2.000
2.000 Exclusions from Gross Income
Tax Expenditure Name
Tax Expenditure Number
FY2019
FY2020
FY2021
FY2022
FY2023
Exclusions from Gross Income
2.000
149.4
152.6
156.6
161.3
169.2
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Tax Item
Description
Origin
FY2023
2.001
Small Business Corporations
Small Business Corporations
In general, corporations organized under, or subject to, Chapters 156, 156A, 156B, 156C, 156D or 180 of Massachusetts General Laws (M.G.L.) or that have privileges, powers, rights or immunities not possessed by individuals or partnerships are subject to the corporate excise. Most corporations have an income tax component of their excise. For those corporations, income is taxed at a rate of between 8 and 9%. Dividends distributed to Massachusetts residents are also subject to the personal income tax rate of 5%.
Certain corporations with no more than 100 shareholders may elect to be taxed, for both federal and state tax purposes, as "S corporations." Under federal law, most S corporation income is passed through and taxed only as personal income to shareholders, and is not taxable at the entity level. Only limited categories of income are subject to an entity-level tax for federal tax purposes.
For Massachusetts purposes generally, S corporation income is not subject to an entity level tax, except as follows: 1) those limited categories of income that are subject to an entity-level tax for federal tax purposes are also taxable in Massachusetts at the full corporate rate; and 2) the income of an S corporation with receipts of $6 million or more is subject to tax at reduced corporate rates.
As of 2020, S corporations with total receipts of at least $6 million but less than $9 million are subject to a corporate excise of 2.00% of net income for non-financial institutions and 2.67% for financial institutions. An S corporation with total receipts of $9 million or more is subject to an excise of 3.00% of net income for non-financial institutions and 4.00% for financial institutions.
The favorable manner in which income is taxed to an S corporation and its shareholders as compared to an ordinary business corporation (including its shareholders) constitutes a tax expenditure. Massachusetts first adopted this treatment of S corporations in 1986.
Certain corporations with no more than 100 shareholders may elect to be taxed, for both federal and state tax purposes, as "S corporations." Under federal law, most S corporation income is passed through and taxed only as personal income to shareholders, and is not taxable at the entity level. Only limited categories of income are subject to an entity-level tax for federal tax purposes.
For Massachusetts purposes generally, S corporation income is not subject to an entity level tax, except as follows: 1) those limited categories of income that are subject to an entity-level tax for federal tax purposes are also taxable in Massachusetts at the full corporate rate; and 2) the income of an S corporation with receipts of $6 million or more is subject to tax at reduced corporate rates.
As of 2020, S corporations with total receipts of at least $6 million but less than $9 million are subject to a corporate excise of 2.00% of net income for non-financial institutions and 2.67% for financial institutions. An S corporation with total receipts of $9 million or more is subject to an excise of 3.00% of net income for non-financial institutions and 4.00% for financial institutions.
The favorable manner in which income is taxed to an S corporation and its shareholders as compared to an ordinary business corporation (including its shareholders) constitutes a tax expenditure. Massachusetts first adopted this treatment of S corporations in 1986.
IRC §§ 1361-1363; M.G.L. c. 63, §32D; c. 62, § 17A
169.2
2.002
Exemption of Income from the Sale, Lease or Transfer of Certain Patents
Exemption of Income from the Sale, Lease or Transfer of Certain Patents
Similarly for individual income tax, for purposes of the corporate excise the starting point for the computation of Massachusetts taxable net income is federal gross income as defined under the IRC, as amended and in effect for the taxable year (with certain modifications not relevant here). Federal gross income includes income from the sale, lease or other transfer of all patents and income from property subject to such patents. Pursuant to M.G.L. c. 63, § 30.3 income from certain patents that are useful for energy conservation or alternative energy development may be deducted from Massachusetts gross income (and therefore is not subject to tax) for a period of five years. The five-year period begins on the date of issuance of the United States patent or the date of approval by the Commissioner of Energy Resources, whichever expires first.
The income may only be deducted in relation to patents that were issued to or applied for by a Massachusetts resident or a Massachusetts corporation. Also, the patents must be of economic value, practicable, and necessary for the Commonwealth. Finally, the patents must be approved by the Commissioner of Energy Resources.
The FY22 Budget repeals the exemption effective for taxable years beginning on or after January 1, 2022.
The income may only be deducted in relation to patents that were issued to or applied for by a Massachusetts resident or a Massachusetts corporation. Also, the patents must be of economic value, practicable, and necessary for the Commonwealth. Finally, the patents must be approved by the Commissioner of Energy Resources.
The FY22 Budget repeals the exemption effective for taxable years beginning on or after January 1, 2022.
M.G.L. c. 63, § 30.3; c. 62, § 2(a)(2)(G)
N.A.
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