Massachusetts is known for many things, one of which unfortunately is taxes. Let’s face it, a nickname like “Taxachusetts” didn’t just make itself up. However, whether this reputation is deserved is up for debate.
On a comparative basis Massachusetts is right in the middle of other New England states with a corporate tax rate of 8%. While neighbors Maine and Vermont offer a graduated rate structure, the tax rate in these states can quickly reach 8.33% and even 8.99%. Taken with New Hampshire’s 8.2% rate, this leaves Massachusetts looking reasonably attractive.
Further, unlike Maine and New Hampshire, Massachusetts does not impose a corporate alternative minimum tax. The alternative minimum tax system runs parallel to the regular tax system and is designed to ensure taxpayers pay in at least a minimum level of taxes annually by disallowing certain deductions and recalculating the tax owed. Taxpayers then pay in the higher of regular or alternative minimum tax.
While the above seems straightforward, Massachusetts does throw a wrench into our comparison. In addition to corporate income tax, the state applies either a tangible property or net worth tax. The determination of which is applicable is based on the percentage of taxable tangible property to total assets. In the event this ratio exceeds 10%, the tangible property tax applies. If the reverse is true, the net worth tax applies. Each tax is calculated at $2.60 per $1,000 of taxable tangible property or net worth, as applicable, and cannot be less than $456.
After taking into account this additional tax, some may argue that the New England corporate tax pool has been leveled. However, it is important to note that for purposes of the tangible property tax the depreciated book value of the assets is used as the base and any assets subject to local property tax, such as buildings, are exempt from the calculation.
This exemption also applies to the net worth calculation, as businesses can deduct the value of locally taxed tangible property from net worth. Additionally, companies may deduct the value of a subsidiary of which it owns more than 80% of the voting stock. This rule presents an opportunity, in the right circumstances, for a taxpayer to shield invested capital from the net worth tax through the use of a security corporation. These entities are not subject to the net worth tax, instead paying a gross income tax of 1.32% or $456, whichever is greater. Though advantageous to a small group of businesses, a security corporation can be ideal for a corporation which is about to go through a large fundraising or initial public offering.
Evaluating Massachusetts at the face value of its corporate income tax would not offer a full picture of business taxes. Since 1980 the number of businesses organized as passthrough entities in the United States has tripled, whereas the number of corporations has declined. In fact, 60% of net business income in America is earned through sole proprietorships, S corporations and partnerships.1
Unlike corporations which are subject to entity level tax, the net income of passthrough entities is taxed at the investor level as earned. In Massachusetts, individual income is taxed at 5.1%. Individual rates in the remainder of New England vary between 3% and 8.95%. Many are based on a graduated scale and quickly exceed that of Massachusetts.
If a Massachusetts business is organized as a partnership, only the individual rate above is applicable. However, in the case of an S corporation there is a catch, the Massachusetts “sting” tax. S corporations with gross receipts of $6 million are subject to a corporate excise tax on net income at 1.93%. If gross receipts exceed $9 million that percentage is increased to 2.90%.
There are a myriad of other factors that could be taken into consideration, including property and sales tax, state credits, and government economic development programs. Taxes are only one component of an attractive business environment and should not be the determining factor in business decisions. Massachusetts has a lot to offer with its commitment to business investment, world-renowned universities and robust health care industry. The true cost of doing business in Massachusetts cannot be easily whittled down by simple math; however for some, the math doesn’t paint as bad a picture of Massachusetts as generally accepted.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.