News

Stuart Freeland

A number of changes in the federal tax laws affecting S corporations became effective for taxable years commencing after January 1, 2009.  A brief summary of these changes follows:

Federal Law

Section 1374 of the Internal Revenue Code imposes a corporate level tax on built in gains of an S corporation that accrued during taxable years prior to its election to be taxed under Subchapter S.  The tax is not imposed on property disposed of by the corporation more than ten taxable years after the effective date of its election.  The American Recovery and Reinvestment Act of 2009 amended this provision for taxable years commencing in 2009 and 2010 shortening the period during which built in gain must be recognized from ten years to seven years.

Massachusetts Law

Section 32D of Chapter 63 of the General Laws imposes a tax on large S corporations which have total receipts of $6 million or more during the taxable year.  Prior to 2009 the net income of an S corporation with total receipts of $6 million or more and less than $9 million was subject to a corporate level tax of 3%.  The net income of an S corporation with total receipts of $9 million or more was subject to tax at the rate of 4.5%.  For taxable years commencing after January 1, 2009 and prior to January 1, 2010 these rates have been reduced to 2.8% and 4.2% percent respectively and will be further reduced in three annual steps to 1.8% and 2.7 percent for taxable years commencing after January 1, 2012.

For years prior to 2009, Massachusetts did not follow the federal classification regulations commonly known as the “check the box” regulations for business entities other than limited liability companies.  This difference was most significant with respect to the taxation of corporate trusts that were taxed under MGLA c. 62, §8 at the rates imposed on individuals.  Chapter 173 of the Acts of 2008 adopted the federal classification rules for taxable years commencing after January 1, 2009 with the result that corporate trusts are now classified in the same manner for Massachusetts tax purposes as for federal tax purposes.  A corporate trust with two or more members is now taxable either as a partnership or a corporation depending on its federal classification and, if it has just one member, it is taxed as a disregarded entity whose tax attributes are treated as those of its owner unless it is taxed as a corporation under federal law.

Also, under federal law, a qualified subchapter S subsidiary of a parent S corporation is treated as a disregarded entity as described in the preceding paragraph.  Prior to March 5, 2004, Massachusetts followed federal law in this respect.  For the period between March 5, 2004 and December 31, 2008, Massachusetts taxed Qsubs as separate S corporations.  Chapter 173 reversed this treatment and, for taxable years commencing after January 1, 2009, Massachusetts again recognizes federal Qsub elections.

One result of the foregoing amendments made by Chapter 173 is a complicated transition period for some affected entities.  Pending the adoption of formal regulations, the Massachusetts Department of Revenue has issued TIR 08-5 which provides guidance to assist these entities and their advisors with respect to the consequences of the adoption of “check the box.”

Chapter 62B, Section 2 was amended effective January 1, 2009, authorizing the Department of Revenue to impose withholding regulations on Massachusetts entities in order to prevent avoidance of tax.  The department has exercised this authority by issuing 830 CMR 62B.2.2, which imposes withholding on income allocated to non resident shareholders of S corporations and other pass through entities.  The Commissioner has issued guidance regarding this amendment that may be found presently on the Department’s website.