Appendix A

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. Most recently, the Federal Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021 were enacted. These Acts provide for federal changes to a variety of provisions in the Internal Revenue Code (“Code”) that affect the personal income tax and corporate excise.

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 recent federal tax law changes, 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. See TIR 20-9: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act. More recently, the Federal Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021 were enacted. For their impact on Massachusetts personal income tax and corporate excise, See Working Draft TIR 21-XX: Massachusetts Tax Implications of Selected Provisions of the Federal Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021

Eligible 529 Plan Expenses, IRC § 529 (TE Item 1.041)

MGL allows a deduction for contributions to a Massachusetts 529 college savings plan or a prepaid tuition program, up to $1,000 per individual or $2,000 per married couple filing jointly. This deduction was available to taxpayers for tax years beginning January 1, 2017 through January 1, 2021. The deduction was scheduled to expire, however, the FY22 Budget made the deduction permanent.

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 2022, the Massachusetts monthly exclusion amounts are $280 for employer-provided parking and $150 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 21-12 for more information.

Favorable Tax Treatment of Qualified Small Business Stock (QSBS) Gain — IRC § 1202; M.G.L. c. 62, § 4(c) (TE Item 1.042).

For federal tax purposes IRC § 1202 allows individuals to exclude 50% of their gains derived from the sale of qualified small business stock (“QSBS”). Because Massachusetts generally follows the IRC as in effect in 2005 for personal income tax purposes, Massachusetts allows an income exclusion for 50% of such gains.

Massachusetts also provides a reduced rate for such gains that are included in income if certain statutory requirements are met. Specifically, gains on the sale of qualified small business stock are taxed at a reduced rate of 3%, instead of the generally applicable long-term gain rate of 5%. To qualify for the 3% rate, the stock that is sold (i) must have been acquired within five years of the corporation's date of incorporation (ii) must be held for three years or more prior to the sale, and (iii) must have been issued by a C corporation or S corporation which (a) is domiciled in Massachusetts, (b) was incorporated on or after January 1, 2011, (c) has less than $50 million in assets at the time of investment, and (d) complies with certain of the “active business” requirements of IRC § 1202.

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

Beginning in calendar year 2023, 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, TIR 21-4, and the FY22 Budget (St. 2021, c. 24, s. 99) 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 $1,170 (for tax year 2021). 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 $884,000. For tax year 2021, an eligible taxpayer’s total income cannot exceed $62,000 in the case of a single filer who is not a head of household filer, $78,000 for a head of household filer, and $93,000 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 21-11 for more information.

Film (or Motion Picture) Credit — M.G.L. c. 62, § 6 (l) (TE item 1.611)

Motion picture companies subject to tax under G.L. c. 62 or G.L. c. 63 may claim credits with respect to certain payroll expenses and certain production expenses. The credits were due to expire on January 1, 2023. However, the FY22 Budget amends “An Act Providing Incentives to the Motion Picture Industry,” which created the film incentive credits, to make them permanent. The FY22 Budget also amends credit eligibility with respect to production expenses. For taxable years beginning on or after January 1, 2022, a taxpayer must incur at least 75% of its production expenses in Massachusetts for a film project to qualify for the credit. A 50% threshold applies to prior taxable years.

Disability Hire Credit — M.G.L. c. 62, § 6 (z) (TE item 1.622)

Effective for tax years beginning on or after January 1, 2023, employers that hire disabled employees may claim a nontransferable, refundable credit equal to (i) the lesser of $5,000 or 30% of the wages paid to a disabled employee in the employee’s first year of employment, and (ii) the lesser of $2,000 or 30% of the wages paid to a disabled employee in each subsequent year of the employee’s employment.

Cranberry Bog Renovation Credit — M.G.L. c. 62, § 6 (w) (TE item 1.623)

Beginning in calendar year 2020, taxpayers primarily engaged in cranberry production may claim a nontransferable, refundable credit equal to 25% of expenses incurred in the renovation, repair, replacement, regrading or restoration of a cranberry bog for the cultivation, harvesting or production of cranberries. The amount of credit that can be claimed by a taxpayer for a taxable year cannot exceed $100,000.

