Income Not Subject to Massachusetts Income Tax

(a) Duty in the armed forces. Compensation paid by the United States of America to its servicemembers for services rendered on active duty, including members of the Army, Navy, Air Force, Coast Guard and Marines who are assigned to a military airbase, naval station, or any facility, public or private, in Massachusetts, to which they must report under service orders.

(c) Certain income of foreign citizens. Massachusetts source income received by a non-resident who is a citizen of a foreign country, which income is excluded from federal gross income under an income tax treaty or convention to which the United States is a party. Massachusetts source income not excluded from federal gross income by the treaty or convention and that is included in federal gross income is subject to Massachusetts income tax.

(d) Certain Pension income . Income from any contributory annuity, pension, endowment or retirement fund of the United States Government or the Commonwealth or any political subdivision thereof, to which the employee has contributed.

(e) Qualified pension income , as set forth in 4 U.S.C. § 114, or other provision of federal law that would preclude such income from being subject to Massachusetts tax, which includes any distribution received by the taxpayer from:

1. a qualified trust under section 401(a) of the Code that is exempt from taxation under section 501(a) of the Code; 2. a simplified employee pension as defined in section 408(k) of the Code; 3. an annuity plan described in section 403(a) of the Code; 4. an annuity contract described in section 403(b) of the Code; 5. an individual retirement plan described in section 7701(a)(37) of the Code; 6. an eligible deferred compensation plan as defined in section 457 of the Code; 7. a governmental plan as defined in section 414(d) of the Code; 8. a trust described in section 501(c)(18) of the Code; 9. any plan, program, or arrangement described in section 3121(v)(2)(C) of the Code, under the conditions provided in 4 U.S.C. § 114.

(f) Federal preemption. Any other income that is the subject of federal preemption on state taxation. This includes income of: certain seafarers and fishers, as set forth at 46 USC § 11108, or its successor; certain employees of interstate rail carriers, as set forth at 49 USC, § 11502, or its successor; certain employees of motor carriers, as set forth at 49 USC § 14503, or its successor; certain employees of air carriers who regularly perform duties on an aircraft, as set forth at 49 USC, § 40116, or its successor.

(5) Rules for Allocation or Apportionment of Income to Massachusetts for Non-Resident Individuals Working in Massachusetts

When a non-resident earns or derives income from sources both within Massachusetts and elsewhere, the taxpayer must either allocate or apportion the income to determine the amount of Massachusetts source income, using the following apportionment provisions. These rules apply to non-resident individuals working in Massachusetts. Non-resident members of pass-through entities use the rules at 830 CMR 62.5A.1(6). The Commissioner may by rule or other public statement create alternate allocation and apportionment methods. (a) Employees Compensated on an Hourly, Daily, Weekly or Monthly Basis . When a non-resident employee is able to establish the exact amount of pay received for services performed in Massachusetts, that amount is the amount of Massachusetts source income. When no exact determination of amounts earned or derived in Massachusetts is possible, the income of employees who are compensated on an hourly, daily, weekly or monthly basis must be apportioned to Massachusetts by multiplying the gross income, wherever earned, by a fraction, the numerator of which is the number of days spent working in Massachusetts and the denominator of which is the total working days. The result is the amount of the non-resident's Massachusetts source income. Total working days does not include days in which the employee was not required to work, such as holidays, sick days, vacations, and paid or unpaid leave. When a working day is spent working partly in Massachusetts and partly elsewhere, it will be treated as a day spent working in Massachusetts, unless the non-resident can prove that he or she worked outside Massachusetts for more than half the day.

