(5) Shareholder Basis in S Corporation Stock or Indebtedness.

(a) S corporation shareholder basis in S corporation stock, in general. An S corporation shareholder’s basis in the S corporation’s stock is generally determined by taking into account the provisions of the Code, including, without limitation, §§ 1012, 1014, 1015, and 1367, except as modified by statute or regulation, or other public written statement. As more specifically explained in 830 CMR 62.17A.2(5) and (6)(concerning the effect of S corporation distributive share and distributions on a shareholder’s basis in the S corporation’s stock), a shareholder’s basis is generally increased by the shareholder’s distributive share of the S corporation’s income and is generally decreased by distributions from the S corporation to the shareholder. (b) Initial basis adjustment in shares to account for periods before the enactment of St. 1986, c. 488, § 39. Shareholders of entities that were S corporations for federal purposes before the recognition in Massachusetts of S corporation status in 1986 were required to adjust their stock basis to reflect the difference in basis that resulted from federal S corporation basis adjustments for pre-1986 taxable years, which adjustments would have been inapplicable in Massachusetts during the pre-1986 period. See 830 CMR 62.17A.1(8). Entities to whom this adjustment applies must use the rules in St. 1986, c. 488, § 39, as codified at M.G.L. c. 62, § 17A, and in 830 CMR 62.17A.1(8). (c) Current Basis Adjustments. A shareholder’s Massachusetts basis in the stock of an S corporation must be adjusted at least annually to the extent that the S corporation's items of income, loss, or deduction are included in the shareholder's computation of income taxable under M.G.L. c. 62 for the taxable year. Items of income, loss, or deduction are calculated under M.G.L. c. 62, and thus may differ from income, loss or deduction as calculated under the Code for federal purposes. Once items of income, loss, or deduction are determined under Massachusetts law, a shareholder must apply the rules at Code § 1367, which state the mechanics for determining current basis adjustments, to determine Massachusetts basis adjustments on accounts of such items. 1. Effect on basis of certain federal deductions that are disallowed in Massachusetts. Certain items are deductible by an S corporation for federal purposes when calculating distributive share income and are not deductible when calculating distributive share income under M.G.L. c. 62. In cases where a federal deduction is not allowed in Massachusetts, the federally-allowed deduction that results in a decrease in basis in a shareholder’s stock for federal purposes will also result in a decrease in basis of a shareholder’s S corporation stock for Massachusetts purposes. 2. Effect on basis of certain federal deductions where Massachusetts permits a similar deduction, but on a different schedule. Certain items that are deductible by an S corporation for federal purposes when calculating distributive share income represent amounts for which Massachusetts generally allows a deduction, but on a different schedule. In such a case, the federally-allowed deduction that results in a decrease in basis in a shareholder’s stock for federal purposes will not result in a decrease in basis of a shareholder’s S corporation stock for Massachusetts purposes. To illustrate, as stated in 830 CMR 62.17A.2(4)(h)1., Massachusetts personal income tax provisions are decoupled from the federal bonus depreciation rules at Code § 168(k). The depreciation amount represents an expenditure that is capitalized for both federal and state purposes and recovered over time, but on a different schedule for federal and state tax purposes. The taking of the bonus depreciation deduction at the federal level will not result in a decrease in the Massachusetts basis in shares for an S corporation shareholder. Instead, basis for Massachusetts purposes will be adjusted based on the depreciation timetable permitted under Massachusetts law. See M.G.L. c. 62, § 2(d)(1)(N). (d) Transfers of stock or indebtedness. In a transaction in which the basis of the stock or indebtedness to the transferee carries over from the transferor, the adjustments and modifications to Massachusetts basis described in 830 CMR 62.17A.2(5) and (6) as to any part of a shareholder’s interest in such stock or indebtedness of the S corporation continue to apply. (e) Special rules for adjustment to basis in indebtedness. An S corporation shareholder may have made loans to the S corporation and in such a case will have a basis in his or her interest in the indebtedness to the S corporation. Massachusetts generally follows the federal rules for adjustment to basis in indebtedness under Code § 1367(b)(2). See also Treas. Reg. § 1.1367-2. However, to the extent that there are federal and Massachusetts differences in calculating income or loss, see 830 CMR 62.17A.2(4)(h), that would have an effect on the basis adjustment, an S corporation shareholder’s basis in an S corporation’s indebtedness may differ from his or her federal basis. (f) Special rules for shareholders in S corporations that were formerly taxed as corporate trusts under the repealed M.G.L. c. 62, § 8. Certain S corporations were formerly taxed as corporate trusts under M.G.L. c. 62, § 8, which has been repealed. See St. 2008, c. 173, § 19. The relevant tax provisions of M.G.L. c. 62, § 8 last applied to corporate trusts for tax years beginning on or before December 31, 2008. Shareholders of S corporations that were formerly taxed under the repealed provisions of M.G.L. c. 62, § 8 are required to make a basis calculation as to their shares for periods commencing on the first day the entity became subject to taxation under M.G.L. c. 63, following the rules in 830 CMR 63.30.3(3)(d)4.a. (which applies particularly to the treatment of tax-free earnings and profits of the former corporate trust). Shareholders of an entity that formerly was treated as a corporate trust under M.G.L. c. 62, § 8, but that was simultaneously an S corporation for federal income tax purposes will often have a Massachusetts basis in their shares that differs, possibly significantly, from their federal basis. See 830 CMR 63.30.3(4)(a)2.