(8) S corporation entity-level taxation in Massachusetts.

(a) General . An S corporation that meets the requisite jurisdictional requirements is subject to a corporate excise at the entity level in Massachusetts. The components of the excise differ based on whether the entity is taxed as a corporation subject to M.G.L. c. 63, §§ 32D and 39, a financial institution subject to M.G.L. c. 63, § 1 through 2B, or an entity subject to another provision of M.G.L. c. 63. 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 in 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. (b) Rules generally applicable to entities taxable under M.G.L. c. 63, §§ 1 and 2B (financial institutions) and 32D and 39 (certain business corporations) for determining the income measure of the excise. 1. Two categories of income, with separate rules for each. There are two categories of income that are subject to the income measure of the excise as measured under M.G.L. c. 63, §§ 2B and 32D. 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 one 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), 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. 2. Method for determining total receipts, aggregation rules. In order to determine whether an S corporation must pay an entity-level excise measured by Category two income, the S corporation must first determine whether its total receipts meet the $6 million total receipts threshold for such taxation. For purposes of this calculation, if the S corporation owns one or more QSubs, its total receipts must be computed by combining them with those of its QSubs, irrespective of whether the S corporation and its QSubs are engaged in a unitary business. Also, if the S corporation is engaged in a unitary business with one or more other S corporations or pass-through entities (such as an LLC or partnership), its total receipts must be aggregated with the receipts of: a. such other S corporations, including any QSubs owned by them; and b. other pass-through entities with which the S corporation is engaged in a unitary business, including entities that are owned by other pass-through entities in a tiered-ownership or similar structure. However, the total receipts of two or more corporations, including one or more entities subject to the aggregation rules of 830 CMR 62.17A.2(9)(b)2. shall not include receipts derived from intercompany transactions between such entities. 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. See 830 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. 3. Taxable year issues related to group members when determining total receipts. a. Choosing a principal group member. It is possible that a group of entities that is required to combine the total receipts of each group member in order to determine whether and at what rate an S corporation each member of the group is subject to the entity-level excise will have different taxable years. In such cases the group must perform its total receipts calculation based on the taxable year of one group member (the “principal group member”). 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, 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. b. Method for determining total receipts for a group of entities. Where more than one entity in a group must combine its total receipts and the taxable year differs as to one or more group members, those members’ accounting periods must be adjusted, generally following the principles of fiscalization that apply in the context of combined reporting as set forth at 830 CMR 63.32B.2(12). The group must use this method in a reasonable and consistent way, such that it will not materially distort the total receipts of the group members. The Commissioner reserves the right to adjust the method of fiscalization used by the group. 4. Determining an S Corporation’s total receipts in a short taxable year. a. Annualization method. Except as allowed under 830 CMR 62.17A.2(8)(b)4.b., in computing its total receipts for a taxable year consisting of fewer than 12 months, an S corporation must annualize its total receipts for the taxable year by taking the average income for the number of months in the short taxable year, and multiplying the result by 12. b . Actual twelve-month receipts method. In the case of a company that terminates its business, for example, by sale or dissolution, and as a result has a taxable year consisting of fewer than 12 months, such taxpayer may elect to count actual receipts of the corporation for the twelve-month period ending on the closing date of the short taxable year. (c) Rules specific to calculating the income measure of the excise for Category two income for corporations subject to M.G.L. c. 63, §§ 32D, 39. 1. General. An S corporation subject to the entity-level tax under M.G.L. c. 63, §§ 32D, 39 must pay an excise on its Category two income if its total receipts for the taxable year are $6 million or more. It must calculate the income measure using the following rules. 2. Rate of excise under M.G.L. c. 63, § 32D(a)(ii). There are two rates that apply to the taxation of an S corporation’s Category two income measured under M.G.L. c. 63 § 32D(a)(ii): a. If the S corporation’s actual and deemed total receipts for the taxable year are $9,000,000 or more, the income measure rate is derived by subtracting the rate applicable to Part B taxable income for that taxable year pursuant to M.G.L. c. 62, § 4(b) from the income measure rate applicable to C corporations under M.G.L. c. 63, § 39(a)(2). b. If the S corporation’s total receipts for the taxable year are at least $6,000,000 but less than $9,000,000, the rate is ⅔ of the rate set forth in the preceding paragraph, 830 CMR 62.17A.2(8)(c)2.a. 3. Net operating loss carryforward deduction with respect to S corporations subject to tax under M.G.L. c. 63, §§ 32D and 39. a. S corporations are generally allowed to take net operating loss (NOL) carryforward deductions, subject to some restrictions. An S corporation subject to tax under M.G.L. c. 63, §§ 32D, 39 pursuant to 830 CMR 62.17A.2(8)(c) is generally allowed to deduct, on a carryforward basis, a net operating loss (NOL) incurred in a prior taxable year from its Category two income (but not from its Category one income), under the rules set forth at M.G.L. c. 63, § 30.5. See