Example (5)(a)(1.1). An auditor living in Providence, Rhode Island is employed by an accounting firm in Boston at an annual salary of $ 66,000. The auditor is considered to have a trade or business including employment carried on in Massachusetts. He works a total of 240 days during the year. He works on audit engagements in Rhode Island and Connecticut on 160 days of the year and works 80 days in Boston. His Massachusetts source income is $ 22,000, calculated as follows:

$66,000 x _____ 80_______ = $22,000

240

Example (5)(a)(1.2). A telecommuter works for a Massachusetts firm, mainly out of her home in Ohio. The telecommuter works a total of 240 days during the tax year, and is in Massachusetts on 60 of those days. Her salary is $120,000 per year. Her Massachusetts source income is $30,000, calculated as follows:

$120,000 x _____ 60_______ = $30,000

240

Example (5)(a)(1.3). In some cases, a non-resident flight crew member, such as a pilot or flight attendant, may be subject to taxation in Massachusetts. The general apportionment rules at 830 CMR 62.5A.1(5)(a) do not adequately measure a flight crew member's activities in the state. Using the authority stated in 830 CMR 62.5A.1(5), the Commissioner has by rule created an alternate allocation and apportionment method, as follows. When a flight crew member is unable to establish the exact amount of pay received for services performed in Massachusetts, the employee should apportion his or her income to Massachusetts by multiplying the gross income related to his or her employment, wherever earned, by an apportionment factor, that is, a fraction, the numerator of which is Massachusetts workdays and the denominator of which is total workdays. For purposes of this example, a Massachusetts workday is any workday that a flight crew member flies out of Massachusetts. For workdays on which a flight crew member does not fly out of Massachusetts, the general rule at 830 CMR 62.5A.1(5)(a) applies, and any day part of which is spent in Massachusetts will be treated as a Massachusetts workday, unless the taxpayer can prove that he or she worked outside of Massachusetts for more than half the day. The term "total work days" is the sum of all days that an employee is either flying or is required to be on duty (non-flight workdays).

(b) Employees Compensated on a Mileage Basis . The amount of Massachusetts source income of an employee whose wages are based on mileage is determined by multiplying the employee's Massachusetts gross income, determined as if the non-resident were a resident, by a fraction, the numerator of which is the employee's total mileage traveled in Massachusetts and the denominator of which is the employee's total mileage upon which the employer computes total wages.

(c) Salespersons . The amount of Massachusetts source income of a salesperson or other employee whose compensation is based in whole or in part upon commissions is determined by multiplying the Massachusetts gross income, determined as if the non-resident were a resident, by a fraction, the numerator of which is the dollar amount of sales made within Massachusetts and the denominator of which is the dollar amount of sales everywhere. The determination of whether sales are made within Massachusetts or elsewhere is based upon where the salesperson performs the activities in obtaining the order, not the location of the formal acceptance of the contract.

(d) Self-Employed Non-Residents Carrying on a Trade or Business in Massachusetts and Elsewhere .

1. General rule . The non-resident must report on the return the gross income of the trade or business, wherever derived, and apportion that income in the same manner as employees apportion income under either 830 CMR 62.5A .1(5)(a), (b) or (c), whichever applies. In the following examples, the non-resident is considered to have a trade or business including employment carried on in Massachusetts: Example (5)(d)(1.1). A non-resident surgeon is called in from New York to perform tests and surgery at a Boston hospital. The surgeon spends six days performing the tests and surgery in Boston and is paid $50,000. The entire $50,000 is income subject to the Massachusetts income tax. Example (5)(d)(1.2). A non-resident carpenter is contracted by a Vermont resident to remodel her Vermont home and perform other work as needed. The carpenter works a total of 90 days remodeling the house. As part of the contract, the carpenter works for 45 additional days repairing the Vermont resident's Massachusetts vacation house. The carpenter is paid a total of $ 21,000 for his services under the contract. His Massachusetts source income from this contract is $ 7,000, calculated on the following basis: $ 21,000 x 45 (days worked in Massachusetts) (total income) ____________________________ = $ 7,000 135 (total working days) 2. Other situations - Three factor apportionment . If none of the formulas described in 830 CMR 62.5A .1(5)(a) - (c) is applicable to the apportionment of a non-resident's trade or business income, then the amount of Massachusetts source income is determined based upon the three-factor formula for apportioning a corporation's income under G.L. c. 63, § 38 and the definitions applicable to that formula. The following three factors must be determined: a. Property factor . The average value of the taxpayer's real and tangible personal property owned or rented, and used in the taxpayer's business in Massachusetts, divided by the average value of all the taxpayer's real and tangible personal property owned or rented everywhere, and used in the taxpayer's business during the tax year. The average value of property is determined by averaging the values at the beginning and at the end of the tax year. b. Payroll factor . The total wages, salaries and other personal service compensation paid during the tax year to employees in connection with the trade or business carried on within Massachusetts divided by the total of such wages and compensation wherever earned and paid. c. Sales factor . The gross sales in Massachusetts, or gross receipts derived from activities in Massachusetts, divided by the total gross sales or charges everywhere. The above three factors must be carried out to four decimal places. The apportionment percentage is a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four. The resulting figure is then multiplied by the entire net income of the trade or business, wherever derived. The result is the Massachusetts source income. d. In a case where only two of the foregoing three factors are applicable, the Massachusetts source income is determined by multiplying the entire net income of the business by a fraction, the numerator of which is the remaining two factors with their respective weights and the denominator of which is the number of times that such factors are used in the numerator. If only one of the three factors is applicable, the Massachusetts source income is determined solely by that factor. A factor will not be deemed to be inapplicable merely because the numerator of the factor is zero. A factor will not be applicable if the denominator of the factor is less than ten percent of one third of the entire net income or if it is otherwise determined to be insignificant in producing income.

