Tax Expenditure Appendix A - Recent Law Changes Affecting Tax Expenditures
The following tax expenditures have been revised or created due to recent law changes:
The Personal Income Tax:
Veteran’s Hire Tax Credit
A new credit is available to businesses that hire veterans who live and work in Massachusetts. The credit is equal to $2,000 for each qualified veteran hired. The business must employ fewer than 100 employees; be certified by the Commissioner of Veteran’s Services; and qualify for and claim the federal Work Opportunity Credit allowed under I.R.C. § 51. A business may be eligible for a second credit for the next taxable year if the veteran continues to work for the business. The credit cannot be transferred or refunded. Any amount of credit that exceeds the tax due in the current taxable year may be carried forward to any of the three subsequent taxable years. The credit is available for qualified veterans hired after July 1, 2017. See TIR 17-10.
Low-Income Housing Donation Tax Credit
A new credit is available to individuals and businesses if they donate real or personal property to certain non-profit entities for use in purchasing, constructing or rehabilitating a Qualified Massachusetts Project. The credit is generally limited to 50% of the amount of the donation, but it may be increased to 65% by the Department of Housing and Community Development. The credit is a one year credit that must be claimed in the year that the donation is made and is not refundable. Any credit amounts that exceed the tax due may be carried forward for five years. See TIR 16-15.
Circuit Breaker Tax Credit Increased (TE item 1.609)
A credit is allowed to an owner or renter of residential property located in Massachusetts equal to the amount by which the real estate tax payment or 25% of the rent constituting real estate tax payment exceeds 10% of the taxpayer’s total income, not to exceed $1,080 (for tax year 2017). The amount of the credit is subject to limitations based on the taxpayer’s total income and the assessed value of the real estate, which must not exceed $747,000. For tax year 2017, an eligible taxpayer’s total income cannot exceed $57,000 in the case of a single filer who is not a head of household filer, $72,000 for a head of household filer, and $86,000 for joint filers. In order to qualify for the credit, a taxpayer must be age 65 or older and must occupy the property as his or her principal residence. See TIR 17-8 for more information.
Parking, Combined Commuter Highway Vehicle Transportation and T-Pass Fringe Benefit — IRC sec. 132(f) (TE Item 1.030)
Massachusetts follows IRC sec. 132(f) as amended and in effect under the January 1, 2005 Code. For taxable years beginning in 2018, the Massachusetts monthly exclusion amounts are $260 for employer-provided parking and $135 for combined transit pass and commuter highway vehicle transportation benefits. Under Massachusetts law, these numbers reflect an inflation adjustment but do not include the increase in the federal monthly exclusion amount for the combined transit pass and commuter highway vehicle transportation benefits that was signed into law on December 18, 2015. Massachusetts adopts these 2018 tax year monthly exclusion amounts because they are based on the January 1, 2005 Code. For further discussion, see TIR 17-12.
Changes to the Massachusetts Earned Income Tax Credit (TE Item (1.606)
A Massachusetts refundable earned income tax credit is available to certain low-income individuals who have earned income. To claim the Massachusetts credit, taxpayers must qualify for and claim the federal earned income tax credit allowed under I.R.C. § 32, as amended and in effect for the taxable year. Taxpayers may claim the Massachusetts credit even if they do not have a filing requirement. To receive the credit, taxpayers must file a tax return and claim the credit. For 2017, the Massachusetts refundable credit remains at 23% of the computed federal credit A person who is a non-resident for the entire year is not eligible for the credit.
For federal purposes, an individual who is married can qualify for the federal earned income tax credit only if the individual files a joint return. However, for purposes of claiming the Massachusetts earned income tax credit, a married taxpayer will satisfy the federal joint filing requirement if the tax- payer files a Massachusetts personal income tax return using a filing status of married filing separately and the taxpayer: (i) is living apart from the taxpayer’s spouse at the time the taxpayer files the tax return; and (ii) is unable to file a joint return be- cause the taxpayer is a victim of domestic abuse; and (iii) indicates on the taxpayer’s income tax return that the taxpayer meets the criteria of clauses (i) and (ii). A taxpayer that is eligible for this filing exception should keep records that demonstrate they meet these criteria. See TIR 17-10 and additional form instructions on page 16.
