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

Note on the impact of recent Federal Law changes:

On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act

(TCJA) was signed into law. The TCJA provides for federal changes to a variety of provisions in the IRC that affect the personal income tax.

As a general rule, Massachusetts does not adopt any federal personal income tax law changes incorporated into the IRC after January 1, 2005. However, certain specific Massachusetts personal income tax provisions, as set forth in MGL ch 62, § 1(c), automatically conform to the current IRC. Provisions of the IRC Massachusetts adopts on a current basis are:

• Roth IRAs;
• IRAs;
• The exclusion for gain on the sale of a principal residence;
• Trade or business expenses;
• Travel expenses;
• Meals and entertainment expenses;
• The maximum deferral amount of government employees’ deferred compensation plans;
• The deduction for health insurance costs of self-employed taxpayers;
• Medical and dental expenses;
• Annuities;
• Health savings accounts;
• Employer-provided health insurance coverage;
• Amounts received by an employee under a health and accident plan; and
• Contributions to qualified tuition programs.

Since Massachusetts automatically conforms to any change in the above tax items, any existing tax expenditures in the state’s Tax Expenditure Budget (TEB) that is calculated based on Federal estimates will reflect the impact of those changes. DOR will continue to review the impact of tax law changes at the Federal level, and will update future TEBs as necessary.

Treatment of Business Related Entertainment Expenses — IRC sec. 274 (TE Item 1.019) Prior to passage of the TCJA, a business was allowed to take a deduction of up to 50% of the cost of business-related entertainment expenses. Generally, the value of the entertainment was not taxed as income to the persons who benefit from the expenditures. The effect provided the hosts and their guests with a nontaxable fringe benefit. With the passage of TCJA, entertainment expenses are no longer allowed as a federal deduction. Massachusetts adopts this change as Massachusetts follows the current IRC in effect for trade or business expenses under IRC § 62(a)(1).

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 2019, the Massachusetts monthly exclusion amounts are $265 for employer-provided parking and $140 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 2019 tax year monthly exclusion amounts because they are based on the January 1, 2005 Code. For further discussion, see TIR 18-12.

Eligible 529 Plan Expenses, IRC § 529 (TE Item 1.041) New provisions allow 529 plan account funds to be used for elementary or secondary school expenses, up to $10,000 per year. Massachusetts adopts this change as Massachusetts follows the current IRC with respect to IRC § 529. See TIR 18-14 for more information.

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 $1,100 (for tax year 2018). 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 $778,000. For tax year 2018, an eligible taxpayer’s total income cannot exceed $58,000 in the case of a single filer who is not a head of household filer, $73,000 for a head of household filer, and $88,000 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 18-10 for more information.

Dairy Farmer Credit (TE Item 1.614) Ch. 154 (H.B. 4800) of the Laws of 2018 (effective July 1, 2018) increased the state wide cap on the dairy farmer credit from $4 million to $6 million each year. Note that the total cumulative value of the credits authorized pursuant to this section is combined with section 38Z of chapter 63.

(NEW) Apprentice Tax Credit (TE item 1.621) St. 2018, c. 228, an “Act Relative to Economic Development in the Commonwealth” established an apprentice credit for individual and corporate taxpayers. The credit is awarded to employers registered with the division of apprentice standards as apprenticeship-program sponsors and who have entered into an apprentice agreement with each apprentice for whom the credit is claimed. Employers that claim the credit in a taxable year will be eligible for an additional credit in the following year.

The credit is equal to the lesser of $4,800 or 50% of the wages paid to the apprentice for each apprentice. The total cumulative amount of credits authorized annually is $2.5 million. The credit is refundable but non-transferable. The credit is available as of January 1, 2019.

The Corporate and Other Business Excise

Some Miscellaneous Federal Tax Law Changes(due to The Tax Cuts and Jobs Act) which Affects Massachusetts Corporate and Business Tax. Enacted on December 22, 2017.

• The charitable deduction is no longer allowed for contributions to a college or university in exchange for athletic event seating rights.
• General depreciation system period for farming equipment and machinery placed into service after December 31, 2017 changed from 7 years to 5 years. In addition, such equipment may also be depreciated using the 200% declining balance method.
• An electing real property trade or business must use the alternative depreciation system for its residential or nonresidential real property. The alternative depreciation system period for nonresidential real property remains 40 years, while the period for residential real property is now 30 years.