(e) Entertainers and Professional Athletes not Members of a Professional Athletic Team . The Massachusetts source income of non-resident entertainers and professional athletes who are not members of a professional athletic team is the entire amount received for performances, engagements or events that occurred in Massachusetts. If the entertainer or athlete is not paid separately for each Massachusetts event, then the following apportionment formula must be used. The income earned and subject to the Massachusetts income tax is the total annual compensation derived from performances, engagements, or events multiplied by a fraction, the numerator of which is the number of performances or events the entertainer or athlete performed (or was available to perform, as, for example, with understudies) in Massachusetts, and the denominator of which is the total number of performances or events that the entertainer or athlete was obligated to perform during the tax year.

Example (5)(e)(1.1) . A non-resident entertainer performs for three evenings at Symphony Hall in Boston and earns $ 100,000. The entire $ 100,000 is income subject to Massachusetts income tax.

Example (5)(e)(1.2) . A non-resident professional dancer earns an annual salary of $50,000. She dances in all 40 of her dance company's performances during the tax year, 20 of which took place in Massachusetts. The income subject to tax in Massachusetts is $ 25,000, calculated by multiplying $ 50,000 by 20/40.

Example (5)(e)(1.3). A non-resident professional tennis player plays in one tournament in Massachusetts during the tax year. She spends six days in Massachusetts and earns $75,000 in winnings from the tournament. The entire $ 75,000 income is subject to Massachusetts income tax.

(f) Allocation and Apportionment for non-residents who have income attributable to a period of Massachusetts residence. Non-residents who have income attributable to a period during which they were residents are taxable only on income from sources within Massachusetts, which includes items of gross income derived from or effectively connected with any trade or business, including any employment carried on by the taxpayer in Massachusetts. Because taxpayers were residents and thus subject to 100% allocation of income during the period to which the current income is attributable, the non-resident receiving such income may allocate or apportion it according to 830 CMR 62.5A.1(5) if the income was attributable to more than one jurisdiction during the year it was earned. A taxpayer asserting this right must document all factors used in calculating the Massachusetts source income under 830 CMR 62.5A.1(5). In the absence of such documentation, the presumption will be that 100% of the income for that year is allocated to Massachusetts. For allocation and apportionment rules for income derived from the sale of a business or an interest in a business, see Example (3)(c)(8.2).

