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Appendix A

Recent Law Changes Affecting Tax Expenditures

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. On March 27, 2020, Public Law No. 116-136, the federal “Coronavirus Aid, Relief and Economic Security Act,” also known as the CARES Act was signed into law. The TCJA and CARES Act provide for federal changes to a variety of provisions in the Internal Revenue Code (“Code”) that affect the personal income tax and corporate excise.

The following tax expenditures have been revised or created due to recent law changes

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 that Massachusetts adopts on a current basis are:

  • The exclusion for income earned by Roth IRAs;
  • The exclusion for income earned by 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 are 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.

The following is a summary of the federal tax law changes included in the CARES Act, as well as other legislative and regulatory measures that modify Massachusetts personal income tax expenditures.

On March 27, 2020, Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), was signed into law. The CARES Act provides for federal changes to a variety of provisions of the Internal Revenue Code (IRC) that affect personal income taxpayers. In response to the CARES Act, the Department of Revenue (DOR) issued written guidance addressing the impact of the CARES Act in Massachusetts. Note that under this guidance, COVID-19 recovery rebates to individuals are not subject to Massachusetts personal income tax and expanded unemployment benefits are subject to Massachusetts personal income tax. See TIR 20-9: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act.

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. With the passage of TCJA, an employer’s cost of entertainment expenses are no longer allowed as a federal deduction. Massachusetts adopted this change as Massachusetts follows the current IRC in effect for trade or business expenses under IRC § 62(a)(1). Note however that this does not change the exclusion of these benefits from employees’ income. Generally, the value of the entertainment is not taxed as income to the persons who benefit from the expenditures. The effect provides a nontaxable fringe benefit.

Parking, Combined Commuter Highway Vehicle Transportation, and T-Pass Fringe Benefit — IRC sec. 132(f) (TE Item 1.030)

Massachusetts follows Code § 132(f) as amended and in effect as of January 1, 2005. For taxable years beginning in 2021, the Massachusetts monthly exclusion amounts are $275 for employer-provided parking and $145 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. See TIR 20-16 for more information.

Medical Expense Deduction — IRC § 213 and M.G.L. c. 62, § 3B(b)(4) (TE Item 1.410) Taxpayers are allowed a deduction for medical expenses for amounts that exceed a certain percent threshold of their federal adjusted gross income. Under the TCJA, the threshold was decreased from 10% to 7.5% of federal adjusted gross income and extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2019 to the 2020 tax year. The deduction is available only to those taxpayers who itemize their deductions. Taxpayers that take the standard deduction are not eligible to take the deduction for medical expenses. Massachusetts adopts these changes. Massachusetts allows a deduction for medical expenses under MGL c. 62, § 3B(b)(4) equal to the federal deduction only for taxpayers that itemize deductions on a federal return.

Charitable Deduction — IRC § 170; M.G.L. c. 62, §3B (a)(13) (TE Item 1.415)

Beginning in calendar year 2021, Massachusetts personal income taxpayers will be allowed to deduct an amount equal to the amount of the charitable contribution deduction allowed or allowable to the taxpayer under § 170 of the Code, as in effect on January 1, 2005 (i.e., the deduction shall be limited to 10% of taxpayers’ federal taxable income). However, no deduction is allowed for contributions of household goods or used clothing. See 830 CMR 62.3.2 and TIR 20-9 for more information.

Health Savings and Flexible Spending Accounts — IRC §§ 62(a)(19) and 223 (TE Item 1.422)

The CARES Act amended Code §§ 106(f), 220(d)(2)(A), and 223(d)(2) to allow amounts paid or expenses incurred for medicine or drugs without a medical prescription to be covered by an HSA or FSA. These changes apply to amounts paid or expenses incurred after December 31, 2019. The Act also amended Code § 223(c)(2) to allow, for plan years beginning on or before December 31, 2021, high-deductible health plans with an HSA to cover telehealth and other remote care services, notwithstanding whether the plan allows for such a deductible. For Massachusetts personal income tax purposes, payments for such services from HSAs or FSAs will similarly be allowable. This change became effective upon the enactment of the Act on March 27, 2020. See TIR 20-9 for more information.

Circuit Breaker Tax Credit Increased — M.G.L. c. 62, § 6 (k) (TE item 1.609)

A credit is allowed to certain qualified owners and renters 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 $1,150 (for tax year 2020). 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 cannot exceed $848,000. For tax year 2020, an eligible taxpayer’s total income cannot exceed $61,000 in the case of a single filer who is not a head of household filer, $76,000 for a head of household filer, and $92,000 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 20-14 for more information.

