Tuesday, June 15, 2021

Part 2 of 3: How Massachusetts Attempted to Tax S Corporations and Their Shareholders

Can Massachusetts reach that debt forgiveness income excluded from federal gross income and include it on the shareholder’s MA personal income tax return?  They said that they could because MGL Ch. 62C, §3 allows the commissioner to write regulations and rulings which are a proper interpretation of statute.  The legislature, however, granted that broad brush authority with an important limitation---it must not be inconsistent with law.  The commissioner has stated that this is so in Letter Ruling      08-11(7/7/2008)---“The Department of Revenue is an administrative agency charged with carrying out the laws of the Commonwealth…In doing so, the Department may issue rulings, but only such as are not inconsistent with law.”


Well, we know that the commissioner has disregarded the changes to the current federal Code (i.e. federal law), but does he have state law on his side?  Read on…


Under MGL Ch. 62, §2(a), the commissioner is allowed to modify applicable federal law to adjust for “(F) Amounts included in or considered to be Massachusetts gross income under any other provision of this chapter.”  Golly, that looks like a loophole which is big enough for a Mack truck!  Have they found something? 


The big problem for the Mass. Department of Revenue at this point is the clear language of a state regulation (written by the commissioner) CMR 62.17A.2(3)(b)…


“S corporation shareholder-level taxation.  The taxation of S corporation shareholders for Massachusetts personal income tax purposes under MGL Ch. 62 is generally modeled on the federal rules that apply to S corporations under the Code.”


Now, you would wonder, what part of that easy to understand language is unclear to those whose job it is to interpret state rules and regulations?  The Congress just gave us an update to the federal rules, so how can MA not follow or agree with the Congress?


Well, they apparently reasoned, we still have the upper hand.  We can add an adjustment to MA form 355S, Schedule S under Other Income (line 11) and now it will flow to each shareholder on Schedule SK-1, and when it lands (somewhere) on the state personal income tax return it will be taxed!  Problem solved.


That takes us to a new problem for the commissioner.  Is this inconsistent with law?  If it isn’t, cite the law which allows this adjustment.  This the commissioner has not done.  Instead, the department of revenue has cited their authority to write rules, but we have already seen that what they write must be lawful.  We were promised, in an FAQ which announced the commissioner’s position, that technical advice would follow.  You editor hasn’t seen it, nor does he expect to, because the state legislature stepped in and changed state law on how this income is taxed (or did it?---read on).


Now we fast forward to the MA legislature, which apparently wanted to exempt this income from taxation on one’s individual income tax return.  Newly enacted legislation (taken from the language in Senate Bill No. 35) – Section 23:


“…the following items shall be deducted from federal gross income for the purpose of determining Massachusetts gross income under section 2 of chapter 62 of the (Mass) General Laws…”


Let’s pause here and think about what they are saying.  MGL Ch. 62, Sec. 2 refers to the taxation of individuals.  The legislature is saying that there is something in federal gross income (i.e. debt forgiveness income) which “shall be deducted” in order to arrive at Mass. gross income, so they are following the reasoning of the Mass. Department of Revenue (it’s in there for personal taxation and we can tax it).


Then the newly enacted legislation says:  “…an amount which, but for this section, would be included in gross income, in whole or in part, of an eligible recipient, as described in subsection (a) of the [CARES] Act…”


Let’s pause again…The legislature is saying that the deduction shall apply to an eligible recipient.  We know what that means---someone who borrowed and then had the loan forgiven, because that is what the Congress said. 


Now we really have a problem because this new legislation does not extend the deduction from gross income to all of those whom the Mass. Department of Revenue proposes to tax---all individual shareholders.  The legislature has only extended a helping hand to those who completed a loan application and received a PPP loan, and our corporate shareholders didn’t do that.  Their corporate entity did that.


Are we skunked because the MA legislature did not forgive that individual shareholder “debt.”  They only forgave it for sole-proprietors.  Stay tuned, because next week we will give you the surprising answer…      

Tuesday, June 8, 2021

Part 1 of 3: How Massachusetts Attempted to Tax S Corporations and Their Shareholders

Back in the late 1970s, your editor wanted to test the boundaries of his newly minted graduate degree in taxation, so what better way to do so (thought he) than to sign-up for the annual tax seminar offered each year at Boston University.  This was strictly a tax lawyer presentation, so could I now follow it and read tax law with them?  To my delight, when I attended and started to follow the presentations it appeared that I could, thanks to my Bentley College training!