Economic Development Incentive Program Credits for Taxpayers that Occupy Previously Vacant Storefronts

The Economic Development Incentive Program (“EDIP”) is a tax incentive program designed to foster full-time job creation and stimulate business growth throughout the Commonwealth. Generally, pursuant to the EDIP, business and individual taxpayers may receive state and local tax incentives in exchange for job creation and investment commitments. The EDIP is administered by the Economic Assistance Coordinating Council (the “EACC”), which is authorized to award up to $30 million annually in EDIP tax credits. The Economic Development Act authorizes the EACC to, “by guideline or regulation, establish a program to incentivize businesses to occupy vacant storefronts in downtown areas.” Pursuant to this program, the EACC may award up to $500,000 of available EDIP tax credits annually, on a competitive basis, to businesses that occupy previously vacant storefronts. Unlike other EDIP tax credits, the businesses will not be required to invest in improvements or create new jobs. Rather, the businesses need only commit to occupying the previously vacant storefront for a period of not less than one year. In determining how to allocate the credits, the EACC will consider a variety of factors, including, but not limited to: (i) the number of jobs to be created, (ii) the volume of pedestrian traffic to be generated, (iii) potential synergy with other downtown businesses, (iv) whether there is a matching contribution from the municipality or landlord, (v) commitment to storefront improvements, and (vi) whether the municipality has made local plans or investments to revitalize the downtown. These changes are effective for tax years beginning on or after January 1, 2019.

(New) Apprenticeship Tax Credit

The Economic Development Act adds new subsection (v) to Section 6 of G.L. c. 62, and new section 38HH to chapter 63, providing certain non-corporate and corporate employers a nontransferable, refundable credit against the personal income tax and corporate excise equal to the lesser of $4,800 or 50% of the wages paid to each qualified apprentice that the employer hires. The credit is available to any employer provided that: (1) the primary place of employment of the apprentice is in the Commonwealth; (2) the employer is registered with the division of apprentice standards as an apprenticeship program sponsor and has an apprentice agreement, as defined in G.L. c. 23 § 11H, with each apprentice for whom the credit is claimed; and (3) the apprentice is employed as an apprentice by the employer for at least 180 calendar days in the taxable year in which the credit is claimed. Further, the apprentice must be hired and trained in certain occupations. Employers that claim the credit in a taxable year are eligible for an additional credit in the subsequent taxable year, provided that the division of apprentice standards certifies that the apprentice for whom the prior year’s credit was claimed remains employed as an apprentice during the subsequent taxable year. The Economic Development Act provides that when a credit is claimed by an employer that is a non-corporate entity, the credit shall be attributed on a pro rata basis to the owners, partners or members of the employer. The credit is effective for tax years beginning on or after January 1, 2019.

Modifications to the Abandoned Building Deduction

G.L. c. 62 § 3B(a)(10) and G.L. c. 63 § 38O allow individuals and business corporations to deduct from their adjusted gross income ten percent of the costs they incur for the renovation of certain abandoned buildings. Previously, the deduction was available only for improvements to abandoned buildings located in Economic Opportunity Areas (“EOA”), as designated by the EACC. However, in 2016, the legislature enacted An Act Relative To Job Creation And Workforce Development, which eliminated the EOA requirement, and inserted the requirement that the EACC need only “certify” a project. The Economic Development Act amends G.L. c. 62 § 3B(a)(10) and G.L. c. 63 § 38O so that they align with the 2016 legislative changes. These changes are effective for tax years beginning on or after January 1, 2019.

Dairy Farmer Credit

Chapter 154 of the Acts of 2018 increased the state wide cap on the dairy farmer credit from $4 million to $6 million each year for the combination of individual income taxpayers and corporate excise taxpayers. It is effective for tax years beginning on or after July 1, 2018.

Historic Builidings Rehabilitation Credit

Chapter 99 of the Acts of 2018 increased the annual cap to $55 million. It is effective for tax years beginning on or after January 1, 2018.

Manufacturing Corporations

830 CMR 58.2.1 explains the requirements for and tax treatment of corporations that apply for manufacturing corporation classification under G.L. c. 63, § 42B. In particular, Section (6)(e)1.b of the regulation is being amended to clarify the impact of recent tax changes in the federal Tax Cuts and Jobs Act on the gross receipts fraction used in determining manufacturing corporation classification. The amendment makes clear that income deemed to have been repatriated under amended Internal Revenue Code section 965 and “GILTI” (global intangible low-taxed income) under new Code section 951A is excluded from the fraction, eliminating the possibility of a distortion of a corporation’s gross receipts and termination of the corporation’s manufacturing classification. The regulation also eliminates the internal manufacturing classification appeal process in 830 CMR 58.2.1(10)(a) in order to streamline the process with that of the Appellate Tax Board to benefit both municipalities and taxpayers.

As the part B personal income tax rate has been reduced, tax rates for S corporations have changed accordingly. See below.

* The part B personal income tax rate is assumed to decline to 5.00% effective January 1, 2020. The tax rates for S corporations are therefore assumed to change accordingly.

* The part B personal income tax rate is assumed to decline to 5.00% effective January 1, 2020. 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.