830 CMR, § 62.17A.2
For federal income tax purposes, a corporation may elect S corporation status if it meets certain requirements under Internal Revenue Code §§ 1361 through 1363, including that the shareholders must consent to the election. Massachusetts recognizes federal S corporation status for purposes of M.G.L. c. 62 and M.G.L. c. 63, and has no separate S corporation election process. Among other things, 830 CMR 62.17A.2 explains the interaction between Federal and Massachusetts S corporation law.
The predecessor regulation, 830 CMR 62.17A.1: Massachusetts Taxation of S Corporations and Their Shareholders, is hereby superseded. Rules stated in 830 CMR 62.17A.1, such as transitional rules that relate back to the original recognition of S corporations in Massachusetts in 1986, remain applicable to the extent they do not conflict with provisions of 830 CMR 62.17A.2, and to the extent they do not conflict with statutory amendments enacted or Department of Revenue rules announced after the promulgation date of 830 CMR 62.17A.1, namely July 6, 1990.
Accumulated Adjustments Account, or AAA, an account similar to that described in Code § 1368(e), but as calculated under Massachusetts law. In general, the AAA is a tracking mechanism for an S corporation's accumulated, undistributed taxable income determined under M.G.L. c. 62. The AAA generally is increased by the income that the S corporation reports to its shareholders as distributive share income, and is decreased by the amount of distributions the S corporation makes to its shareholders. The AAA is an account of the S corporation at the entity level, and is not apportioned among the shareholders. With respect to an entity that for any period was an S corporation for federal purposes, but was not an S corporation for Massachusetts purposes, for example, a corporate trust taxable under the now-repealed M.G.L. c. 62, § 8, the following rules apply: the AAA for such entities generally includes the total amount of the entity's undistributed income that was reported to shareholders federally as distributive share income under 830 CMR 63.39.1, as may be adjusted based on federal/state differences in calculating income, but was not taxable as distributive share income to shareholders in Massachusetts, and instead was actually taxed at the entity level. Income of such an entity that was not taxed at the entity-level is not added to the AAA, but depending on the circumstances, may be subject to inclusion in the Massachusetts Earning and Profits account, as defined in 830 CMR 62.17A.2.
Business Corporation, any corporation, or any other entity as defined in M.G.L. c. 156D, § 1.40, including an S corporation, whether the corporation or other entity may be formed, organized, or operated in or under the laws of the Commonwealth or any other jurisdiction, and whether organized for business or for non-profit purposes, that is classified for the taxable year as a corporation for federal income tax purposes.
Code, with respect to personal income taxation under M.G.L. c. 62, the federal Internal Revenue Code, as modified in M.G.L. c. 62, and particularly in M.G.L. c. 62, § 1(c); and with respect to corporate level taxation under M.G.L. c. 63, the federal Internal Revenue Code, in effect for the taxable year, as more fully defined in M.G.L. c. 63.
Commissioner, the Commissioner of the Massachusetts Department of Revenue or the Commissioner's duly authorized representative.
Common Ownership, for purposes of the income measure of the corporate excise as determined under M.G.L. c. 63, §§ 2B or 32D, when one or more S corporation shareholders own, in the aggregate, directly or indirectly, more than 50% of the total combined voting control or more than 50% of the total value of shares of two or more corporations. Stock is owned by a person under Common Ownership if the person owns the stock directly or if ownership may be attributed to the person under the constructive ownership rules of Code § 318. Note: Common Ownership differs in certain respects from the definition of the term Common Ownership applied for purposes of combined reporting under M.G.L. c. 63, § 32B. See830 CMR 63.32B. 2(2): Definitions: Common Ownership. One significant difference between the two definitions is that for purposes of combined reporting a single shareholder must either directly or indirectly own 50% or more of two or more corporations for there to be common ownership. See830 CMR 63.32B.2(2): Definitions: Commonly Owned or Common Ownership. This requirement applicable to combined reporting does not apply to 830 CMR 62.17A.2(2): Common Ownership. In addition, for purposes of 830 CMR 62.17A.2 both an owner's voting rights in stock owned and the value of stock owned are relevant to the determination of voting control, whereas in the context of combined reporting only voting rights are considered. See 830 CMR 63.32B.2(2): Definitions: Common Ownership.
