MA: Department of Revenue Issues Guidance Addressing Federal Tax Reform

The Massachusetts Department of Revenue recently issued two documents that provide guidance on certain issues related to federal tax reform. The first document, a working draft Technical Information Release (TIR), clarifies that IRC section 965 income will be treated as dividend income for Massachusetts corporate excise purposes. This treatment is consistent with how Massachusetts treats Subpart F income. The draft TIR confirms that section 965 income will be eligible for the state’s 95 percent dividends-received deduction (subject to certain voting stock ownership requirements). The deduction allowed under section 965(c) is not allowed for Massachusetts purposes.

Under Massachusetts law, dividends are generally excluded from the sales factor of general corporations. As such, the TIR provides that section 965 income will likewise be excluded from the Massachusetts sales factor. The TIR notes that the inclusion of five percent of the section 965 income is intended to represent a disallowance of expenses associated with the section 965 income and is not actually a tax on section 965 income. As a mechanism for expense disallowance, the inclusion of five percent of the 965 income should not, in the Department’s view, implicate the apportionment factor. For purposes of the financial institutions excise tax, dividends are included in the receipts factor when the dividends are from “investment assets and activities and from trading assets and activities.”  Therefore, section 965 income may be included in the receipts factor of a financial institution. The draft TIR also provides instructions for reporting section 965 income and reminds taxpayers that the Department will, as previously announced, waive penalties for underpayments of estimated tax associated with section 965 income.

The second document released by the Department of Revenue is an amended emergency regulation that makes changes to CMR 58.2.1, which addresses Manufacturing Corporations. Under Massachusetts law, manufacturing corporations are entitled to certain tax benefits. A key determinant in manufacturing corporation status is whether the taxpayer is engaged in “substantial” manufacturing. The tests used to determine whether a taxpayer is engaged in substantial manufacturing involve measuring a taxpayer’s gross receipts from manufacturing activities and non-manufacturing activates occurring in Massachusetts. The emergency amendment makes clear that section 965 income and GILTI are excluded from this calculation, eliminating the possibility that a taxpayer could lose manufacturing status as a result of having GILTI or section 965 income. Please contact Nikhil Sequeira at 617-988-1787 with questions on these documents.