CCH Tax Day Report
Legislation has been enacted that adds a personal income tax deduction for taxpayers who purchase an interest in, or contribute to, a Massachusetts prepaid tuition or college savings program. The legislation also makes numerous changes to corporate excise and personal income tax credits, including the Economic Development Incentive Program (EDIP) credit, the low-income housing credit, the historic rehabilitation credit, the certified housing development credit, and the community investment credit. In addition, the legislation creates an angel investor credit for personal income taxpayers who invest in qualifying small businesses. Finally, the legislation eliminates the deduction for tuition payments by nonresidents to a college in which the taxpayer or the taxpayer’s dependent is enrolled.
Prepaid Tuition and College Savings Program Deduction
The prepaid tuition and college savings program deduction is $1,000 for a single taxpayer, a married taxpayer filing a separate return, or a taxpayer filing as head of household. The deduction is $2,000 for married taxpayers filing a joint return. A deduction may be recaptured if a distribution or a refund is made in a taxable year for a reason other than to pay qualified higher education expenses or the beneficiary’s death, disability or receipt of a scholarship. If a taxpayer transfers ownership of a prepaid tuition contract or savings trust account, the transferee will succeed to the tax attributes associated with the prepaid tuition contract or savings trust account, including carryover and recapture of a deduction. The deduction is effective for taxable years beginning on or after January 1, 2017 through the tax year beginning on January 1, 2021.
The EDIP credit may be awarded by the Economic Assistance Coordinating Council (EACC) to any corporate excise or individual taxpayer that owns, leases or has the power to direct the operation or management of all or a portion of a Massachusetts facility at which the taxpayer proposes an economic development project that will result in new or retained full-time jobs. If the taxpayer has at least 1 existing facility in Massachusetts, then the EDIP project must be an expansion of, and not merely the replacement of, an existing facility. If the expansion facility is located in a gateway municipality or an adjacent city or town that is accessible by public transportation to residents of a gateway city, the taxpayer must retain at least 50 permanent full-time jobs at the facility that otherwise would be relocated outside Massachusetts. A municipality is a “gateway municipality” if the population is greater than 35,000 and less than 250,000, the median household income is below the state’s average, and the rate of educational attainment of a bachelor’s degree or above is below the state’s average. The taxpayer must maintain new and retained jobs for a period of at least 5 years after project completion. The project must be economically feasible and the taxpayer must have the financial and other means to undertake and complete the project. Unless the project will be located in a gateway municipality, a taxpayer’s duly authorized representative must certify that it would not have undertaken the project but for the EDIP tax credits and local tax incentives.
A taxpayer that has been awarded EDIP credits and that intends to claim those credits for tax years beginning on or after January 1, 2016 must enter into an EDIP contract setting forth the amount of the credits awarded, the amount of credits claimed or carried over, and the taxpayer’s job creation obligations. Any taxpayer that fails to enter into an EDIP contract acceptable to the Massachusetts Office of Business Development on or before December 31, 2016 will forfeit the credits.
Credit amount.— The EDIP credit is equal to 50% of a taxpayer’s corporate excise or personal income tax liability. The 50% limitation does not apply if the credit is designated as refundable by the EACC. A credit of $5,000 is available for each permanent full-time employee retained at a facility in a gateway municipality.
The total dollar amount of credits that may be authorized by the EACC in a calendar year is $30 million as reduced by refundable credits granted during the year, nonrefundable credits granted during the year to the extent those credits are estimated to offset tax liabilities during the year, and credit carryforwards from previous years to the extent that those carryforwards are estimated to offset tax liabilities during the year. Credits for certified housing development expenses are not included in determining the annual EDIP credit cap.
Carryforward provisions.— Unused credits may be carried forward for up to 10 taxable years. However, a taxpayer may not apply the credit to tax liability for a taxable year beginning more than 5 years after the project ceases to qualify for the credit. In addition, the EACC may limit or restrict the carryover of credits.
