Massachusetts: United States

Massachusetts gives corporations a research credit against the corporate excise for qualified research performed in the Commonwealth. It follows the federal definitions, offers both a regular and an alternative simplified computation, and is distinctive for the limit on how much of the excise it can offset in a year and for a long carryforward of the amount that limit defers. It is claimed on Schedule RC with the corporate excise return and administered by the Department of Revenue.

Overview

Who can claim

Business corporations subject to the corporate excise, including members of combined groups, which compute the credit on a combined basis. The credit is not available against the personal income tax, so pass-through entities and their owners do not benefit. Massachusetts adopts the federal definition of qualified research and qualified research expenses, including the four-part test and the exclusions, limited to research performed in Massachusetts. No application or pre-certification is required.

Rate and calculation

Under the regular computation the base amount follows the federal method with Massachusetts figures: a fixed-base percentage multiplied by average annual gross receipts for the four preceding years, subject to the 50% floor. Under the alternative simplified computation the credit is 10% of the excess of current Massachusetts QREs over half the average of the three preceding years, or 5% of current QREs where there were no QREs in one of those years. The limit is then applied: the first US$25,000 of excise can be fully offset, and 75% of the remainder, so a company always pays at least 25% of its excise above US$25,000 in the year, with the deferred credit carried forward without time limit.

Illustrative example. Charles River Devices, a hypothetical corporation, has Massachusetts QREs of US$1,500,000 and a three-year average of US$1,000,000. Its excise before credits is US$125,000.

Had the excise been US$60,000, the limit would be US$25,000 plus 75% of US$35,000 = US$51,250; US$51,250 of credit would be used and US$48,750 carried forward indefinitely.

How to claim

1. Filter the federal workpapers for research performed in Massachusetts.
2. Choose the regular or alternative simplified computation; the election of the alternative method is made on the return.
3. Complete Schedule RC and attach it to the corporate excise return, due on the 15th day of the fourth month after year end for most corporations, or on extension.
4. Apply the limit and track two carryforward schedules: the 15-year amount and the indefinite amount.
5. Keep the records; the Department of Revenue can examine within its limitation period, generally three years from filing.

Working with the federal claim

The state claim is built from the federal workpapers, not alongside them. Each business component in the Section G schedule carries a location, and the state qualified research expenses are the federal QREs for components, employees and contractors located in Massachusetts. Two points of difference need their own working. The state base uses state figures, so prior-year Massachusetts QREs and, where the method needs them, Massachusetts gross receipts must be kept as a separate series from the federal ones. Where Massachusetts adopts the Internal Revenue Code as of a fixed date, federal changes after that date, including the section 174 and 174A deduction rules, may not apply for Massachusetts purposes, and the state deduction for research expenses may differ from the federal one.

Examinations are separate. The Department of Revenue can examine the state credit under its own procedures and limitation period whether or not the IRS examines the federal claim, and it will ask for the same things: the business components, the evidence for each part of the four-part test, the basis of the wage allocations and the location of the work. A single set of records, organised by business component with a location field, answers both.

Common questions

Can we claim the Massachusetts credit without claiming the federal credit? Yes, where the state computation stands on its own, although the definitions are federal and the workpapers are the same, so claiming one without the other is unusual.

Our researchers work remotely from several states. Which state's QREs are they? Wages are allocated by where the employee performs the research, so remote staff need location records as well as project time records. Work performed outside Massachusetts is outside the Massachusetts credit even if the employee is on Massachusetts payroll.

Can an amended return add the Massachusetts credit for a past year? Generally yes within the state refund period, which is noted above; elections that the state requires on the original return cannot be added later.

Does a state credit affect the federal payroll tax offset? No. The federal payroll tax election is independent of any state credit, and a qualified small business can use both.

Related pages

• State credits and the federal computation
• The federal methods the Massachusetts computations follow
• Which costs are QREs
• Advisor and Practitioner Program: United States track