Example (2.1). S Corporation X and S corporation Y are owned by A, B, and C, with each owner having a a interest. S Corporation X and S corporation Y exhibit common ownership within the meaning of 830 CMR 62.17A.2. However, S corporation X and S corporation Y do not meet the definition of 830 CMR 63.32B.2(2): Definitions: Common Ownership, because no single shareholder owns or is considered to own 50% or more of each S corporation.
Example (2.2). Individual A owns 40% of the stock of S corporation X, 30% of the stock of S corporation Y, and 40% of the stock of S corporation Z. Individual B owns 20% of the stock of X, 40% of the stock of Y, and no stock in Z. No other stockholder owns more than 5% of the stock of each S corporation, X, Y, and Z. There is no other common stockholder among X, Y, and Z, and there is no other constructive ownership of the stock under Code § 318. X and Y exhibit common ownership because together Individual A and Individual B own more than 50% of each of them. Z does not share common ownership with X and Y because there is no combination of owners that hold more than 50% of the stock of Z. While X and Y have common ownership for purposes of 830 CMR 62.17A.2, there is no common ownership under 830 CMR 62.32B(2): Combined Reporting, since no single common owner of X and Y directly or indirectly owns stock representing more than 50% of the voting control of each corporation. See 830 CMR 63.32B.2(2): Common Ownership.
Example (2.3). Husband owns 30% of the stock of S corporation Y and 0% of the stock of S corporation Z. Wife owns 0% of the stock of Y and 10% of the stock of Z. Unrelated Investor owns 30% of the stock of Y and 41% of the stock of Z. No other stockholder owns more than 5% of the stock of each S corporation Y and Z, with the result that there is no other common owner between Y and Z. Y and Z are under common ownership under this definition because of the application of the constructive ownership rules of Code § 318. The stock holdings of Husband and Wife, although under separate legal ownership, are considered as being owned by both spouses under Code § 318. When combined, the voting power of Husband, Wife, and Unrelated Investor is greater than 50% for both Y and Z. Y and Z are not under common ownership for purposes of 830 CMR 63.32B.2: Combined Reporting, because no single common owner of Y and Z owns stock representing more than 50% of the voting control of each corporation.
Example (2.4). Shareholder A owns 60% of the value of shares in S corporation X, but only holds 40% of the voting control in X. Shareholder A owns 55% of the value of shares of S corporation Y, but holds only 30% of the voting control of the corporation. X and Y meet the requirement of common ownership under 830 CMR 62.17A.2, because greater than 50% of the value of shares is owned by the same owner or owners. However, X and Y are not under common ownership through A's ownership interest in the context of 830 CMR 63.32B.2Combined Reporting, because Shareholder A does not own more than 50% of the voting control in X or Y.
Distributive Share, the shareholder's aggregate daily portion of each item of income, loss, deduction, or credit determined by the shareholder's daily percentage of ownership of shares of stock in an S corporation.
DOR, the Massachusetts Department of Revenue.
Financial Institution, an entity that is a financial institution within the meaning of M.G.L. c. 63, § 1.
Gross Income, with respect to taxes imposed under M.G.L. c. 63, gross income as defined in M.G.L. c. 63, §§ 1 and 30.3; and with respect to taxes imposed under M.G.L. c. 62, Massachusetts gross income as defined in M.G.L. c. 62, § 2.
Massachusetts Earnings and Profits, an account that is increased and decreased based on the current and accumulated earnings and profits of an S corporation, without regard to apportionment, for any taxable year. As a general principle, the Massachusetts Earnings and Profits account includes:
For transition rules applicable to S corporations after the enactment of St. 1986, c. 488, § 39, see830 CMR 62.17A.1(10)(c). The Massachusetts Earnings and Profits account does not include distributive share income for any period the entity was treated as an S corporation for Massachusetts purposes under M.G.L. c. 62, § 17A. Massachusetts earnings and profits include items that are required to be taken into account by the S corporation, or that are otherwise attributed to the S corporation, under the applicable Code sections, such as in a corporate acquisition under Code § 381, to the extent consonant with Massachusetts law.
Net Operating Loss (NOL), the amount by which the deductions allowed to an S corporation under M.G.L. c. 63, § 30.4, including the dividends-received deduction allowed under M.G.L. c. 63, § 38(a)(1), and excluding any deductions for net operating loss, exceed gross income for the taxable year under M.G.L. c. 63. A net operating loss does not include a capital loss.
