State & Local Taxes
In August 2010, Massachusetts enacted the Economic Development Reorganization Act (S.B. 2582, Acts of 2010, ch. 240, §118), which in addition to a much-publicized sales tax holiday made significant reforms and clarifications to Massachusetts tax law.
Net Operating Loss Carryforwards
Under prior law, net operating losses (NOLs) incurred in Massachusetts could only be carried forward for a maximum of five years. The act extends the maximum carryforward period to 20 years for NOLs sustained in tax years beginning on or after January 1, 2010 (MA Gen. Laws ch. 63, §30).
Qualified Small Business Stock
Sec. 1202 provides special treatment for the sale of “qualified small business stock” by noncorporate shareholders. Prior to the enactment of the Economic Development Reorganization Act, Massachusetts provided no such incentives. The act provides for Part C taxable income (generally, income from the sale of capital assets held for more than one year) to be taxed at 3% instead of 5.3% for investments that meet the following qualifications (MA Gen. Laws ch. 62, §4):
- The investment is in a corporation domiciled in Massachusetts;
- The corporation was incorporated on or after January 1, 2011;
- The corporation had assets of less than $50 million at the time of the investment; and
- The corporation complies with the active business requirement of Sec. 1202.
In addition, the investment must be made within five years from the date of incorporation and held for three years or more.
There is an important distinction between the federal and the Massachusetts provisions. While the federal reduction in the gain applies only to C corporations, the Massachusetts reduction in the tax rate also applies to S corporations.
This new provision can affect the decision whether to buy or sell the assets or stock of a corporation.
Property Exempt from Taxation
Generally, substantially all property owned by a manufacturing or research and development corporation is exempt from taxation. The Economic Development Reorganization Act clarifies that a limited liability company that is a disregarded entity and is engaged in manufacturing or R&D in Massachusetts and whose sole member is a qualifying corporation qualifies for the manufacturing/R&D exemption (MA Gen. Laws ch. 59, §5).
The legislation clarifies that where the combined reporting entities report their federal taxable net income based on a water’s-edge basis, only that income reported for federal income tax purposes will be included (MA Gen. Laws ch. 63, §32B). This clarification is effective for years beginning on or after January 1, 2009. The legislation brings Massachusetts tax law into conformity with federal law.
Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.
For additional information about these items, contact Mr. Koppel at (781) 407-0300 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with CPAmerica International.