the surviving entity retains any amount of credit carry
over, determined under 830 CMR 63.38N.1(10), above, that is separately
generated by the surviving entity before the merger. All of the credit carry
over generated by an entity absorbed in the merger is lost. The surviving
entity may not apply or carry over any amount of credit generated by the entity
that it absorbs. Transactions affecting a single corporation or corporate trust
that do not terminate the existence of the entity for Massachusetts tax
purposes shall not be considered mergers for purposes of this section, 830 CMR
63.38N.1(10)(c). Such transactions include mere changes in identity, form, or
place of organization of one corporation under Section 368(a)(1)(F) of the
Code, and the recapitalization of a single corporation under Section
368(a)(1)(E) of the Code.
(11)
Recapture or Reduction of
Credit Carry Over.
(a)
General. If eligible property is disposed of or ceases
to be used exclusively in a certified project in an economic opportunity area
before the end of its useful life portions of the credit taken in any prior
year that exceed the allowable credit must be recaptured and repaid as
additional tax due in the year the property is disposed of or ceases to be used
exclusively in a certified project within an economic opportunity area. To the
extent that any credit carried over pursuant to 830 CMR 63.38N.1(10) that has
not been taken exceeds the portion of the allowable credit, the carried over
credit must be reduced. The Commissioner may assess additional tax under M.G.L.
c. 62C on account of recapture of the economic opportunity area credit. No
recapture or reduction in carry over is necessary if the property has been used
exclusively in a certified project within an economic opportunity area for more
than twelve consecutive years.
(b)
Allowable credit. If property is disposed of or ceases
to be used exclusively in a certified project in an economic opportunity area
before the end of its useful life, the original credit amount generated must be
recalculated to determine the allowable credit. The allowable credit is
calculated by multiplying the original credit generated with respect to the
property by the following fraction. The numerator is the number of months that
the taxpayer owned the property and used it exclusively in a certified project
within an economic opportunity area. The denominator is the total number of
months of useful life of the property at the time the property was first
used.
(c)
Amount of
Recapture or Carry Over Reduction. If the amount of credit taken
in prior years exceeds the allowable credit, the excess must be recaptured and
paid as additional tax. If the full amount of the allowable credit has been
taken, the entire amount of any carry over must be eliminated. If only a
portion of the allowable credit has been taken, any carry over credit that
exceeds the portion of the allowable credit must be eliminated. Any remaining
credit may continue to be carried over.
Example 1: Taxpayer files a return for
2002 on 9/15/03 stating that it generated $10,000 of credit on 5-year property
costing $200,000 and placed in service on 1/1/02. The taxpayer uses $7,000 of
credit and carries over the remaining $3,000 of credit. As of 4/1/03, the
taxpayer ceases to use the property in its certified project.
Under the rules above, the taxpayer is allowed credit from
1/1/02 - 4/1/03, which is 15 months. The allowable credit is $2,500 ($10,000 x
15/60).
Of the $7,000 of credit previously taken, $4,500 of it will
have to be recaptured as additional tax in tax year 2003. The $3,000 of carry
over will be eliminated as of 2003.
(d)
Special Recapture Rule for
Corporations with Property also Eligible for the Investment Tax
Credit. It is a condition for taking the EOA credit that the
taxpayer not take the 3% Massachusetts investment tax credit ("ITC") with
respect to the same property. 830 CMR 63.38N.1(8). If a corporation eligible
for the ITC allowed under M.G.L. c. 63, § 31A is required to recapture EOA
credit because eligible property is no longer used exclusively in a certified
project in an economic opportunity area, but the property continues to be in
qualified use for purposes of the ITC, the taxpayer may either (1) apply the
recapture rules set forth in 830 CMR 63.38N.1(11)(a)-(c) to the 5% EOA credit;
or (2) recapture the entire amount of the EOA credit and eliminate any EOA
credit carry over, but apply the ITC rules as if the EOA credit had not been
taken. In the latter case, the Commissioner will require the corporation to
recapture the EOA credit and reduce its EOA credit carry over by only the net
difference between the amount of the EOA credit generated with respect to the
property and the amount of the ITC that the corporation would have been
eligible to claim with respect to the property had it not claimed the EOA
credit.
Example 2: Same facts as in Example 1,
except the taxpayer is a manufacturing corporation eligible for the ITC that
would have been eligible to claim $6,000 ($200,000 x 3%) of ITC with respect to
the property had it not claimed the EOA credit, and when the taxpayer ceases to
use the property in its certified project it continues to use it in
Massachusetts in its manufacturing business.