generally 830 CMR 63.30.2: Net Operating Loss Deductions and Carryover . The deduction is available to the extent that it would be allowed to a C corporation under the provisions of M.G.L. c. 63, § 30.5 and 830 CMR 63.30.2. NOL carryforwards have no effect on, and shall not be taken into account in, the calculation of a shareholder’s distributive share income or loss under M.G.L. c. 62. See 830 CMR 63.17A.2(4)(e)3.a. Further, an S corporation that is subject to tax under M.G.L. c. 63, §§ 2 shall not be entitled to deduct an NOL carry forward. In no case can an NOL deduction be carried back. b. Limitation on NOL carryforward deduction where an S corporation has Category one income. Category one income is a net-income amount of the S corporation determined under the Code. M.G.L. c. 63, § 32D(a)(i). From this net income figure certain federal loss carryforward amounts have already been deducted. See Code §§ 1374(b), (d), Treas. Reg. § 1.1374-5. To the extent that an S corporation’s Massachusetts NOL carryforward includes one or more amounts that were previously deducted from Category one income under Code § 1374(b), (d), and Treas. Reg. § 1.1374-5, such NOL amounts may not be deducted by the S corporation from its Category two income. c. i. Specific rules for carrying forward NOL deductions. An S corporation that is entitled to deduct carryforward NOLs is allowed to carry forward an NOL for a prior taxable year, subject to the general rules that apply to carry forwards, whether or not the S corporation was subject to the entity-level excise on Category two income in such year. The determination as the amount to carry forward must be made using the carryforward calculation set forth in 830 CMR 62.17A.2(8)(c)3.c.ii. A net operating loss shall not be carried back; thus, for example, a taxpayer that sustains a loss in a taxable year may not amend a prior year’s return to claim that loss. ii. Carryforward calculation. In order to properly determine the allowable NOL carryforward amount that an S corporation may use, the S corporation must calculate its apportioned net income or loss for each relevant taxable year, whether or not it is subject to the income measure on its Category two income for such year. Any loss amount carried forward must be reduced by the S corporation’s post-apportionment positive income amounts in succeeding taxable years for the carryforward period as determined under M.G.L. c. 63, § 30.5, and increased by its post-apportionment loss amounts incurred in such succeeding taxable years. 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, 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 post-apportionment 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, 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). d. Carryforward rules when an S corporation acquires a C corporation . The following rules apply when an S corporation acquires a C corporation. 830 CMR 62.17A.2(8)(c)3.d is unrelated to the rules that apply to an S corporation merger or restructuring that results from the application of St. 2008, c. 173, relating to changes in entity classification under Massachusetts law. See 830 CMR 63.30.3: Entity Classification Under St. 2008, c. 173 . i. S corporation acquires a C corporation, elects QSub status for the acquired corporation. Where an S corporation acquires a C corporation and elects to treat the acquired entity as a QSub, the transaction is treated as a liquidation of the C corporation into the parent S corporation. In such a case, the net operating losses attributable to the former C corporation cannot be carried forward, and therefore are not available to the S corporation. ii. S corporation acquires a C corporation, with no QSub election. Where an S corporation acquires a C corporation and does not elect to treat the acquired entity as a QSub, the net operating losses attributable to the acquired C corporation continue to reside with and are available to the C corporation, to the extent otherwise allowed under Massachusetts law. 4 . Treatment of income derived from a Code § 338(h)(10) election. An S corporation that is subject to an election made under Code § 338(h)(10) recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction. The S corporation in such a case will make a final return for the period ending as of the close of the date of the sale. All income attributable to the deemed sale of assets is reportable by the S corporation as income subject to the entity-level excise under M.G.L. c. 63, §§ 32D and 39. (d) Rules specific to calculating the income measure excise for Category two income for financial institutions subject to M.G.L. c. 63, §§ 2B(a)(2) through (4). 1. General . An S corporation that is a financial institution and thus is subject to the entity-level tax under M.G.L. c. 63, §§ 2B(a)(2) through (4) must pay an excise on its Category two income if its total receipts for the taxable year are $6 million or more. It must calculate the income measure using 830 CMR 62.17A.2(8)(d)2. Financial institutions are not eligible to deduct losses incurred in prior years. 2. Rate of excise under M.G.L. c. 63, §§ 2B(a)(2) through (4). There are two rates that apply to the taxation of an S corporation’s Category two income taxable under M.G.L. c. 63, § 2B(a)(2) through (4): a. If the S corporation’s total receipts for the taxable year are $9,000,000 or more, the income measure rate is derived by subtracting the rate applicable to Part B taxable income for that year in M.G.L. c. 62, § 4(b) from the rate applicable to financial institutions in that taxable year in M.G.L. c. 63, § 2. b. If the S corporation’s total receipts for the taxable year are at least $6,000,000 but less than $9,000,000, the income measure rate is ⅔ of the rate set forth in the preceding paragraph, 830 CMR 62.17A.2(8)(d)2.a. 3. Treatment of income derived from a Code § 338(h)(10) election. An S corporation that is subject to an election made under Code § 338(h)(10) recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction. The S corporation in such a case will make a final return for the period ending as of the close of the date of the sale. All income attributable to the deemed sale of assets is reportable by the S corporation as income subject to the entity-level excise under M.G.L. c. 63, §§ 1 through 2B.