Changes to Economic Development Incentive Program (“EDIP”) Tax Credit
For projects certified on or after January 1, 2017, the economic development incentive program tax credit is no longer calculated based on the cost of property that qualifies for the investment tax credit allowed under G.L. c. 63, § 31A and is instead determined by the Economic Assistance Coordinating Council (EACC) based on factors set out in G.L. c. 23A, § 3D. In addition, limitations on the maximum amount of the credit awarded to particular types of certified projects have been eliminated, and the EACC may designate the credit as refundable for any certified project (subject to a limitation that the EACC may not award more than $5 million in refundable credits per year) and may specify the timing of the refund. For further information, see TIR 16-15.
Changes to the Certified Housing Development Tax Credit
Effective January 1, 2017, the certified housing development tax credit is available for 25% of “qualified project expenditures” instead of 10% of “qualified substantial rehabilitation expenditures.” The carry forward period for which the credit can be used is changed from 5 to 10 years. In addition, the annual cap is no longer a part of the overall annual cap imposed on the EDIP. For further information, see TIR 16-15.
Farming and Fisheries Personal Income Tax Credit (TE item 1.618)
A new credit applies to personal income taxpayers who are primarily engaged in agriculture, farming or commercial fishing. G.L. c. 62, § 6(s). The credit is 3% of the cost or other basis for federal income tax purposes of qualifying property acquired, constructed or erected during the tax year. Qualifying property is defined as tangible personal property and other tangible property including buildings and structural components that are located in Massachusetts, used solely for farming, agriculture or fishing, and are depreciable with a useful life of at least four years. The credit applies to lessees calculated as follows: 3% of a lessor’s adjusted basis in qualifying property for federal income tax purposes at the beginning of the lease term, multiplied by a fraction, the numerator of which is the number of days of the tax year during which the lessee leases the qualifying property and the denominator of which is the number of days in the useful life of the property. Where the lessee is eligible for the credit, the lessor is generally not eligible, with the exception of “equine-based businesses where care and boarding of horses is a function of the agricultural activity.”
Angel Investor Credit
St. 2016, c. 219 amends G.L. c. 62, § 6 by adding new subsection (t), which provides a credit against personal income tax equal to 20% of the amount of qualifying investments made by a taxpayer investor in a qualifying business generally, and 30% of the amount of qualifying investments made by a taxpayer investor in a qualifying business located in a “Gateway municipality,” as defined in G.L. c. 23A, § 3A. For purposes of the credit, a taxpayer investor may invest up to $125,000 per qualifying business per year up to a maximum of $250,000. A taxpayer investor’s total credits may not exceed $50,000 in a single calendar year. The credit may be taken in either the tax year of the initial investment or it can be carried forward to any of the three subsequent taxable years, as long as the qualifying business maintains its principal place of business in Massachusetts. If the qualifying business does not maintain its principal place of business in Massachusetts for this three year period, the taxpayer investor must repay the total amount of credits claimed. The credit is administered and awarded by the Life Sciences Center, and is included in the annual cap of $25 million applicable to other life sciences credits (so tax expenditure estimation for this credit is included in item 2.617). The credit may be allowed for tax years beginning on or after January 1, 2017. See TIR 16-15 for more information.
Tuition Deduction (TE item 1.414)
Effective for tax years beginning on or after January 1, 2017, non-residents and part year residents are no longer eligible for the tuition deduction. See TIR 16-15 for more information.
Prepaid Tuition or College Savings Plan Deduction (TE item 1.427)
A new deduction against Part B income is allowed in an amount equal to 1) purchases of or 2) contributions made in a taxable year to an account in a pre-paid tuition program or a college savings program established by the Commonwealth or an instrumentality or authority of the Commonwealth. The deduction is capped at $1,000 for a single person or head of household and $2,000 for a married couple filing a joint return. The deduction applies to tax years beginning on or after January 1, 2017 through the tax year beginning on January 1, 2021.