Under the ordinary recapture rules above, 3/4 of the
$10,000 or $7,500 would be subject to recapture/carry over elimination. The
taxpayer may choose, however, to recapture and reduce its carry over by $4,000
- the difference between the 5% EOA credit and the 3% ITC. Accordingly, if it
so chooses, $1,000 of EOA credit taken will be recaptured as additional tax and
the $3,000 of credit carry over will be eliminated.
(12)
Unincorporated Flow-through
Entities. Unincorporated flow-through entities, such as
partnerships and joint ventures, shall be treated as flow-through entities for
purposes of determining the credit. All amounts relevant calculating the credit
shall be attributed to the owners of the entities in accordance with Section
704 of the Code, as defined in M.G.L. c. 62, § 1, and shall be taken into
account in determining the credit for the taxable year during which the taxable
year of the unincorporated flow-through entity ends. If recapture is required,
the owners of the flow-through entities must recapture.
(13)
S Corporation
Rules. Either the S corporation or its shareholders may take the
credit with respect to any property, but not both.
(a) The credit may be applied against either
or both the non-income or income (if applicable) measure of the S corporation's
corporate excise subject to the limitations in 830 CMR 63.38N.1(7).
(b) Alternatively, the credit can be applied
against the shareholders' income tax imposed by M.G.L. c. 62. In this case, all
amounts relevant to the calculation of the credit are attributed to the
shareholders of the S corporation and are taken into account in determining the
shareholders' credit for the taxable year during which the taxable year of the
S corporation ends.
(c)
Shareholders cannot take the economic opportunity area credit if the S
corporation is taking or has taken the investment tax credit with respect to
the same property.
(d) If the
shareholders of the S corporation take the credit with respect to any property,
the S corporation must maintain adequate records to specifically identify that
property and to distinguish it from property with respect to which the S
corporation has taken the credit.
(e) If the S corporation takes the credit and
does not use the full amount of the credit generated in a taxable year, the S
corporation may carry over the unused amount of the credit to succeeding
taxable years. Amounts carried over by the S corporation may be applied only to
offset the S corporation's corporate excise liability. If recapture is
required, the S corporation must recapture.
(f) If the shareholders of the S corporation
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 the shareholder's tax liability. If recapture is
required, the shareholders must recapture.
(14)
Controlled Groups and
Entities under Common Control. For purposes of determining whether
a taxpayer has acquired or disposed of tangible personal property, corporations
that are members of the same controlled group as defined in Section 41(f) of
the Code and all entities, whether or not incorporated, under common control as
defined in Section 41(f) of the Code shall be treated as a single taxpayer.
Transfers of tangible personal property between members of the same controlled
group or between entities under common control will be disregarded for purposes
of generating a credit or triggering recapture of a credit already taken with
regard to transferred property.
(15)
Combined
Groups.
(a)
General. The amount of the credit shall be determined
separately, under the provisions of this regulation, for each corporation that
is a member of a combined group, as defined at
830 CMR
63.32B.1(2).
(b)
Limitations on the
Credit. The limitations on the amount of the credit that a
corporation may claim for a taxable year, described at 830 CMR 63.38N.1(7),
above, shall apply to each member of a combined group separately. In applying
those limitations, the corporate excise liability of each member of the
combined group is the member's separately computed excise determined under
830 CMR
63.32B.1(8)(a).
(c)
Sharing the
Credit. A member of a combined group must use the amount of the
credit available to it for a taxable year first to offset its own separately
determined corporate excise liability for the taxable year. Where a member of a
combined group cannot use the full amount of the credit available for a taxable
year that member may share the amount of the credit that it cannot use with
other members of the combined group to the extent that such other members can
apply the credit to their separately determined corporate excise liabilities
for the taxable year under the limitations described by 830 CMR 63.38N.1(7),
above. Members of combined groups may share the credit in the manner described
above regardless of whether the group filed a combined return for the taxable
year in which the credit was generated.
(d)
Carry Over.
Subject to the carry over provisions of 830 CMR 63.38N.1(10), each member of a
combined group may carry over any unexpired amounts of the credit that have not
been used to reduce the corporate excise liability of any member of the
combined group. Each member of a combined group may carry over amounts of
unused, unexpired, credit only to the extent that such amounts are generated by
the member itself. The combined group, therefore, has no credit or carry over
of its own.