Pass-through Entity, an entity whose income, loss, deductions and credits flow through to its members for Massachusetts tax purposes, including:
Q Sub, a federal qualified subchapter S subsidiary, as defined in the Code, in effect for the taxable year.
S Corporation, an entity described at Code § 1361 and in effect for the taxable year.
Tiered Structure, a pass-through entity that has a pass-through entity as a member.
Total Receipts, gross receipts or sales (including income) realized in a taxable year less returns and allowances, including service charges, carrying charges, and any other charges included in sales prices. Total receipts include sales taxes or other excises where the sales tax or excise is imposed directly on the taxpayer, but not where such taxes or excises are simply collected by the S corporation and remitted to the taxing authority. Total receipts include dividends, interest, all tax-exempt income, royalties, capital gain net income, gross rents, deemed receipts, recognized built-in gain, other passive income, reimbursed costs, the income includable in the taxable year that is attributable to an installment transaction as defined in M.G.L. c. 62, § 63, the S corporation's pro rata share of the total receipts of any pass-through entity in which the S corporation holds an interest, and all other income. Consistent with the above, total receipts include Category one income, which generally refers to income to the S corporation that is taxed at the entity level for federal income tax purposes, as defined in 830 CMR 62.17A.2(8)(b)1., as well as Category two income, as defined in 830 CMR 62.17A.2(8)(b)1. Similarly, total receipts include both Massachusetts source income and non-Massachusetts source income. The cost of goods sold or the cost of operations shall not be deductible in determining total receipts. Total receipts include any deemed income that is attributed under the Code to an S corporation that takes part in an election under Code § 338(h)(10).
Unitary Business, a group of two or more corporations related through common ownership, as defined in 830 CMR 62.17A.2, that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts. The term unitary business shall be construed to the broadest extent permitted under the Constitution of the United States. Unitary Business generally corresponds to the definition of a unitary business as applied for purposes of combined reporting under M.G.L. c. 63, §32B. See 830 CMR 63.32B.2(2): Definitions: Unitary Business. Also, this definition is further explained at 830 CMR 63.32B.2(3): Unitary Presumptions and Inferences, except to the extent that the term Common Ownership in 830 CMR 62.17A.2, differs from 830 CMR 63.32B.2(2): Definitions: Common Ownership.
Example (2.5). A group of three shareholders owns six S corporations, (S1 - S6), and as to each of the six corporations this ownership meets the definition of common ownership. Each S corporation operates as a separate franchise of a single restaurant chain. Each of the restaurants maintains its own set of books and has a separate on-site manager. The six corporations are presumed to be engaged in a unitary business, because business activities conducted by corporations under common ownership that are in the same general line of business will generally constitute a unitary business. See830 CMR 63.32B.2(3)(b): Likely Unitary Situations.
Example (3)(e). An S corporation (S) has a project that qualifies for the Economic Development Incentive Program (EDIP) credit, which is available for five years. In year one S places $100,000 of qualifying assets in service and generates $5,000 EDIP. S claims $3,000 of the EDIP in year one and has a carryover to year two of $2,000. Because S claimed the credit, none of the $2,000 can be claimed by the shareholders in any taxable year. In year two, S places $120,000 of qualifying assets in service and generates a credit of $6,000. The corporation chooses to pass through to its shareholders this $6,000 credit, to be applied against their individual income tax obligations under M.G.L. c. 62. S is eligible to use the $2,000 of carryover from year one in year two against its corporate excise obligations under M.G.L. c. 63, but it cannot use any of the $6,000 credit generated in year two against its corporate excise. The shareholders may use the $6,000 of EDIP in year two and in later years to the extent allowed under general EDIP rules.
Example (3)(f). Shareholder A disposes of her interest in an S corporation in the middle of a taxable year. All affected shareholders, within the meaning of Code § 1377(a)(2)(B), generally Shareholder A and those who acquire his or her shares, consent under the method described in Code § 1377(a)(2)(A). The entity continues in existence as an S corporation. As under federal law the S corporation's taxable year for purposes of M.G.L. c. 62 is treated as two taxable years, the first of which ends on the date of termination. In such a case, each affected shareholder's distributive share is calculated as provided under the Code for each short year, as such distributive share may be modified under M.G.L. c. 62. See Code § 1377(a). In contrast, note that for purposes of the entity-level excise applicable to the S corporation under M.G.L. c. 63, there is only one taxable year on the facts in this example.