Credit for Eligible Dependents — M.G.L. c. 62, § 6 (y) (TE item 1.624)

The parameters of the credit are substantially the same as the former deduction. To claim the credit, a taxpayer must furnish over half of the cost of maintaining a household. The household must include a dependent that qualifies as a dependent under IRC § 152 and who is (1) under the age of 12; (2) age 65 or over; or (3) disabled. The credit is equal to $180 if the taxpayer claims one dependent, or $360 if the taxpayer claims two or more dependents. A taxpayer claiming this credit may not also claim the credit for dependent care expenses allowed under G.L. c. 62, § 6(x).

Credit for Dependent Care Expenses — M.G.L. c. 62, § 6 (x) (TE item 1.625)

The parameters of the credit are substantially the same as the former deduction. The credit is equal to “employment-related expenses” allowed for purposes of determining the credit provided under Internal Revenue Code (“IRC”) § 21. A qualifying individual is (1) a dependent of the taxpayer who is younger than 13 years old; or (2) a dependent of the taxpayer, including a spouse, who is physically or mentally incapable of taking care of himself or herself and principally lives with the taxpayer.^[1] The credit cannot exceed $240 if the taxpayer claims expenses for one qualifying individual, or $480 if the taxpayer claims expenses for two or more qualifying individuals. A taxpayer claiming the credit may not also claim the dependent credit allowed under G.L. c. 62, § 6(y).

The Corporate and Other Business Excise:

New Cranberry Bog Renovation Credit

The Economic Development Act and the FY22 Budget adopt new credits for expenses incurred in renovating cranberry bogs. Specifically, the Economic Development Act adds G.L. c. 62, § 6(w) and the FY22 Budget adds G.L. c. 63, § 38II. These provisions allow taxpayers primarily engaged in cranberry production to claim a nontransferable, refundable credit equal to 25% of expenses incurred in the renovation, repair, replacement, regrading or restoration of a cranberry bog for the cultivation, harvesting or production of cranberries. The Secretary for Energy and Environmental Affairs (the “Secretary”) determines eligible costs and the amount of the credit. The amount of credit that can be claimed by a taxpayer for a taxable year cannot exceed $100,000. The annual total cap amount is $2 million.

To receive the credit, a taxpayer must file a summary of renovation expenditures with the Secretary, who will notify the Commissioner of the amount of credit awarded. The Commissioner will allow the amount of the credit determined by the Secretary on the taxpayer’s return for the tax year in which the qualified renovation expense was incurred. Further guidance from the Commissioner and the Secretary regarding the credit is anticipated. The credit is available for taxpayers subject to G.L. c. 62 (“c. 62 taxpayers”) and taxpayers subject to the corporate excise (“c. 63 taxpayers”) for taxable years beginning on or after January 1, 2020.

New Disability Hire Credit

The FY22 Budget adds a new credit for employers that hire disabled employees. Specifically, the FY22 Budget adds G.L. c. 62, § 6(z) and new G.L. c. 63, § 38JJ. These provisions allow employers subject to tax under G.L. c. 62 or G.L. c. 63 to claim a nontransferable, refundable credit equal to (i) the lesser of $5,000 or 30% of the wages paid to a disabled employee in the employee’s first year of employment, and (ii) the lesser of $2,000 or 30% of the wages paid to a disabled employee in each subsequent year of the employee’s employment. The credit is available to employers subject to tax under G.L. c. 62 or G.L. c. 63 provided that:

(1) the employee is certified by the Massachusetts Rehabilitation Commission as having a disability as defined under the Americans with Disabilities Act, 42 U.S.C. § 12102;

(2) the employee is capable of working independently;

(3) the employee has a mental or physical disability that constitutes or results in a substantial impediment to employment;

(4) the employee is hired after July 1, 2021;

(5) the employee’s primary place of employment and primary place of residence is in Massachusetts;

(6) the employer must obtain certification from the Massachusetts Rehabilitation Commission that the employee is qualified no later than the employee’s first day of work; and

(7) the employer employs the employee for at least 12 consecutive months prior to and in the taxable year in which the credit is claimed.

