2.200 Deductions from Gross Income

Deductions from Gross Income

2.200

299.9

314.8

330.9

343.6

355.7

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2.201
Charitable Contribution and Gift Deduction

In calculating net income, corporations may deduct charitable donations up to 10% of taxable income computed without the deduction. The Tax Cuts and Jobs Act (TCJA; enacted December 22, 2017) changed the limitation and the charitable deduction is no longer allowed for contributions to a college or university in exchange for athletic event seating rights. There is a carryover of excess contributions available for 5 succeeding taxable years.

IRC §170; M.G.L. c. 63, § 30.4

67.6

2.203
Net Operating Loss (NOL) Carry-Forward

The net operating loss (NOL) deduction is a current-year deduction for losses sustained in prior years. Losses incurred in years a corporation is not subject to the corporate excise in Massachusetts (for example, where the corporation does no business in Massachusetts) are not allowed to be carried forward. While the Internal Revenue Code provides a federal deduction for NOLs, Massachusetts does not conform to those rules; rather the General Laws provide for a specific Massachusetts deduction. The deduction was enacted in 1988. Prior to 2010, NOLs incurred by Massachusetts corporate excise filers could be carried forward for not more than 5 years, and could not be carried back. Losses incurred in taxable years beginning on or after January 1, 2010 can be carried forward for 20 years, and cannot be carried back.

IRC §172; M.G.L. c. 63, §30.5

279.3

2.204
Excess Natural Resource Depletion Allowance

An essential characteristic of a business income tax is that it is imposed on the net of business receipts over deductible business expenses. However, an immediate deduction is generally not allowed for the full cost of investments in natural resources such as mineral, natural gas or oil deposits. Rather, the cost of the natural resource property is required to be recovered over time as the natural resources are depleted by extraction. Traditional financial accounting and tax accounting rules base cost recovery on the percentage of the volume of natural resources extracted in a year over the estimated total volume of natural resources included in the investment. This traditional cost recovery method is referred to as the "cost-depletion" method. Internal Revenue Code (Code) § 613 gives taxpayers the option to use an alternative cost recovery method for investments in natural resource property. The alternative method is referred to as "percentage depletion." Under this method the deduction for cost recovery is based on a percentage of the income generated by the natural resource property. Specially, percentage depletion permits deduction of a statutory percentage of gross income from natural resource property, and bears no relationship to cost or other basis. In fact, an allowance calculated under percentage depletion is deductible even when the taxpayer's adjusted basis in the property is zero, provided that the taxpayer has gross income from the property. The statutory percentage of gross income allowed as a deduction depends on the type of natural resource that is extracted. The percentages range from 22% for sulfur, uranium and other designated minerals including most metals, to 5% for sand and gravel. See Code § 613(b). The deduction may not exceed 50% (in some cases, 100%) of net income from the property. The percentage depletion method is not available to large, integrated oil companies or for natural gas resources located outside the US. See Code §§ 613(d), 613A. Due to Massachusetts' reliance on the Internal Revenue Code (Code) for purposes of determining income, taxpayers must recover the cost of natural resource property in the same manner and in the same amount as they do for federal tax purposes. Thus, Massachusetts permits the use of the percentage depletion method if it is used for federal tax purposes. The percentage depletion method often results in a larger deduction than traditional cost depletion method. The excess of the deduction determined using the percentage depletion method over the deduction using the cost depletion method constitutes a tax expenditure.

IRC §§613, 613A; M.G.L. c. 63, §30.3

3.6

2.205
Deduction for Certain Dividends of Cooperatives

Cooperatives are organizations comprised of separate businesses that band together for limited purposes to take advantage of economies of scale, for example when buying supplies or selling products. Farmers' cooperatives and certain corporations acting as cooperatives may deduct so-called "patronage dividends" from their gross incomes. A "patronage dividend" is a dividend paid to members of the cooperative: (i) based on the quantity or value of business done with the members, (ii) under a pre-existing obligation of the cooperative; and (iii) determined by the cooperative's net earnings from business with members. In order to deduct the dividends, cooperatives must provide notice to members of the total patronage dividend and must pay a minimum of 20% of each member's dividend in cash within 8½ months following the close of the cooperative's taxable year. The deduction is based on the notion that the cooperative is an agent working for the members and that any funds transferred to members already belong to the members. See Farm Service Cooperative v. Commissioner, 619 F.2d 718, 722 (1979). In this view, the primary function of a cooperative is the allocation of the economic benefits of the cooperative, either in the form of net savings or net earnings. The deduction recognizes that taxing patronage dividends would discourage such allocation and could result in double taxation of income (first when earned by the cooperative and second as a dividend received by the member).

IRC §§1381-1388

5.1

2.206
Deduction for Renovation of Abandoned Buildings as Part of Certified Project

Corporations and individuals are subject to tax on their taxable net income (under the corporate excise) and taxable income (under the personal income tax), respectively. In determining the applicable tax base, a deduction is provided to corporations and individuals for 10% of the cost of renovating abandoned buildings. The deduction is in addition to any other deduction for the cost of such renovation that is available to corporations subject to the net income measure of the corporate excise or to individuals subject to the personal income tax. Apart from this deduction, renovation expenses incurred with respect to business property are generally deductible as current business expense deductions or as depreciation. Amounts allowed under the renovation deduction might also be included in deductible business expenses or deductible depreciation. Thus, the deduction functions as an extra, or bonus, deduction for renovation expenses. To be deductible, the renovation costs must be incurred with respect to a building (i) located in an economic opportunity area and (ii) designated as abandoned, by the Economic Assistance Coordinating Council (EACC). The deduction is part of the Massachusetts Economic Development Incentive Program (EDIP). The EDIP generally employs local property tax incentives to spur economic development, often in blighted areas. These incentives are available for projects that will create new jobs. In addition to the local property tax incentives, the EACC is empowered to authorize the abandoned building renovation deduction. The revenue lost as a result of the deduction constitutes a tax expenditure.

M.G.L. c. 63, §38O

Negligible

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