Gambling Loss Deduction
For tax years beginning on or after January 1, 2015 a deduction is allowed from Part B income for gambling losses incurred at certain licensed gaming establishments or “racing meeting licensee or simulcasting licensee” establishments but only to the extent of winnings from such establishments included in gross income for the calendar year. See TIR 15-14 and Schedule Y, line 17 for more information. The new gambling loss deduction is the only deduction for gambling losses allowed for a Massachusetts taxpayer, unless the gambling activities constitute a trade or business. See DD 03-3. Massachusetts does not adopt the federal deduction under IRC § 165(d) for gambling losses.
Current Code Provisions
As a general rule, Massachusetts does not adopt any federal personal income tax law changes incorporated into the Code after January 1, 2005. However, certain specific Massachusetts personal income tax provisions, as set forth in G.L. c. 62 § 1(c), automatically conform to the current Code. Provisions of the Code Massachusetts adopts on a current Code basis are (i) Roth IRAs, (ii) IRAs, (iii) the exclusion for gain on the sale of a principal residence, (iv) trade or business expenses, (v) travel expenses, (vi) meals and entertainment expenses, (vii) the maximum deferral amount of government employees’ deferred compensation plans, (viii) the deduction for health insurance costs of self-employed taxpayers, (ix) medical and dental expenses, (x) annuities, (xi) health savings accounts, (xii) employer-provided health insurance coverage, and (xiii) amounts received by an employee under a health and accident plan. See TIRs 98-8, 02-11, 07-4, and 09-21 for further details.
Qualified Charitable Distribution from an IRA — IRC § 408(d)(8)
Under IRC § 408(d)(8), taxpayers age 701⁄2 or greater are allowed to make tax-free distributions from traditional and Roth IRAs to qualified charities not to exceed $100,000 per tax year. Massachusetts adopts this federal exclusion, as IRC § 408(d)(8) is adopted by Massachusetts on a current Code basis.
IRC § 179 Election to Expense Certain Depreciable Business Assets
Under IRC § 179, a taxpayer may elect to treat the cost of certain types of depreciable business property (i.e., tangible depreciable business assets acquired by purchase for use in the active conduct of a trade or business and certain qualified real property) as an expense rather than a capital expenditure, and deduct it in the year the property is placed in service, instead of depreciating it over several years. The maximum IRC § 179 expensing limitation is $500,000, subject to an overall investment phase-out threshold of $2,000,000. As a trade or business deduction under G.L. c. 62, § 1(c), IRC § 179 is adopted by Massachusetts on a current Code basis.
Federal Deduction — Not Allowed Federal “Bonus” Depreciation — IRC sec.
Under G.L. c. 62 § 2(d)(1)(N), Massachusetts specifically disallows the bonus depreciation deduction allowed under IRC § 168(k), as amended and in effect for the current taxable year. Therefore, Massachusetts does not adopt the five-year extension through tax year 2019 of the federal bonus depreciation deduction pursuant to the Consolidated Appropriations Act of 2016 (P.L. 114-113). See TIRs 02-11 and 03-25 for further details.
Domestic Production Activity Deduction — IRC § 199
For federal income tax purposes, under IRC § 199, a business entity that pays wages to employees and conducts qualified production activities is allowed a deduction for domestic production activities. Generally, in the case of a non-corporate taxpayer, the deduction allows a business with qualified production activities to deduct 9% of its U.S. adjusted gross income. Under G.L. c. 62 § 2(d)(1)(O), Massachusetts specifically disallows the domestic production activity deduction allowed under IRC § 199, as amended and in effect for the current taxable year. Therefore, Massachusetts does not adopt the two-year extension through tax year 2016 of the deduction allowable for income attributable to domestic production activities in Puerto Rico pursuant to the Consolidated Appropriations Act of 2016 (P.L. 114-113). See TIR 05-5.
Qualified Principal Residence Indebtedness Exclusion — IRC § 108(a)
Massachusetts does not adopt the federal exclusion for qualified principal residence indebtedness under IRC § 108(a) set to expire at the end of 2016, nor will Massachusetts adopt any federal extension of the exclusion enacted after the publication of these form instructions, as IRC § 108(a) was enacted after January 1, 2005.
