Massachusetts releases 163(j) working draft treatment

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November 2019

UPDATE: On December 18, 2019, the Department finalized the TIR with no substantive changes. TIR 19-17: Application of IRC § 163(j) Interest Expense Limitation to Corporate Taxpayers.

Overview

Massachusetts on October 3 released its Working Draft TIR - Application of IRC s. 163(j) Interest Expense Limitation to Corporate Taxpayers. The Draft Technical Information Release acknowledges that Massachusetts generally follows the federal IRC Sec. 163(j) limitation on the business interest expense (BIE) deduction.

The Draft TIR provides guidance on the application of IRC Sec. 163(j) to the Massachusetts corporation excise tax, including rules for (1) the general calculation and application of the BIE limitation to a business corporation in Massachusetts, (2) the calculation and application of the BIE limitation to a member of a Massachusetts combined group, (3) the carryforward of BIE, (4) the interaction of other Massachusetts limitations with the BIE limitation, and (5) examples illustrating these rules.

The Commissioner intends to promulgate regulations adopting the rules set out in the Draft TIR for corporate taxpayers.

The Massachusetts formal legislative session ended on November 20, with the House and Senate advancing different versions of the supplemental budget bill. Section 163(j) decoupling language was included in the House version but not in the Senate version. The legislature moves to informal session for six weeks where the two versions of the supplemental budget bill remain pending in a House-Senate Conference Committee to resolve differences between them. It is unknown at what time the versions of the bill will be resolved and whether Section 163(j) decoupling language will survive.

The takeaway

Massachusetts’ approach in calculating a state-level IRC Sec. 163(j) limitation is consistent with its general historical approach of determining and applying limitations on a separate-company basis.  In the context of a combined report, because the draft rules allow the application of one member’s excess BIE against another member’s unused BIE limitation, it is anticipated that a combined filer whose membership mirrors that of the filer’s federal consolidated return generally will be able to deduct the same amount of interest expense for Massachusetts purposes as is deducted for federal purposes.  

However, some differences may arise since Massachusetts may add back an interest expense paid to a related member that is allowed federally.  Moreover, the determination of ATI on a consolidated basis might result in a smaller federal BIE limitation (where the consolidated group is in a loss) than might be calculated on a separate-company basis for Massachusetts purposes.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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