Shareholders are allowed to claim certain tax credits against their personal income tax liabilities. See830 CMR 62.17A.2(4)(g). Such allowable credits are calculated by the S corporation at the entity level, and are reported to shareholders to be used in determining the shareholders' personal income tax liabilities. See830 CMR 62.17A.2(3)(e) (credits may be taken at the individual shareholder level, or the S corporation entity level, but not at both levels).
The taxation of an S corporation shareholder under M.G.L. c. 62 is separate and distinct from the taxation of an S corporation at the entity level under M.G.L. c. 63. An S corporation shareholder is taxable on its distributive share regardless of any S corporation entity-level tax obligation in Massachusetts.
With respect to a non-resident S corporation shareholder, the character of an item does not determine the source of the income for purposes of determining whether the item is subject to Massachusetts tax. For the sourcing rules that apply to non-resident shareholders, see830 CMR 62.17A.2(4)(i).
Example (4)(c). S corporation X provides professional services, does business only in Massachusetts, and has a taxable year that is a calendar year. During its taxable year X earns $10 million from the provision of professional services; buys a capital asset on January 30th that it sells it at a profit on November 1st; and, sells a second capital asset that it has held for more than one year. Under the provisions of M.G.L. c. 62, § 2, the earnings from X's provision of its professional services are Part B income (see M.G.L. c. 62, § 2(b)(2)), and are reported and taxable to X's shareholders as Part B income. The gain from the sale of the capital asset that X purchased on January 30th and sold on November 1st is Part A income (see M.G.L. c. 62, § 2(b)(1)), and is reported to and taxable to X's shareholders as Part A income. The gain from the sale of the capital asset held for more than one year is Part C income (see M.G.L. c. 62, § 2(b)(3)), and is reported to and taxable to X's shareholders as Part C income.
Example (4)(e)(1). S Corporation A is not engaged in a trade or business, and has an investment interest expense deduction that is allowed for federal tax purposes. The investment interest expense deduction of A as it may be allowed under federal law must be disregarded in computing the Massachusetts tax liability of A's shareholders since investment interest does not qualify as a deductible business expense under M.G.L. c. 62.
With respect to a non-resident shareholder, two different rules apply depending on the residence of the shareholder at the time of the sale or deemed sale by the S corporation that is treated as an installment sale. If the non-resident shareholder was a Massachusetts resident at the time of the sale or deemed sale, then the shareholder is treated as a resident with respect to income derived from such sale or deemed sale. Pursuant to the authority in M.G.L. c. 62, § 5A(b), such a shareholder is not permitted to apportion the income from the sale or deemed sale, but rather must report the full amount of such income as taxable Massachusetts source income, and is entitled to its proportionate share of the credit for taxes paid to another jurisdiction as it directly relates to such income, and under the terms that apply to credits for taxes paid to another jurisdiction, as set forth in 830 CMR 62.17A.2(4)(g)2.
In the case of a non-resident shareholder who was a non-resident at the time of the sale or deemed sale, where income derived from an installment sale is subject to apportionment, the apportionment percentage that applies to such income in each year that it is taxable, irrespective of the year in which payment is actually received, is the S corporation's apportionment percentage from the year of the sale. The S corporation's apportionment percentage is determined under M.G.L. c. 62, § 17A(b).
Example (4)(f)(1). S corporation S is a calendar-year corporation that does business in multiple taxing jurisdictions and is 100% owned by M, a Massachusetts resident. On December 15, 2010, S sells off the majority of its assets and realizes a gain of $100 million. S elects installment sale treatment. Because S has elected installment sale treatment, $40 million of its realized gain is taken into account in its taxable year ending December 31, 2010. The remaining $60 million in gain is to be taken into account ratably over the next three years. On January 1, 2011, M changes her residency to Florida. Because M was a resident at the time of the sale of S's assets, M is treated as a resident with respect to all income that is derived from the sale. Thus, 100% of the income that is taken into account ratably over the period that M is a Florida resident is taxed in Massachusetts. M is entitled to take her proportionate share of the credit for taxes paid to another jurisdiction that directly relates to the income that derives from the installment sale income for the transaction dated December 15, 2010, under the terms that apply to credits for taxes paid to another jurisdiction, as set forth in 830 CMR 62.17A.2(4)(g)2.