The Corporate and Other Business Excise:

Massachusetts generally follows the Code as currently in effect for Corporate Excise purposes. However, certain specific Massachusetts has expressly decoupled from certain provisions of the Code. The following is a summary of the federal tax law changes included in the TCJA and CARES Act, as well as other legislative and regulatory measures that will modify Massachusetts corporate excise expenditures.

Federal Tax Law Changes

Qualified Opportunity Zones (TEB 2.102 is newly created)

The TCJA added Code Subchapter Z, §§ 1400Z-1 and 1400Z-2, effective December 22, 2017. Under Subchapter Z, Taxpayers may elect to defer gain from the sale or exchange of property to an unrelated party by reinvesting that gain within 180 days of the sale or exchange in a “qualified opportunity fund,” which is defined as an investment vehicle organized as a corporation or partnership for the purpose of investing in “qualified opportunity zones.” The Code defines qualified opportunity zones as population census tracts that are low income communities nominated by a state governor and designated by the U.S. Treasury as qualified opportunity zones. The deferred federal gain must be included in income upon the earlier of (i) the tax year in which the taxpayer’s investment in the qualified opportunity fund is sold or exchanged, and (ii) tax year 2026, if the taxpayer’s investment in the qualified opportunity fund is not sold or exchanged by December 31, 2026. In either case, the amount of gain includable in the taxpayer’s federal gross income is the excess of: the amount of gain excluded or the fair market value of the investment in the qualified opportunity fund, whichever is less, over the taxpayer's federal basis in the investment. For Massachusetts corporate excise purposes, the gain will be similarly determined. See TIR 19-7 for more information.

Treatment of Transportation Fringe Benefits

Prior to passage of the TCJA, pursuant to Code § 274, a business was allowed to deduct expenses it incurred in providing qualified transportation fringe benefits (e.g., commuting transportation, transit passes, qualified parking). Section 13304(c) of the TCJA eliminated this deduction for tax years beginning on or after January 1, 2018. For Massachusetts corporate excise purposes, this deduction will likewise be excluded. See TIR 18-14 for more information

Small Business Loan Forgiveness

The CARES Act provides loan forgiveness to small businesses for certain loans made pursuant to the Paycheck Protection Program (“PPP”) under the Small Business Act. Borrowers are eligible for forgiveness equal to the amount spent (up to the principal of the loan) by the borrower during an 8-week period after the origination date of the loan on the following items: (i) payroll costs; (ii) interest payments on mortgage obligations incurred before February 15, 2020; (iii) payments of rent on any lease in force before February 15, 2020; and (iv) utility payments, for which service began before February 15, 2020. Under the Act, any amount of cancelled indebtedness that would otherwise be includable in the gross income of the borrower under the Code for federal income tax purposes is excluded from gross income. Correspondingly, no deduction is allowed for an expense that is otherwise deductible if both (i) the payment of the expense results in forgiveness of a loan made under the PPP and (iii) the income associated with the forgiveness is excluded from gross income pursuant to the Act. For Massachusetts corporate excise purposes, the loan forgiveness will be similarly treated (i.e., it will not be considered income subject to the corporate excise), and the related deductions will not be allowed. See TIR 20-9 for more information.

Changes to the depreciable life of Qualified Improvement Property (“QIP”)

Section 2307 of the CARES Act assigns a 15-year depreciable life under MACRS, the modified accelerated cost recovery system, and a 20-year depreciable life under ADS, the alternative depreciation system to QIP. Prior to the CARES Act, the depreciable life of QIP was 39 years. Massachusetts adopts these new depreciation schedules for purposes of the corporate excise. See TIR 20-9 for more information.

Increase in charitable donation deduction limitation

Section 2205 of the CARES Act eases the limitation on the charitable deduction found in Code § 170(b)(2)(A) with respect to certain cash contributions. Prior to the CARES Act, Taxpayers’ deductions for charitable donations were limited to 10% of their taxable income. The CARES Act allows a deduction for 2020 cash contributions in an amount up to 25% of the taxpayer’s taxable income (increased from 10%) less the amount of all other charitable contributions allowed. For purposes of the corporate excise, Massachusetts adopted the temporary easing of the charitable contribution limitation. See TIR 20-9 for more information.

Sales and Use Tax:

Sales Tax Holiday Weekend — Acts of 2018, 121 § 4 (TE Item 3.612)

Pursuant to Acts 2018, 121 § 4, a 2-day weekend in August of each year shall be designated as the annual “sales tax holiday.” During the annual sales tax holiday, no tax shall be otherwise taxable retail sales of tangible personal property. Retail sales eligible for the exemption must occur during one of two days during the holiday weekend, i.e., transfer of possession of or original payment in full for the property shall occur on such days. However (i) transactions where a deposit, prepayment or binding promise to pay is made before the designated days; (ii) prior sales; and (iii) layaway sales do not qualify for the exemption.

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