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Massachusetts: Check-The-Box Conformity

Executive Summary 

  • For taxable years beginning on or after January 1, 2009, the federal "choice of entity" rules will apply for Massachusetts corporate excise and personal income tax (TIR 08-15 is effective on July 3, 2008).
  • For tax years beginning on or after January 1, 2009, corporate trusts will cease to exist in Massachusetts. Corporate trusts will be reclassified as a corporation, partnership, or disregarded entity consistent with their federal classification. 
  • Transition Rules apply to re-organizations of: Corporate Trust to Corporation, Partnership, or Disregarded Entity; and, Partnership to Corporation. Consult your EisnerAmper tax advisor for specifics.

Partnerships and LLCs; Disregarded Entities 

  • LLCs may elect to be taxed as a corporation.
  • Default classifications should continue to apply.

S Corporations and QSubs 

  • A federal S corporation will in every case be an S corporation for Massachusetts purposes -- no separate Massachusetts election is necessary or allowed.
  • QSUB is no longer subject to the "sting tax" (Massachusetts currently imposes a corporate-level tax, known as a "sting tax," on large S corporations. As result, S corporations with over $6 million in gross receipts are subject to tax of 3%-4.5% on taxable income, calculated as if the S corporation were a C corporation. This tax is in addition to the income tax due on each of the S shareholders' respective share of the corporation's income).
  • Instead, an S corporation must take into account its QSUB’s income, loss, deductions, and credits in determining its net income.

Massachusetts Business Trusts  

  • Because of the "sting tax", the use of a Massachusetts Business Trust (MBT) was developed as a tax planning strategy. Although the MBT structure has gained popularity over the last few years, it has several disadvantages. One involves out-of-state shareholders. A shareholder who is not a Massachusetts resident might face state double taxation of income and might have to report S Corporation income to his or her home state and to Massachusetts. Most states will allow a tax credit if the taxpayer pays Massachusetts income tax, but others will not.
  • A slow economy has brought another disadvantage to light. A taxpayer with several passthrough entities may want to offset the income of one entity against the losses of another. An MBT structure traps any losses at the trust level, resulting in greater overall state income taxes.
  • Any distributions made on or after July 3, 2008, by a corporate trust or its successor shall be deemed to be taxable dividends.
  • Nonresidents must report such taxable dividends as Massachusetts source income to the extent of tax free earnings and profits apportioned to Massachusetts.

Dividends Received Deduction  

  • With respect to dividends received by corporations from former corporate trusts, there will be no DRD for dividends that represent untaxed earnings and profits.

For more information, contact EisnerAmper's State and Local Tax Group.

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