Example (5)(f)(1). Taxpayer lived in Massachusetts in 2005 and worked for a single corporation in both Massachusetts and Connecticut during that year. In 2006, Taxpayer moved to Florida. In 2008, Taxpayer receives income that is attributable to her work for that corporation in 2005. Taxpayer has no apportionment percentage available for 2005, because Taxpayer was a resident and subject to 100% allocation of income. Taxpayer is unable to establish the exact amount of pay received for services performed in Massachusetts. Taxpayer can, however, prove through documentation that she worked 50% of her working days in Massachusetts and 50% in Connecticut. The Massachusetts source income is the amount of the payment attributable to 2005 multiplied by the resulting apportionment percentage of 50%.

(6) Rules for Allocation or Apportionment of Income to Massachusetts for Non-Resident Members of Pass-Through Entities

A pass-through entity that earns or derives income from sources both within Massachusetts and elsewhere must either allocate or apportion the income to determine the amount of Massachusetts source income of its non-resident members, using the following allocation and apportionment provisions. These rules apply to pass-through entities with non-resident members that have Massachusetts source income. Non-resident individuals use the rules at 830 CMR 62.5A.1(5). The Commissioner may by rule or other public statement create alternate allocation and apportionment methods.

(a) General. A pass-through entity that has income that is taxable both within and outside of Massachusetts must report the member's apportioned share of income to the member. To arrive at the apportioned income figure, the pass-through entity must multiply its taxable net income by the apportionment percentage determined under G.L. c. 63, § 38 and 830 CMR 63.38.1. For taxable years beginning on or after January 1, 2025, the apportionment percentage is equal to the sales factor except as otherwise required under G.L. c. 63, § 38. For Massachusetts purposes, the pass-through entity's income subject to apportionment is its entire net income derived from its related business activities, as that term is defined at 830 CMR 62.5A.1(2), and further described at 830 CMR 62.5A.1(6)(d), within and outside of Massachusetts. The entity's income subject to Massachusetts tax is its apportioned net income derived from its related business activities, plus any other income subject to the tax jurisdiction of Massachusetts. Guaranteed payments made to pass-through entity members are treated as other income of the pass-through entity is treated, and are subject to the apportionment rules in this paragraph.

(b) Treatment of multiple pass-through entities engaged in a unitary business. If a pass-through entity has Massachusetts source income and is related to one or more other pass-through entities in a unitary business, including non-Massachusetts businesses that are in a unitary relationship, the entire income derived from the related activities of the members of the unitary business is subject to Massachusetts apportionment. The method of apportionment is to take the pro rata share of the applicable apportionment factor or factors of each entity in the unitary structure, and to aggregate the result for the entire group. The non-resident members will report as Massachusetts source income their apportioned share of income of the entire unitary business.

Example (6)(b)(1.1) . In a taxable year beginning before January 1, 2025, General Partnership (General) has a 50% interest in Subsidiary Partnership (Subsidiary); the entities are engaged in a unitary business. General has the following apportionment factors attributable to Massachusetts, presented as a fraction of Massachusetts activity divided by activity everywhere: Property, 25/100; Payroll, 50/100; Sales, 1000/10,000. General has income of $1,000. Subsidiary has the following apportionment factors, presented as a fraction of Massachusetts activity divided by activity everywhere: Property, 10/100; Payroll, 50/100; Sales, 1000/10,000. Subsidiary has a loss of $500. The Massachusetts income of the unitary group is calculated as follows: Income = $1,000 (General's income) - $250 (representing half the loss of Subsidiary; half because General has a 50% interest in Subsidiary) = $750. The $750 income figure must be multiplied by the blended apportionment factors. The blended factors are determined by adding the full factor of General to half the value of Subsidiary's factors (again, because of the 50% ownership). Thus the blended property factor is (25 + 5)/(100 + 50) = 30/150; the blended payroll factor is (50 + 25)/(100 + 50) = 75/150; the blended sales factor (to be counted twice according to the double weighted sales factor rule) is [(1000 + 500)/(10,000 + 5,000)] = 1,500/15,000; the sum of these factors is then divided by four to yield the following result: .2 + .5 + .1 + .1 = .9 / 4 = .225.