The Corporate and Other Business Excise:
Veteran’s Hire Tax Credit (TE item 2.623)
St. 2017, c. 47 adds new § 38GG to G.L. c. 63, allowing business corporations that hire veterans and meet certain requirements a tax credit equal to $2,000 for each qualified veteran hired. The business corporation must (i) employ less than 100 employees; (ii) be certified by the commissioner of veteran’s services pursuant to G.L. c. 115, § 2C; and (iii) qualify for and claim the Work Opportunity Credit allowed under I.R.C. § 51, as amended and in effect for the taxable year.
In order to claim the credit under G.L. c. 63, §38GG, the primary place of employment and the primary residence of the qualified veteran must be in Massachusetts. A business corporation must obtain certification that the veteran is a qualified veteran from the Department of Career Services (or any successor agency), no later than the employee’s first day of work. The term “qualified veteran” is defined in I.R.C. § 51(d)(3).
A business corporation that is eligible for and claims the credit allowed under this subsection in a taxable year, with respect to a qualified veteran employee, will be eligible for a second credit equal to $2,000 in the subsequent taxable year, subject to certification of the veteran employee’s continued employment during the subsequent taxable year.
The credit is non-transferrable and non-refundable. However, any amount of credit that exceeds the tax due in the current taxable year may be carried forward to any of the three subsequent taxable years. The credit cannot reduce the corporate excise due below the minimum excise. The total cumulative value of the credits authorized pursuant to G.L. c. 63, § 38GG and G.L. chapter 62, § 6(u) (similar provision for individual taxpayers) must not exceed $1,000,000 annually. The credit is available for qualified veterans hired after July 1, 2017 for tax years beginning on or after January 1, 2017. See TIR 17-10.
Economic Development Incentive Program Tax Credit
For projects certified on or after January 1, 2017, the economic development incentive program tax credit is no longer calculated based on the cost of property that qualifies for the investment tax credit allowed under G.L. c. 63, § 31A and is instead determined by the Economic Assistance Coordinating Council (EACC) based on factors set out in G.L. c. 23A, § 3D. In addition, limitations on the maximum amount of the credit awarded to particular types of certified projects have been eliminated, and the EACC may designate the credit as refundable for any certified project (subject to a limitation that the EACC may not award more than $5 million in refundable credits per year) and may specify the timing of the refund. For further information, see TIR 16-15.
Community Investment Tax Credit
Effective August 10, 2016, the community investment tax credit has been modified. A community partner may now claim a subsequent community investment tax credit if the Department of Housing and Community Development determines that the community partner has made a satisfactory progress towards utilizing any prior allocation it has received. Prior to this change, a community partner was required to have utilized at least 95% of its prior allocation to be eligible for a subsequent allocation. For further information, see TIR 16-15.
Low-Income Housing Tax Credit
Effective January 1, 2017, the low-income housing tax credit has been expanded to also provide a non-refundable tax credit for individuals and corporations who donate real or personal property to certain non-profit entities for use in purchasing, constructing, or rehabilitating a qualified Massachusetts project. This credit is generally limited to 50% but may be increased to 65% of the amount of the donation. The credit must be claimed in the year that the qualifying donation is made and credit amounts that exceed the tax due may be carried forward for up to five years. For further information, see TIR 16-15.
Historic Rehabilitation Tax Credit
Effective August 10, 2016, the historic rehabilitation tax credit has been modified to allow the Massachusetts Historical Commission to, subject to certain criteria, transfer the historic rehabilitation tax credit to corporate excise taxpayers that acquire a qualified historic structure. For multi-phased projects, the Massachusetts Historical Commission may transfer historic rehabilitation tax credit awards for any phase that meets the criteria. For further information, see TIR 16-15.