Example (4)(f)(2). Same facts as in Example (4)(f)(1), except that on December 15, 2010, the date of the sale that is subject to installment sale treatment, M is a non-resident residing in Florida. All of M's income that is attributable to the installment sale is subject to the allocation and apportionment rules at 830 CMR 62.17A.2(4)(i). The determination of whether any gain should be reported to Massachusetts by M is based on the facts and circumstances in the year of the sale. If the income was Massachusetts source income in the year of the sale it will remain Massachusetts source income in subsequent years. Allocable items of income are determined based on the allocation rules that apply in the year of the sale and are reportable in their entirety to M as Massachusetts source income. Items subject to apportionment are apportioned to Massachusetts and are taxable to M using S's apportionment percentage for the year of the sale. With respect to both Example (4)(f)(1) and Example (4)(f)(2), because the total receipts derived from the installment sale under these facts exceed the $6 million threshold for income measure taxation at the entity level for each year from 2010 through 2013, S is subject to entity-level taxation on the gain from the installment sale in each of those years, under 830 CMR 62.17A.2(8).
Example (4)(g)(1). S corporation S is eligible for the Economic Development Incentive Program (EDIP) credit for its taxable year. The EDIP credit set forth in M.G.L. c. 62, § 6(g) and M.G.L. c. 63, § 38N, is among those credits that may be taken either by S's shareholders and applied against a shareholder's income tax under M.G.L. c. 62, or by S itself to apply against its entity-level tax. Therefore this credit is subject to the general rule at 830 CMR 62.17A.2(3)(e). If the EDIP credit is taken by individual shareholders, all amounts relevant to the calculation of the credit are attributed to S's shareholders and are taken into account in determining the shareholders' credit for the taxable year during which the taxable year of S ends. If S's shareholders take the credit with respect to property, S must maintain adequate records to specifically identify that property and to distinguish it from property with respect to which S has taken any credit. If S's shareholders take the credit and do not use the full amount of the credit generated in a taxable year, the shareholders may carry over the unused amount of the credit to succeeding taxable years. Amounts carried over by a shareholder may be applied only to offset that shareholder's tax liability. If recapture of the credit is later required, each shareholder that took the credit must recapture. For rules related to the EDIP credit that may be taken against S's corporation's entity-level tax, see830 CMR 62.17A.2(8)(a).
Example (4)(g)(2)(a). S corporation M does business in Massachusetts and owns an office building in State A. State A fully allocates the rental income of $100,000 to itself, and M's shareholders pay their proportionate share of the tax attributable to that rental income to State A. The total amount of such tax paid on this rental income to State A is $10,000. Massachusetts residents own 60% of the total value of shares of M. The rental income is included in the Massachusetts income reported to M shareholders as distributive share income. Massachusetts resident M shareholders are allowed to take the credit for taxes paid to the other jurisdiction, each member taking his or her proportionate share of the credit, in accordance with 830 CMR 62.17A.2(4)(g)2.b. The total credit taken by all Massachusetts resident shareholders may not exceed $6,000, that is 60% (representing total share ownership of Massachusetts resident shareholders) multiplied by the total amount of tax paid to State A, namely $10,000. In accordance with 830 CMR 62.17A.2(4)(g)2.d., non-resident M shareholders are not allowed the credit, but rather pay tax as determined after the application of the allocation and apportionment rules set forth at 830 CMR 62.17A.2(4)(i), and in the Non-resident Income Tax regulation, 830 CMR 62.5A.1(6).
Example (4)(g)(2)(b). S corporation has five resident shareholders and five non-resident shareholders. Each shareholder owns a 10% interest in the S corporation. The S corporation pays taxes measured by its income in several other states, for a total tax paid to other jurisdictions of $10,000. Each resident shareholder is allowed a credit in an amount that represents a 10% share of the total eligible tax paid to the other jurisdictions. Thus each resident shareholder is allowed a credit of $1,000.
Example (4)(i). S corporation Y has income of $5,000,000 for the taxable year. Y has a Massachusetts apportionment percentage of 60% for the taxable year. Shareholder B has a 20% ownership interest in Y. B resides in Massachusetts from January 1st through March 31st of the taxable year, then moves out of state. B's distributive share income from Y is $1,000,000 for the taxable year. The calculation of B's Massachusetts tax liability for the taxable year is as follows:
For the period of residency, January 1st through March 31st, the income taxable to Massachusetts is based on the formula at 830 CMR 62.17A.2(4)(i)6.a., namely, first determining the portion of the distributive share income that is attributable to the period of residency, in this case 90 days divided by 365 = 24.66%. Then, B's distributive share of $1,000,000 is multiplied by 24.66% to yield $246,600, B's distributive share income that is taxable to Massachusetts for the period of residency.