Example (6)(b)(1.2) . Assume the same facts as in Example (6)(b)(1.1), except that the taxable year begins on or after January 1, 2025. In this case, the $750 income figure must be multiplied by the blended sales factor. The blended sales factor is determined by adding the full sales factor of General to half the value of Subsidiary's sales factor (again, because of the 50% ownership). Thus, the blended sales factor is [(1000 + 500)/(10,000 + 5,000)] = 1,500/15,000 = .1.

(c) Treatment of income derived from unrelated activities . If the unitary business subject to Massachusetts apportionment has income derived from unrelated business activities, as determined under 830 CMR 62.5A.1(6)(d), these items of income will be excluded from the taxpayer's taxable net income and will not be apportioned to Massachusetts if Massachusetts does not have jurisdiction to tax the items of income under the Constitution of the United States. Income derived from unrelated business activities will be allocated to Massachusetts when the entity's commercial domicile is Massachusetts. The unitary business must report to the non-resident taxpayer, and the non-resident taxpayer must disclose on his or her return, the nature and amount of any item of income that is derived from unrelated business activities and is excluded from (or is excludable from) taxable net income. The taxpayer must also disclose and exclude expenses allocable in whole or part to such unrelated business activities. Any property, payroll, or sales derived from unrelated business activity are excluded from the taxpayer's applicable apportionment factor or factors.

Example (6)(c)(1). In a taxable year beginning before January 1, 2025, Massachusetts LLC owns a commercial real estate property that it leases, both to its parent, a Partnership that gives investment advice to clients, and to other unrelated tenants. The Partnership, in turn, is owned by three Owner LLCs, all of which have a commercial domicile in other states. The Owner LLCs own the interests in the Partnership, as well as other business ventures, such as a manufacturing corporation in South Carolina and a public utility corporation in North Dakota. The manufacturing corporation and the utility corporation are not in a unitary business with other entities, nor do they have any contacts with Massachusetts. The Massachusetts LLC and the Partnership have centralization of management and a flow of value between the entities, and comprise a unitary business. In determining the Massachusetts source income of the Owner LLC members, the Massachusetts LLC and the Partnership must combine their taxable net income and calculate the Massachusetts apportionment percentage based on their combined property, payroll, and sales. The unitary business will exclude the income of the manufacturing corporation and the public utility corporation from this determination, and will not take into account any of the property, payroll, or sales of the two corporations in calculating the Massachusetts apportionment percentage of the unitary business.

Example (6)(c)(2). Assume the same facts as in Example (6)(c)(1), except that the taxable year begins on or after January 1, 2025. In this case, the Massachusetts source income of the Owner LLC members, the Massachusetts LLC and the Partnership is determined by combining their taxable net income and calculating the Massachusetts apportionment percentage based on their combined sales. The unitary business will exclude the income of the manufacturing corporation and the public utility corporation from this determination, and will not take into account any of the sales of the two corporations in calculating the Massachusetts apportionment percentage of the unitary business.

(d) Related Business Activities .