For employers subject to tax under G.L. c. 62, the credit will be attributed on a pro rata basis to the owners, partners, or members of the legal entity that hires eligible employees. For employers subject to an excise under G.L. c. 63, the credit cannot reduce the excise due below the minimum excise.

The FY22 Budget requires that the Secretary of Health and Human Services, in consultation with the Commissioner, promulgate regulations establishing an application process for the credit. Further guidance from the Secretary of Health and Human Services and the Commissioner regarding the credit is anticipated.

The credit is available for tax years beginning on or after January 1, 2023.

Changes to the Film Incentive Credits

Changes to the Low-Income Housing Credit

Under G.L. c. 62, § 6I and G.L. c. 63, § 31H, a low-income housing credit is available to eligible c. 62 or c. 63 taxpayers that invest in affordable rental housing (“Qualified Massachusetts Projects”) to the extent authorized by the Department of Housing and Community Development (“DHCD”). The credit may be claimed in the year that the Qualified Massachusetts Project is placed in service and for each of the four subsequent taxable years.

DHCD ultimately allocates the amount of credit a taxpayer can claim based on an annual aggregate statewide limit, which, prior to the Economic Development Act, was $20 million. Effective for tax years beginning on or after January 1, 2021 and ending on or before December 31, 2025, the Economic Development Act raises the credit’s annual limit from $20 million to $40 million. For tax years beginning on or after January 1, 2026, the credit’s annual limit will revert to $20 million.

Extension of the Massachusetts Historic Rehabilitation Credit

The Massachusetts historic rehabilitation credit, which allows c. 62 and c. 63 taxpayers to claim a credit for certain expenditures made to rehabilitate certain qualified historic structures, was due to expire on December 31, 2022. The FY22 Budget amends G.L. c. 62, § 6J and G.L. c. 63, § 38R to extend the credit to tax years ending on or before December 31, 2027.

Repeal of Certain Deductions and Credits

1. Repeal of Deduction for Energy Patents

Under the law in effect for taxable years beginning before January 1, 2022, G.L. c. 62, § 2(a)(2)(G) and G.L. c. 63, § 30.3 allow taxpayers to deduct income from certain patents that are useful for energy conservation or alternative energy development. The FY22 Budget repeals the deduction effective for taxable years beginning on or after January 1, 2022.

2. Repeal of Medical Device User Fee Credit

Under the law in effect for taxable years beginning before January 1, 2022, G.L. c. 62, § 6½ and G.L. c. 63, § 31L allow taxpayers that develop or manufacture medical devices in Massachusetts to claim a transferable credit equal to 100% of the user fees they pay when submitting certain medical device applications and supplements to the Food and Drug Administration. A taxpayer claiming the credit cannot carry forward the credit, but can transfer unused portions of the credit. The transferee may carry over the credit, but must use it within five years of the credit’s transfer.

The FY22 Budget repeals the credit effective for taxable years beginning on or after January 1, 2022. However, taxpayers will still be able to transfer previously awarded credits, and transferees will be able to apply unused amounts of the credit within five years of the credit’s transfer.

Repeal of Harbor Maintenance Credit

Under the law in effect for taxable years beginning before January 1, 2022, G.L. c. 63, § 38P allows taxpayers subject to the corporate excise to claim a nonrefundable, nontransferable credit equal to certain harbor maintenance taxes paid to the federal government to the extent the taxes are attributable to the shipment of break-bulk or containerized cargo by sea and ocean-going vessels through one of three designated Massachusetts ports. Unused portions of the credit may be carried forward for up to five years. The FY22 Budget repeals the credit effective for taxable years beginning on or after January 1, 2022. However, unused portions of the credit claimed in taxable years beginning before January 1, 2022 may continue to be carried forward.

Sales and Use Tax:

Sales Tax Holiday Weekend — M.G.L. c. 64H, § 6A (TE Item 3.612)

Pursuant to M.G.L. c. 64H, § 6A, 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 imposed upon otherwise taxable non-business 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.

IRC § 21(b)(1). ↑