Recapture provisions.— If the EACC revokes the certification of a project, a portion of the tax credit claimed by the taxpayer before the date of revocation must be added back on the taxpayer’s return for the taxable period in which the EACC makes its determination. The amount of credits subject to recapture is proportionate to the taxpayer’s compliance with the job creation requirements for the project. The taxpayer’s proportion of compliance is determined by the EACC as part of its revocation process and must be reported to the taxpayer and the Massachusetts Department of Revenue (DOR) at the time that certification is revoked.
Transfer provisions.— If a project is sold or otherwise disposed of by the taxpayer, the EDIP tax credit may be transferred to the purchaser of the project. However, the EDIP contract must be assigned to and assumed by the purchaser of the project. The assignment and assumption also must be approved in writing by the EACC.
Angel Investor Credit
Taxpayers who invest up to $125,000 each year in a qualifying business may claim a credit against personal income tax liability for 20% of their investment up to a maximum of $50,000 in a calendar year. The credit is 30% of an investment made in a business located in a gateway municipality. There is a $250,000 investment cap for each qualifying business.
A “qualifying business” means a business with:
– its principal place of business in Massachusetts;
– 50% or more of its employees located in the business’s principal place of business;
– a fully developed business plan that includes long-term and short-term forecasts and contingencies of business operations, including research and development, profit, loss and cash flow projections and details of angel investor funding;
– 20 or fewer full-time employees at the time of the taxpayer investor’s initial investment;
– a federal tax identification number; and
– gross revenues equal to or less than $500,000 in the fiscal year before eligibility.
Investments in venture capital funds, hedge funds or commodity funds with institutional investors and investments in a retail, real estate, professional services, gaming, or financial services business do not qualify for the credit.
The angel investor credit may be taken in either the tax year of the initial investment or in any of the following 3 taxable years. Unused credits may be carried forward by the taxpayer investor for up to 3 taxable years. If the qualifying business ceases to have its principal place of business in Massachusetts within that 3 year period, the taxpayer investor cannot claim any additional credits and must repay the total amount of credits claimed.
The Massachusetts Life Sciences Center will authorize, administer and determine eligibility for the angel investor credit and award the credit with the goal of creating and maintaining jobs, including digital e-health, information technology and healthcare jobs. The annual cap on all angel investment credits is $25 million.
The low-income housing credit is expanded to include a credit for real or personal property donated to a tax exempt nonprofit organization that has control over the purchase, construction, or rehabilitation of a qualified Massachusetts low-income housing project and that is a certified Massachusetts Community Development Corporation or Organization, or that is determined to have a history of successful development of affordable housing projects in Massachusetts. The total low-income housing tax credit available to a taxpayer for a qualified donation is equal to 50% of the donation’s value. Unused credits are nonrefundable, but may be carried forward for up to 5 taxable years.
Historic Rehabilitation Credit
The Massachusetts historical commission is directed to ensure that criteria for awarding historic rehabilitation credits allows a taxpayer that acquires a qualified historic structure to receive any tax credits for qualified rehabilitation expenditures previously awarded to the transferor if:
– the rehabilitation was not placed in service by the transferor;
– the DOR has verified that no credit has been claimed by anyone other than the acquiring taxpayer;
– the taxpayer completes the rehabilitation and obtains certification; and
– the taxpayer conforms with all other credit requirements.
Certified Housing Development Credit
The certified housing development credit is increased from 10% to 25% of the costs of qualified substantial rehabilitation expenditures. The credit carryforward available to taxpayers or transferees with unused credits is increased from 5 to 10 taxable years after the taxable year in which the Massachusetts Department of Housing and Community Development (DHCD) gave the DOR written notification of completion for the certified housing development project.
Community Investment Credit
A community development corporation cannot receive an additional allocation of community investment credits until the DHCD has determined that it has made satisfactory progress toward using any previous credit allocation. The credit may be claimed by taxpayers that make cash contributions of $1,000 or more to community development corporations that partner with residents and stakeholders to implement an investment plan for improving economic opportunities for low and moderate income households and other residents in urban, rural, and suburban communities across Massachusetts.
Ch. 219 (H.B. 4569), Laws 2016, effective January 1, 2017 and as noted