1. Definition . a. General Rule . Related business activities are activities where there is a sharing or exchange of value between the segments of a single entity or multiple entities such that the activities are mutually beneficial, interdependent, integrated, or such that they otherwise contribute to one another, as generally described under the discussion of the unitary business principle in Allied-Signal, Inc. v. Director, Division of Taxation , 504 U.S. 768 (1992). The rules that apply to corporations, found at 830 CMR 63.38.1(4), generally apply to pass-through entities as they are applicable, with certain modifications set forth in this regulation. In general, any two segments or activities of a single pass-though entity are related business activities unless the two segments or activities are not unitary. In addition, the following activities are related business activities notwithstanding the absence of a unitary relationship: i. the short term investment of capital in a non-unitary business segment or activity; and ii. any other investment of capital that serves an operational function. b. Income from Cash, Cash Equivalents, and Short-Term Securities. Interest or other income from cash deposits, cash equivalents, and short-term securities is considered related business income if such capital serves or performs an operational function. Without limitation, examples of operational functions include: the use or holding of funds as working capital or reserves; the use or holding of funds to maintain a favorable credit rating ( e.g. by maintaining a strong current or quick asset ratio); the use or holding of funds to self-insure against business risks; and the interim investment of funds pending their future use in the taxpayer's business. 2. Burden of Proof . Except as provided in 830 CMR 62.5A.1(6)(d)(3) (relating to pass-through entity limited partners), all income of a single pass-though entity (whether derived directly or through representatives, or other pass-through entities) is presumed to be income from related business activities until the contrary is established. Either the taxpayer or the Commissioner may assert that an item of a taxpayer's income is derived from unrelated business activities. The party making such an assertion must prove by clear and cogent evidence that the business activities do not reasonably warrant a finding that the business activities are related. To demonstrate that income from cash, cash equivalents, or short-term securities is derived from unrelated business activities, a taxpayer must prove by clear and cogent evidence that the underlying assets and their acquisition, maintenance, and management were, in fact, unrelated to the pass-through entity's business activities in the Commonwealth. 3. Presumption of Unrelated Business Activity of Pass-Through Entity Limited Partners . In cases where a pass-through entity limited partner owns no more than 50% of the capital interests of a partnership, income that the pass-through entity limited partner derives from the holding or disposition of its limited partnership interest is presumed to be unrelated to the pass-through entity's other business activities unless the Commissioner or the taxpayer rebuts this presumption, as provided (and applicable) in 830 CMR 63.39.1(8)(f). If the business activities of the pass-through entity limited partner and the limited partnership are unrelated, then the pass-through entity limited partner must separately account for its limited partnership income and its other business income and must separately apportion to Massachusetts income from each unrelated activity (to the extent that Massachusetts has jurisdiction to tax income from each such activity), using only the apportionment factor or factors applicable to that activity. Example (6)(d)(3.1) . Texas LLC owns a minority limited partnership interest in Partnership A. Partnership A conducts business in Massachusetts. Apart from this partnership holding, Texas LLC does not conduct business in Massachusetts. Texas LLC does conduct business in other jurisdictions, either directly or through ownership of other pass-through entities. Neither Texas LLC nor the Commissioner rebuts the presumption that the business activities of Texas LLC and Partnership A are unrelated. Texas LLC must separately apportion to Massachusetts income from the holding or disposition of its interest in Partnership A, using the apportionment factor or factors derived from the partnership's activity. Income from Texas LLC's other activities is not subject to Massachusetts tax jurisdiction and is excluded from the Massachusetts source income that it reports to its members.

(e) Special apportionment rules for the gain on the sale of an ownership interest in a partnership that holds real property in Massachusetts.

1. Partnerships that are carrying on a trade or business in Massachusetts . A non-resident partner who sells an interest in a partnership that both holds an interest in real property in Massachusetts and is carrying on a trade or business in Massachusetts is subject to the general rule at 830 CMR 62.5A.1(3)(c)(8), particularly as illustrated at 830 CMR 62.5A.1, Example (3)(c)(8.2). 2. Partnerships that are not carrying on a trade or business in Massachusetts . A non-resident partner who sells an interest in a partnership that holds an interest in real property in Massachusetts but is not carrying on a trade or business in Massachusetts should apply the following rule. The non-resident partner selling his or her interest in the partnership must multiply the gain by a fraction, the numerator of which is the value of the Massachusetts real property and the denominator of which is the total value of the partnership. The value of real property to be used in the fraction is the current fair market value of the property reduced by the value of any lien or encumbrance remaining thereon at the time the partner sells his or her interest in the partnership. Example (6)(e)(2). Non-resident is a partner in LandHold, a partnership that purchases land in several states and holds the land for subsequent sale to developers. The partnership was formed with an initial capital contribution from its partners, but was not engaged in the conduct of a trade or business in Massachusetts during the year that Non-resident sells his interest in the partnership. The Massachusetts source income derived from the sale is the total gain from the sale, multiplied by fraction set forth in 830 CMR 62.5A.1(6)(e)(2).