(3) General rules.

(a) Relationship between federal S corporation provisions and Massachusetts law. While Massachusetts taxation of S corporations and their shareholders has many parallels to the federal rules that apply income tax to S corporations and their shareholders, Massachusetts has distinct rules that apply to shareholders under the personal income tax provisions of M.G.L. c. 62, and that apply to the corporate entity under the corporate excise provisions of M.G.L. c. 63. Under Massachusetts law, S corporation shareholders pay an income tax determined by the income of the S corporation, and in many cases the S corporation itself is subject to a separate tax at the entity level. These two taxes are separate and distinct obligations, and payment of one is not a substitute for payment of the other. (b) S corporation shareholder-level taxation. The taxation of S corporation shareholders for Massachusetts personal income tax purposes under M.G.L. c. 62 is generally modeled on the federal rules that apply to S corporations under the Code. S corporation income, losses, deductions, and allowable credits are calculated by the entity using rules set forth under M.G.L. c. 62, but then these items are passed through to shareholders as their distributive share. The obligation to pay tax on a shareholder’s distributive share exists whether or not the entity actually makes a distribution of the income to its shareholders. Non-resident shareholders of S corporations that are doing business in Massachusetts are also obligated to pay an income tax on their distributive share, as determined under 830 CMR 62.5A.1: Non-Resident Income Tax . Shareholders are subject to tax on their distributive share income irrespective of whether the S corporation is subject to an entity-level tax under M.G.L. c. 63. (c) S corporation entity-level taxation. The application of the entity-level taxation provisions of M.G.L. c. 63 varies depending on the entity type. S corporations are most commonly taxable under M.G.L. c. 63, §§ 39 and 32D. An S corporation that is a financial institution is subject to the separate tax provisions under M.G.L. c. 63, §§ 2, 2A, and 2B. An S corporation that is a security corporation is subject to the entity-level excise under M.G.L. c. 63, § 38B. For general exclusions from taxation under M.G.L. c. 39, and 32D, see M.G.L. c. 63, § 68C. In every case, the S corporation’s entity-level taxation under M.G.L. c. 63 is separate from the S corporation’s shareholder-level taxation under 830 CMR 62.17A.2(3)(b). (d) Issues that affect an S corporation that is subject to taxation on its income at both the shareholder and the entity level. The taxation of S corporation income under the personal income tax provisions of M.G.L. c. 62 and the entity-level provisions of M.G.L. c. 63 is similar in that both statutes derive their definition of gross income from the Code. Also, certain rules that apply to determine income may be applicable both for purposes of shareholder taxation and for purposes of entity-level taxation. Due to statutory differences between M.G.L. c. 62 and M.G.L. c. 63, however, gross income determined under M.G.L. c. 62 may differ from gross income determined under M.G.L. c. 63. 830 CMR 62.17A.2 generally evaluates rules for shareholder taxation under M.G.L. c. 62 in separate sections from rules that apply to an S corporation’s entity-level taxation under M.G.L. c. 63. Where practical or necessary, a rule may be stated twice, under the shareholder-level taxation rules, and again under the entity-level taxation rules. A statement or example identifying a rule in one part of 830 CMR 62.17A.2, for example under the M.G.L. c. 62 provisions, but not repeated in another part, for example, the M.G.L. c. 63 provisions, should not be read to imply that the rule is not applicable in both places. (e) Tax credits that are available under both M.G.L. c. 62 and M.G.L. c. 63. There are certain tax credits that are available both to M.G.L. c. 62 and to M.G.L. c. 63 taxpayers. No credit may be applied against both the entity-level and the shareholder-level tax. An available credit amount may not be divided, with part being used at the corporate level and another part being passed through to shareholders. An S corporation that is eligible for such credits must choose in each taxable year that it generates a credit whether the credit is to be passed through to its shareholders under the provisions of M.G.L. c. 62, or instead to be applied against the S corporation’s corporate excise under M.G.L. c. 63. Once an S corporation has made this choice for a given taxable year through its filings and reporting to shareholders, that choice is binding with respect to the credit amount attributable to that taxable year. Any unused credit amount from that year must carry forward to the extent allowable with regard to the statutory credit at issue, and be taken in future taxable years either by the shareholders or by the entity according to the original filings and reporting of the taxable year in which the credit was generated. 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. (f) Taxable year . 1. S Corporation’s taxable year for entity-level taxation. Massachusetts generally follows the relevant federal income tax rules for purposes of the determination of an S corporation’s taxable year for purposes of the S corporation’s entity-level taxation under M.G.L. c. 63. An S corporation that adopts or elects a taxable year under the provisions of the Code is deemed to have adopted or elected the same taxable year for Massachusetts purposes. 2. S Corporation shareholder’s taxable year. An S corporation shareholder’s taxable year is defined in M.G.L. c. 62, §§ 1, 62. A shareholder of an S corporation shall take into account the shareholder's distributive share of items of income, loss, deduction, or credit for the shareholder's taxable year in which the taxable year of the S corporation ends. 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 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 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. 3. Taxable year accounting in the case of a decedent shareholder. In filing a return on behalf of a shareholder of an S corporation who dies before the end of the S corporation's taxable year, the filer shall take into account the shareholder's distributive share of the S corporation's items of income, loss, or deduction by multiplying those items by a ratio of the number of days to the date of death to the number of days in the year. Upon the death of an S corporation shareholder, the estate may be treated as a successor shareholder under the provisions of Code § 1361(b)(1)(B). An estate shareholder in an S corporation shall account for its distributive share of income, loss, or deduction of the S corporation from the date of death. (g) Accounting method. The accounting method applicable to S corporations with respect to calculating tax liability under M.G.L. c. 62, including the distributive share of income of its shareholders, is the method detailed in M.G.L. c. 62, § 62. The accounting method applicable to S corporations with respect to calculating tax liability under M.G.L. c. 63, is the method of accounting that the S corporation has adopted or elected under the provisions of the Code. (h) Relation to former corporate trusts that are now S corporations. Prior to tax years beginning on or after January 1, 2009, Massachusetts applied special rules for the taxation of certain S corporations that were treated in Massachusetts as corporate trusts, under the now-repealed M.G.L. c. 62, § 8. In particular, the corporate trust’s income generally was taxed at the entity level and not passed through as taxable income to the shareholders. The separate taxation rules for corporate trusts were repealed in Massachusetts with the passage of St. 2008, c. 173, § 19, generally effective for taxable years beginning on or after January 1, 2009. St. 2008, c. 173, § 101. As a result, distributive share income of S corporations that were formerly taxed under M.G.L. c. 62, § 8 is subject to shareholder-level tax in Massachusetts notwithstanding the legal form of the entity’s organization.