Massachusetts excise tax is composed of two measures—an income base and a tangible property base. The classification of leases for excise tax purposes could have a significant impact on the total corporate state tax liability.
Financial Accounting Standards Board accounting standards for leases - ASC 842 has recently been modified and requires capital and operating leases in excess of one year to be capitalized on the entity’s balance sheet. This requirement, effective for taxable years beginning after December 15, 2021, raised questions as to the classification of such leases for state excise tax purposes.
The calculation of the nonincome measure of the Massachusetts excise tax is dependent on whether an entity has more or less than 10% of its tangible property situated in the state and not taxed locally. A “tangible property” corporation with 10% or more of its tangible property in Massachusetts would calculate its nonincome measure based on the book value of tangible property in the state. An “intangible property” corporation with less than 10% of its tangible property in the state would calculate the nonincome tax measure based on the corporation’s net worth. These calculations are dependent on the classification of leases on the corporate balance sheet.
The Massachusetts Appellate Tax Board has determined in past cases1 that the distinction between the two types of corporations focuses partly on financial accounting concepts that are based on Generally Accepted Accounting Principles (GAAP). Under current GAAP rules, all leases, previously classified as operating leases and capital leases, should be considered intangible assets. The Massachusetts Department of Revenue (DOR) has recently issued a working draft of a Technical Information Release characterizing leases as intangible property for purposes of the corporate excise tax. If you believe this change in law affects how your assets are or could be categorized, please reach out to a Ryan tax professional today for assistance.
1 Eaton Financial Corporation v. Commissioner, Mass. ATB Findings of Fact and Report 2000-526, 536 (July 20, 2000). Web Industries, Inc. & Web Converting, Inc. v. Commissioner, Mass. ATB Findings of Fact and Report 1999-122 (March 26, 1999).
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