A lot of businesses are wondering how the recent changes in the Federal Coronavirus Aid, Relief and Economic Security Act (the CARES Act) will impact our state tax bill. States generally use federal taxable income as a starting point for calculating state taxable income. States also generally adopt the provisions of the Internal Revenue Code (IRC) on a rolling or fixed date basis. Even so, it isn’t always immediately clear how or when federal law changes become effective for state income tax.
Massachusetts issued a working draft Technical Information Release (TIR) covering how the CARES Act will impact corporate taxpayers in the Commonwealth. Highlights of the TIR:
The CARES Act provides loan forgiveness to small business loans made under the Paycheck Protection Program (PPP). For example, any amount of cancelled indebtedness that typically would be included in the gross income of the borrower is now excluded. Also, the CARES Act states that no deduction is allowed for an expense that is otherwise deductible if both the payment of the expense results in forgiveness of a PPP loan and the income associated with the forgiveness is excluded from gross income. Massachusetts will apply similar treatment for state corporate income tax.
The CARES Act modifies a provision of the IRC that limits the deductibility of business interest for businesses and corporations for tax years beginning December 31, 2017. This provision generally limited the deductibility of net interest expense to 30% of a taxpayer’s adjusted taxable income. Business interest is defined as any interest paid or accrued on debt that is “properly allocable to a trade or business” and does not include investment interest. The limitation does not apply to taxpayers with average gross receipts of less than $25 million over the preceding three taxable years. The CARES Act provides that for tax years 2019 and 2020 a taxpayer’s current year business interest deduction is increased to 50% of adjusted taxable income. Massachusetts will also allow the increased deduction.
The CARES Act made changes to the depreciable life of qualified improvement property (QIP); prior to the CARES Act it was 39 years but now QIP is assigned a 15-year depreciable life under the modified accelerated cost recovery system. This change was made to a provision that Massachusetts had already specifically decoupled from and the taxpayers must use the 39-year life for Massachusetts purposes.
In general, the deduction for charitable contributions by a corporate taxpayer cannot exceed 10% of the corporation’s taxable income. The CARES Act temporarily eases that limitation with respect to certain cash contributions made to charitable organizations during calendar year 2020. With regard to corporations, a deduction for 2020 cash contributions will be allowed in an amount up to 25% of the taxpayer’s taxable income less the amount of all other charitable contributions allowed. Massachusetts will follow this rule.
There’s a lot to keep up to date about these days. The fast pace of new information can seem overwhelming to businesses as they continue to move toward the “new normal.” Professional tax, accounting, audit and advisory firms can help businesses better navigate this evolving landscape.
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.
Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.