For the period of non-residency, April 1st through December 31st, the income taxable to Massachusetts is based on the formula at 830 CMR 62.17A.2(4)(i)6.b., namely, first determining the portion of the distributive share income that is attributable to the period of non-residency, in this case 275 days divided by 365 = 75.34%. Then, B's distributive share of $1,000,000 is multiplied by 75.34% to yield $753,400, B's Massachusetts source income for the period of non-residency, which must then be multiplied by Y's apportionment percentage of 60%, to yield $452,040 of Massachusetts source income taxable to B during the period of non-residency.
As explained in more detail in the specific rules below, an S corporation's distribution to its shareholders is taken first from the S corporation's AAA, which account contains amounts that have been previously reported to the S corporation's shareholders as distributive share income and that has been taxed to such shareholders. Because such amounts have been previously taxed, have not been distributed to the S corporation's shareholders, and have increased such shareholders' basis in the S corporation stock, distributions from the AAA are tax-free to these shareholders, and correspondingly decrease the shareholders' basis in the S corporation stock. Distributions from AAA in excess of basis are generally treated as a taxable gain from the sale or exchange of property.
An S corporation may also have earnings and profits that derive from a period that the S corporation was previously a C corporation or from an acquisition by the S corporation of a C corporation that has earnings and profits. After the AAA is fully depleted, the next distributions from the S corporation to its shareholders are taken from the Massachusetts Earnings and Profits account. These distributions are taxable to the S corporation shareholders as dividends and have no effect on basis. In such cases, once the Massachusetts Earnings and Profits account is fully depleted, the same rules apply to shareholders of S corporations that have no Earnings and Profits account: further distributions from the S corporation to its shareholders are made tax-free to the shareholders to the extent of the shareholders' basis in shares, and the distributions reduce the shareholders' basis in the shares. Once an S corporation shareholder's basis in shares is fully depleted, any further distribution from the S corporation to its shareholders is treated as taxable gain from the sale or exchange of property.
Each of the various statutory sections under which an S corporation may be taxed at the entity level under M.G.L. c. 63 has its own requirements. Except as otherwise provided by statute or 830 CMR 62.17A.2, rules that apply to C corporations with respect to calculating the entity-level excise generally also apply to S corporations. For example, the determination of the Massachusetts basis of an S corporation in its assets generally follows the same rules as the determination of the Massachusetts basis of a C corporation in its assets. See M.G.L. c. 63, § 31N.
For S corporations that are subject to the entity-level excise under M.G.L. c. 63, §§ 32D and 39, each of the three components of the excise potentially apply, namely the income measure, the non-income measure, and the minimum excise. For S corporations that are financial institutions and that are subject to the entity-level excise under M.G.L. c. 63, § 1 through 2B, the two components of the financial institution excise potentially apply, namely the income measure and the minimum excise.
S corporations that are not subject to the entity-level excise at M.G.L. c. 63, §§ 1 through 2B or 32D and 39 are otherwise subject to an entity-level excise under M.G.L. c. 63, for example, security corporations, which are subject to M.G.L. c. 63, § 38B.
An S corporation is generally allowed to use credits against its entity-level excise in the same manner and subject to the same limitations that other corporations taxable under the various provisions of M.G.L. c. 63 are allowed to use such credits. However, as stated in 830 CMR 62.17A.2(3)(e), no credit may be applied against both the entity-level excise and the shareholder-level tax. Similarly, an available credit may not be divided, part being used at the entity level and part being used at the shareholder level.
The taxation of an S corporation at the entity level is separate and distinct from the taxation of an S corporation's shareholders on their distributive share income, as set forth in M.G.L. c. 62, § 17A, and 830 CMR 62.17A.2(1) through (7). Payment of an entity-level corporate excise does not satisfy the obligation of an S corporation's shareholders to pay an income tax on their distributive share of income, and vice-versa.
Category one income is that income of an S corporation that is taxable at the entity level under the Code; for example, built-in gains of an S corporation taxable under Code § 1374, or excess net passive income of an S corporation that has accumulated earnings and profits for a taxable year and that has gross receipts more than 25% of which are passive investment income, taxable under Code § 1375. Category 1 income is taxed at the rate that would apply if the S corporation were a C corporation. M.G.L. c. 63, §§ 2B(a)(1) and 32D(a)(i).