In the afternoon, there was a panel discussion of MA state taxation and whether or not the Commonwealth could reach beyond the water’s edge and tax the overseas income of international corporations which filed returns in MA.  The speaker was a deputy commissioner whose every word on taxation was closely followed and even referenced in CCH MA taxation material.  Absent a Code or MGL citation, he was cited as the authority because of a presentation he had made somewhere.


The deputy commissioner argued, yes we can tax beyond the water’s edge.  He was challenged by another panel member, the tax counsel for a major CPA firm, and a former MA Commissioner of Revenue.  The former Commissioner argued no you cannot, and provided a cite.  Well, thought I, this will be interesting but my little balloon soon burst when the deputy commissioner responded by saying…


                         What difference does it make, we are doing it!


You could hear a pin drop in that room, and the attention of the panel swiftly changed to another topic.  No one else had a word to say to the guy who made tax law in MA.


Some of you will remember one of our annual state tax update seminars when we held them in Sturbridge.  Fred Laskey became MA Commissioner of Revenue in 1991 and he attended one of our seminars and spoke about his plans for the revenue department.  He told us about a national survey which had been conducted to rank state departments of revenue and MA ranked dead last.  Commissioner Laskey pledged to reform things and do better.  Both he and his successors did just that, until now.


Are we falling back to the “old” way of doing things (what difference does it make, we are doing it)---read on and make up your own mind.


When the Congress first enacted the PPP (paycheck protection program) we were told that most employers would qualify for a $10,000 loan and that part or all of it might later qualify for debt forgiveness.  This looked like free money, so folks applied and sought our help with their applications.  And, it did prove to be so, the SBA was forgiving the debt and this really looked like free money.  Then the IRS stepped in (as they were required to do, so don’t fault them) and reminded us that debt forgiveness income is taxable.  IRC §61(a)(11).


Well, everyone was upset---how can this be, said they.  Yes, how can this be said the Congress???  It’s easy---you guys didn’t exempt or exclude it when you wrote the law, so the IRS is just reminding us that you wrote a failed attempt to pass on a free lunch.  Later, when the Congress enacted the CARES Act they decided to fix the problem and declared that their intent was for this to be tax free.  [CARES Act §1106(c) - Treatment of Amounts Forgiven].


The way that the Congress did this was simple.  They said that the amount of the forgiven loan shall be excluded from the gross income of an eligible recipient.  The Act carefully explains this---if you are either an individual or an entity who received the loan proceeds, the funds are not part of your gross income.  Gross income is what you start with.  Example (for an individual):


Wages…………………………………………………………………..$ 50,000

Debt forgiveness income……………………………………………… 10,000


Gross Income…………………………………………………………… 60,000


The Congress said that this eligible recipient (individual) now has:


Wages……………………………………………………………………$ 50,000


Gross Income……………………………………………………………$  50,000


Now you see it; now you don’t, said the Congress.  The $10,000 has disappeared---it has been EXCLUDED from the starting point, and this is what we meant to do the first time, when we got it wrong.  Now the Department of Revenue has a problem---the Congress made this income disappear, so how can they tax something which isn’t there (in the current federal tax Code).  Well, it doesn’t matter reasoned the Department, because individuals are taxed based on the federal tax Code in effect on 1/1/2005, and the Congress didn’t change that Code, so we can tax individuals who are shareholders of S corporations even though they did not borrow, nor did they receive the funds.  We have all the authority which we need under state statute to include this in S corporation pass-through income, so they didn’t change their position to conform with expressed Congressional intent.


                              What does it matter, we are doing it.


Can they do that (ignore the Internal Revenue Code) and pass-through the income to an S corporation shareholder.  Stay tuned because next week we will give you the answer to that important question.

Wednesday, April 7, 2021

Application Period for Wavemaker Reopens

The application period for the Wavemaker Fellowship has reopened. 

The Wavemaker Fellowship is available to graduates who have incurred student loan debt during the completion of an associate degree, bachelor's degree, or graduate degree, and are pursuing careers in science, technology, engineering, mathematics, or design-related fields -- including life, natural or environmental sciences; computer, information or software technology; advanced mathematics or finance; engineering; industrial design or other commercially related design field; or medical or medical device technology in the state.