As the part B personal income tax rate has been reduced, tax rates for S corporations have changed accordingly. See below.
| Income Measure Tax | Tax Year | Non-income Measure Tax |
Rate on C Corps' income and S Corps' Qualified and Passive Income |
S Corp. Rate (Gross Sales $6M-$9M) |
S Corp. Rate (Gross Sales > $9M) |
|---|---|---|---|---|
| Corporations: | ||||
| 2013 | 0.26% | 8.00% | 1.83% | 2.75% |
| 2014 | 0.26% | 8.00% | 1.87% | 2.80% |
| 2015 | 0.26% | 8.00% | 1.90% | 2.85% |
| 2016 | 0.26% | 8.00% | 1.93% | 2.90% |
| 2017 | 0.26% | 8.00% | 1.93% | 2.90% |
| 2018 | 0.26% | 8.00% | 1.93% | 2.90% |
| 2019* | 0.26% | 8.00% | 1.97% | 2.95% |
| Financial Institutions: | ||||
| 2013 | No | 9.00% | 2.50% | 3.75% |
| 2014 | 9.00% | 2.53% | 3.80% | |
| 2015 | 9.00% | 2.57% | 3.85% | |
| 2016 | 9.00% | 2.60% | 3.90% | |
| 2017 | 9.00% | 2.60% | 3.90% | |
| 2018 | 9.00% | 2.60% | 3.90% | |
| 2019* | 9.00% | 2.63% | 3.95% | |
| S Corporations: | Rate is equal to: |
|---|---|
| Large S Corp (Gross Sales > $9M): | C Corp rate minus Part B individual income tax rate |
| Medium S Corp ($6M < Gross Sales < $9M) | 2/3 of Large S Corp rate |
| Small S Corp (Gross Sales < $6M): | 0% |
| * The part B personal income tax rate is assumed to decline to 5.05% effective January 1, 2019. The tax rates for S corporations are therefore assumed to change accordingly. | |
The Sales and Use Tax:
In June 2009 legislation was enacted that amended G.L. c. 64H (sales tax) and G.L. c. 64I (use tax), changing the rate of tax for sales and use of tangible personal property and telecommunications services from 5% to 6.25%. See Stat. 2009, c. 27, §§ 53, 55-57, 59. In addition, the new legislation repealed the exemption for alcoholic beverages, including beer, wine, and liquor, sold at retail by amending G.L. c. 64H, § 6(g) to omit reference to c. 138. These changes were effective on and after August 1, 2009. See TIR 09-11 for further details.
As the result of a referendum question on the November 2, 2010 ballot, the law extending the Massachusetts sales and use tax to alcoholic beverages sold at package stores and liquor stores for off-premises consumption, which was enacted on August 1, 2009, has been repealed, effective for sales on or after January 1, 2011. See TIR 10-24 for further details.
Effective July 1, 2011, physician-prescribed, medically necessary breast pumps are exempt from sales and use tax. See St. 2011, c. 68, § 72.
In July 2012 legislation was enacted stating explicitly that “sales that do not involve tangible personal property shall not result in tax expenditures”. See St 2012, c.165, §112. Pursuant to this legislation, from fiscal year 2014 on, we remove some items from our tax expenditure estimates, which we regularly reported in prior years. But to facilitate comparison to tax expenditure estimates in prior years, these items (3.203, 3.422, 3.501, 3.502, 3.503 and 3.504) have been listed in appendix D.
On September 27, 2013, the Governor signed a bill that repealed the expansion of the sales tax on computer software and systems design services that had been enacted by the Legislature on July 24, 2013, retroactive to its effective date, July 31, 2013.
Section 66 of St. 2014, c. 287 added subsection (d) to G.L. c. 63, § 42B. Effective August 13, 2014, solely for the purpose of claiming the sales tax exemption available to research and development corporations under chapters 64H and 64I, §§ 6(r) and 6(s), this change allows a limited partnership that is not a business corporation, but that would otherwise qualify as a research and development corporation under § 42B, to be considered a research and development corporation when all partners are corporations. See also TIR 14-13.
Chapter 369 of the Acts of 2012 legalized the sales of marijuana, products containing marijuana such as food, tinctures, aerosols, oils and ointments as well as related supplies or educational materials to qualifying patients or their personal caregivers in the Commonwealth by medical marijuana treatment centers. According to Directive 15-1 issued by the Department of Revenue, the sales tax exemption for medicine on prescription in G.L. c. 64H. § 6(l) applies to sales of marijuana and products containing marijuana to a qualifying patient or the patient’s personal caregiver pursuant to a written certification by a licensed physician. Any other supplies, educational materials or other items sold by the medical marijuana treatment center are subject to tax unless another exemption applies.
The estimates for tax expenditure items for sales and use tax reflect these tax law changes.
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