Massachusetts updates 2021 return for FAS 109 deduction

Massachusetts has updated its 2021 Corporate Excise Tax Return to include the so-called FAS 109¹ deduction originally allowed by tax reform legislation enacted in 2008 but repeatedly delayed by subsequent legislation. This deduction was approved in 2008 for certain publicly held companies as part of Massachusetts legislation that lowered the corporate excise tax rate and adopted mandatory unitary combined reporting for tax years beginning on or after Jan. 1, 2009. A publicly held company must have filed an electronic statement by July 1, 2009, to be eligible for the deduction.

Background

On July 3, 2008, Massachusetts enacted major tax reform legislation, an Act Relative to Tax Fairness and Business Competitiveness (“the Act”).² Under the Act, for tax years beginning on or after January 1, 2009, a corporation engaged in a unitary business³ with one or more corporations subject to combination must calculate its taxable net income in accordance with combined reporting.⁴ The term unitary business “is to be construed to the broadest extent permitted by the United States Constitution.”⁵

Under Sec. 95 of the Act, if the combined reporting requirement for unitary businesses resulted in an increase to a combined group’s net deferred tax liability, the combined group may be entitled to a FAS 109 deduction.⁶ The FAS 109 deduction is allowed for publicly traded companies whose financial statements were prepared in accordance with GAAP, as of July 3, 2008.⁷ The term “publicly traded company” is defined as “a company whose stock is publicly traded; a privately held company that issues publicly traded debt is not eligible for the FAS 109 deduction.”⁸ As originally enacted, the deduction was scheduled to be available over a seven-year period beginning in 2012.⁹ The purpose of the FAS 109 deduction was to lessen the financial impact of change in reporting from a separate company basis to a combined basis.

To claim the future FAS 109 deduction, the principal reporting corporation must have electronically filed a statement with the Massachusetts Department of Revenue on or before July 1, 2009.¹⁰ This statement cannot be amended unless the taxpayer obtains information that would lower the deduction amount. It is compulsory for the taxpayer to report any changes that would reduce the amount of the FAS 109 deduction.

Claiming the FAS 109 deduction

The most recent delay of the FAS 109 deduction was provided by the budget for the 2016 fiscal year.¹¹ The implementation of the FAS 109 deduction was delayed for five years, from 2016¹² to 2021, and the time over which a company may claim the deduction was increased from seven to 30 years.¹³

For tax reporting years beginning on or after Jan. 1, 2021, the Department has updated Massachusetts Form 355U: Excise for Taxpayers Subject to Combined Reporting, Schedule U-E to include Line 24 for the FAS 109 deduction. This deduction only may be taken by eligible taxpayers that filed the FAS 109 Deduction Statement in 2009. The amount of the deduction is one-thirtieth of the amount reported on the 2009 statement, subject to verification by the Department.¹⁴ The financial statement impact amount reported on the 2009 statement must be apportioned to reflect the impact attributable to Massachusetts using the corporation’s current year Massachusetts apportionment percentage.

Eligible taxpayers must complete and submit Schedule TDS, Taxpayer Disclosure Statement, with their tax return to substantiate the FAS 109 deduction.¹⁵ A detailed worksheet must be attached to Schedule TDS to show the calculation of the FAS 109 deduction. Schedule TDS must be submitted for each year in which the FAS 109 deduction is claimed.¹⁶

Note that the FAS 109 deduction cannot reduce taxable income below zero.¹⁷ Any amount in excess cannot be used as a deduction and cannot be carried forward. For this reason, the deduction for FAS 109 should be applied before any other allowable deductions in determining taxable income. No portion of the FAS 109 deduction can be counted in generating a net operating loss in the current tax year.

Commentary

Massachusetts repeatedly delayed implementing the FAS 109 deduction since its original inception in 2008, but the deduction is now available to certain taxpayers, as reflected in the Department’s updated corporate excise tax form. For tax years beginning on or after Jan. 1, 2021, eligible taxpayers who filed an electronic statement in 2009 to report the financial statement impact resulting from the change from separate to combined reporting in Massachusetts will need to ensure proper documentation and records for each year in which a deduction is claimed. Documentation should include the amount originally calculated in 2009, the amount allowable for each tax reporting year (one-thirtieth), and the Massachusetts apportionment percentage for the current year. There is a possibility that the mechanics of the FAS 109 deduction may cause further financial statement impact. If a taxpayer originally recorded the benefit, but did not receive the full benefit because some of the deduction was not usable, the taxpayer should assess whether an adjustment of the deferred tax asset is necessary. Taxpayers should remain alert to any future legislation or administrative guidance that may impact the FAS 109 deduction in Massachusetts.

1 Although the provisions of FAS 109 were moved into the Accounting Standards Codification as ASC 740, Massachusetts legislation and related Massachusetts Department of Revenue guidance refer to the deduction using this superseded term.
2 Ch. 173 (H.B. 4904), Laws 2008.
3 “Unitary business” is defined as “the activities of a group of 2 or more corporations under common ownership that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts.” MASS. GEN. LAWS ch. 63, § 32B(b)(1).
4 MASS. GEN. LAWS ch. 63, § 32B(a).
5 Id.; Technical Information Release 08-11: An Act Relative to Tax Fairness and Business Competitiveness, Massachusetts Department of Revenue, Aug. 19, 2008.
6 “Net deferred tax liability” means the net increase in deferred tax liabilities minus the net increase in deferred tax assets of the combined group, as computed in accordance with GAAP, that would result from combined reporting.
7 Ch. 173 (H.B. 4904), Laws 2008, § 95.
8 Technical Information Release 08-11: An Act Relative to Tax Fairness and Business Competitiveness, Massachusetts Department of Revenue, Aug. 19, 2008.
9 Ch. 173 (H.B. 4904), Laws 2008, § 95(2).
10 For further details on what should have been included in the electronic filing, see Technical Information Release 09-8: Claiming the FAS 109 Deduction for Publicly Traded Companies, Massachusetts Department of Revenue, May 28, 2009. The “principal reporting corporation” is the taxable member of the combined group that is either the combined group’s common parent corporation, or where this no such common parent corporation or this parent corporation is not a taxable member of the combined group, the taxable member of the combined group reasonably expected to have the largest amount of Massachusetts taxable net income on a recurring basis. The principal reporting corporation agrees to act as the agent for the taxable members of the combined group for all tax matters relating to the combined group. MASS. REGS. CODE tit. 830, § 63.32B.2(11)(a).
11 Ch. 46 (H.B. 3650), Laws 2015.
12 Prior legislation had delayed the beginning of the deduction to 2016.
13 Ch. 46 (H.B. 3650), Laws 2015; Technical Information Release 15-12: Tax Changes in the Fiscal Year 2016 Budget, Massachusetts Department of Revenue, Oct. 28, 2015.
14 Form 355U, 2021 Schedule U-E Instructions.
15 Id.
16 Id.
17 Id.

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