Any resident or nonresident with higher education loan debt who is employed in Rhode Island in one of the fields mentioned above is encouraged to apply. The maximum annual Rhode Island tax credit awarded under the Wavemaker program is $6,000 for graduate degree holders, $4,000 for bachelor's degree holders, and $1,000 for holders of an associate degree. All applications must be submitted by midnight, May 4, 2021, for consideration.

For more details on the Wavemaker program, click here and here.

Friday, April 2, 2021

Recent Legislative Changes to Support Massachusetts Taxpayers


Some important, recent legislative changes will have an impact on Massachusetts taxpayers. The changes affect the treatment of unemployment income and Paycheck Protection Program [PPP] loan forgiveness. Additionally, the individual income tax filing and payment deadline was recently extended.
We have updated the FAQs covering these changes and will continue to add to them with new information to answer taxpayer questions. A Technical Information Release with updated guidance will be issued soon.
Unemployment Income Deduction
For tax years 2020 and 2021, taxpayers with household income under 200% of the federal poverty level may deduct up to $10,200 of unemployment income per person. Review the chart on our FAQ page for detailed information on the deduction. Please note that the income threshold for Massachusetts taxpayers is different from the federal income threshold. Some Massachusetts taxpayers may be eligible for a deduction on their federal tax return but not on their Massachusetts tax return. 

The taxpayer does not have to do anything. Any taxpayer who claimed unemployment income on their 2020 return will be contacted directly by DOR by mail with information. DOR will handle any calculations to determine if a refund is due to a taxpayer. If a taxpayer is entitled to a refund, a check will be mailed after satisfying liabilities. There’s no need to file an amended tax return.

If a taxpayer who received unemployment income has not yet filed a 2020 return, all unemployment income should be reported on the return [line 8a for residents or line 10a for
nonresidents/part-year residents], and if eligible for a deduction, the deduction amount should be reported on line 9 of Schedule Y.

PPP Loan Forgiveness
Recent legislation excludes forgiven PPP loan amounts from gross income for Massachusetts personal income taxpayers for 2020. Learn how income from PPP loans is treated by reviewing the FAQs on the DOR website.

New extended deadline for individual income tax filing and payment
A reminder that the deadline for filing and paying 2020 Massachusetts individual income tax was extended from April 15 to May 17, 2021. This change is addressed in FAQs.

Tuesday, March 30, 2021

Important message from MA DUA

Please be aware of current scams. Massachusetts residents have received text messages and emails that include a link requesting claimants enter their login and password on a site that looks similar to UI Online. If you have received such a message, please do not respond. 

Responses to requests from DUA should only be uploaded through your secure account at https://uionline.detma.org/Claimant/Core/Login.ASPX or  https://ui-cares-act.mass.gov/PUA/_/. DUA will never ask you to reply to a text or email with your personal information.

DUA takes fraudulent claims seriously and we are working closely with state and federal law enforcement agencies to protect claimants’ information. We want to assure you that there is no evidence of a state data breach.

The following considerations are suggested to help you protect your online profiles and account information.

  • As part of our online security protocol we recommend that you check your UI profile information often (at least 1x per week) this includes your logon, password, name, contact information. Change your information back and report any discrepancies or changes not made by you immediately to DUA by calling (877) 626-6800

  • When checking your UI profile, pay close attention to your payment selection to be certain the payment type and / or account information is correct

  • Be alert to any unknown email sources containing links. Never click on a link unless you are expecting one or you know the sender and recognize the email address – this may be a phishing scheme to obtain access to your computer

  • Create security credentials that you will remember but are hard for others to guess. Do not give your security credentials to ANYONE – DUA will never contact you asking for that information

  • Report any changes or suspicious activity involving your UI claim immediately to DUA by calling (877) 626-6800

  • Monitor communications from DUA often in case you receive a message that a change has been made to your account or to make you aware of an ongoing scheme that has affected claims or warnings from other UI agencies

  • DUA WILL NOT ask you to verify your eligibility for unemployment benefits, or for personal information by email, phone or text message. If you receive an email, phone or text message and you are unsure if it came from DUA, contact us by calling (877) 626-6800

  • If you believe someone is using your identity to falsely claim unemployment benefits, please complete our secured form at www.mass.gov/unemployment-fraud to alert us.

Here's some common unemployment scam techniques to watch out for.