Category two income is that income of an S corporation that is not Category one income. Category two income is subject to the income measure excise as calculated under M.G.L. c. 63, § 2B(a)(2) through (5) or § 32D(a)(ii). This income is subject to the income measure excise only if the total receipts of the S corporation (and certain affiliates of the S corporation) are $6 million or greater. See M.G.L. c. 63, §§ 2B(a)(2) through (5), 32D(a)(ii). With respect to this income, the rate of tax depends on the level of receipts; one rate of tax applies to an entity with receipts of at least $6,000,000 and below $9,000,000, and another rate of tax applies to an entity with receipts of $9,000,000 or more. When computing its tax, the S corporation must generally calculate its income in the same manner as other corporations subject to M.G.L. c. 63, §§ 1 through 2A (financial institutions) and §§ 30 and 39 (certain categories of business corporations), and must subtract its Category one income from its Category two net income.
The following sections state additional rules that apply to the taxation of Category two income.
Further, an S corporation's total receipts must be aggregated with the receipts of any other corporation with which the S corporation is engaged in a unitary business, including any C corporation that the Commissioner finds was established for the purpose of avoiding the total receipts thresholds of $6,000,000 and $9,000,000. The Commissioner will presume that any entity created after the formation of the S corporation was organized to reduce the total receipts of an S corporation with which it has common ownership and with which it engages in a unitary business.
The aggregate total receipts of all such entities as set forth in the previous paragraphs is the total receipts amount that is attributed to each entity individually to determine whether and at which rate each S corporation in the group is subject to the excise on Category two income. See830 CMR 62.17A.2(8)(c).
Example (8)(b). Husband and Wife own S Corporation that produces and markets computer software designed to organize hospital patient records. Husband and Wife also own a Partnership that studies the methodology used in various Massachusetts hospitals for patient record keeping, with a goal of finding the most efficient methods and for translating these to computer code. Receipts in the S corporation are less than six million dollars. However, S Corporation and Partnership are engaged in a unitary business. The receipts of both S Corporation and Partnership must be combined in order to determine whether S Corporation is subject to the entity-level excise under M.G.L. c. 63, § 32D.
The principal group member is the group member that the group reasonably expects will have the largest amount of total receipts subject to the income measure excise under M.G.L. c. 63, §§ 2, 2B or 32D and 39 on a recurring basis. Once the group identifies the principal group member, that group member is the principal group member for as long as that member is subject to the income measure excise.
Example (8)(c)(3). In year one, S corporation S is subject to M.G.L. c. 63, § 32D and has total receipts of $3 million, and is not subject to the income measure excise. S has no Category one income. S performs a pro forma calculation of its income measure as if it were subject to the income measure as calculated under M.G.L. c. 63, §§ 32D and 39, and arrives at a post-apportioned loss figure of $100,000. In years two and three, S corporation continues to have total receipts below $6 million, and thus is not subject to the income measure for those years. The pro forma calculation for year two results in a post-apportioned loss figure of $20,000. The pro forma calculation for year three results in a postapportionment income figure of $70,000. In year four, S has total receipts of $7 million, and is thus liable for the income measure excise as calculated under M.G.L. c. 63, §§ 32D and 39. The cumulative loss amount of S for the period year one through year three that may be carried forward to year four is $50,000, calculated as follows: $100,000 (year one loss) plus $20,000 (year two loss) minus $70,000 (year three income).
Where an S corporation is not itself subject to the income measure excise, it is nonetheless required to be included in a combined report if it is engaged in a unitary business with one or more other corporations that are subject to the income measure excise and any member of such group that is a C corporation. In contrast, in any instance where an S corporation is engaged in a unitary business only with one or more other S corporations, and the aggregate gross receipts of such corporations is less than $6 million (that is, no corporation in the combined group is liable for the income measure excise), the group is not required to file a combined report.
An S corporation is not subject to combined reporting unless it is engaged in a unitary business with one or more other corporations. Therefore, in any case in which an S corporation owns one or more QSubs but is not engaged in a unitary business with one or more other corporations apart from its ownership of these QSubs, the S corporation is not subject to combined reporting, because a QSub is not treated as an entity separate from its parent for Massachusetts corporate excise purposes.
830 CMR, § 62.17A.2