Massachusetts Business and Corporation Tax Implications Under the CARES Act
Many businesses are wondering how recent changes to the federal coronavirus aid, relief, and economic security law (the CARES Act) will impact the state’s tax bill. States generally use federal taxable income as the starting point for calculating state taxable income. States also generally enact provisions of the Internal Revenue Code (IRC) on a rolling or fixed basis. Even so, it is not always immediately clear how or when changes to federal law come into effect for state income tax.
Massachusetts has published a Technical Information Publication (TIR) project covering the impact of the CARES Act on Commonwealth taxpaying businesses. Strengths of TIR:
Small business loan forgiveness: The CARES Act provides loan forgiveness for small business loans made under the Paycheck Protection Program (PPP). For example, any amount of canceled debt that would typically be included in the borrower’s gross income is now excluded. In addition, the CARES Act states that no deduction is allowed for an expense that is otherwise deductible if both the payment of the expense results in the delivery of a PPP loan and the income associated with the remission is excluded from the. gross revenue. Massachusetts will apply a similar treatment to the state corporation tax.
Limitation of the deduction of commercial interest: The CARES Act amends a provision of the IRC that limits the deductibility of business interest for businesses and corporations for tax years beginning December 31, 2017. This provision generally limited the deductibility of net interest expense to 30% of the adjusted taxable income of a taxpayer. . Business interest is defined as any interest paid or accrued on debt that is “properly attributable to a trade or business” and does not include investment interest. The limit does not apply to taxpayers whose average gross receipts have been less than $ 25 million in the previous three tax years. The CARES law provides that for the 2019 and 2020 tax years, the deduction of a taxpayer’s business interest for the current year is increased to 50% of the adjusted taxable income. Massachusetts will also allow the increased deduction.
Qualified improvement property: The CARES law has made changes to the depreciation period for qualified improvement buildings (PAQ); before the CARES Act, it was 39 years, but now QIP is given a 15-year amortization period under the amended accelerated cost recovery system. This change was made to a provision that Massachusetts had previously specifically decoupled from and taxpayers must use the 39-year term for Massachusetts purposes.
Charitable donations: In general, a taxpayer corporation’s charitable deduction cannot exceed 10% of the corporation’s taxable income. The CARES Act temporarily relaxes this limitation with respect to certain cash contributions made to charities in the 2020 calendar year. For corporations, a deduction for 2020 cash contributions will be allowed up to 25% of the taxpayer’s taxable income less the amount of all other authorized charitable contributions. Massachusetts will follow this rule.
There are a lot of things to follow these days. The rapid pace of new information can seem overwhelming to businesses as they continue to move towards the “new normal”. Professional tax, accounting, auditing and consulting firms can help businesses better navigate this changing landscape.
Joseph Feehan, LL.M., JD, is a partner of blumshapiro. To learn more, visit www.blumshapiro.com.