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How to maximize the Massachusetts Investment Tax Credit (ITC)

Nov 21, 2017

The Massachusetts tax code provides a 3% tax credit on new machinery and equipment purchased by certain corporations. The Massachusetts Investment Tax Credit (ITC) is a valuable credit for manufacturers, but without careful planning the credit can be minimized or eliminated even if the corporation purchased eligible machinery and equipment. This credit is used against the Massachusetts corporate excise tax. It is not a refundable credit but can be carried forward for three years. The corporations eligible are manufacturers, certain research and development corporations, and corporations engaged in agriculture or commercial fishing.    

A couple of factors impact the calculation used for the ITC. One factor is the use of Sec 179 on the corporation’s federal income tax return, which is the election to expense capitalized assets. Any assets where Sec 179 is utilized will not be allowed for the state ITC calculation. The state considers those assets expensed and not capital assets for purposes of the credit. For example, if a corporation purchased $100,000 in new machinery and elected to expense using Sec 179 on its federal income tax return, its ITC would be zero. If the corporation took MACRS depreciation, the entire $100,000 would be eligible for the credit and the amount would be $3,000. Regular tax depreciation has no impact on the ITC.

The de minimis safe harbor election has also had an impact on the Massachusetts ITC. The election allows for the expensing of any items $5,000 or less for corporations with audited financial statements, and $2,500 for all others. While on many accounts this simplifies what has to be capitalized, by expensing those items that might have otherwise been capitalized, the corporation would not be eligible for the ITC for those assets it expensed under this election.

It is important not to overlook the ITC and to balance the use of Sec 179, which only creates a timing difference when the deduction is allowed. Sec 179 just allows for the write off of that asset in one year rather than 5 to 7 years. That election to take all the depreciation in one year eliminates completely the ITC. The de minimis safe harbor is a useful election but must be looked at more carefully when a corporation is eligible or the ITC. 

Contact us if you would like further information on whether the Massachusetts ITC could benefit your company.

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