AAF NEWS FLASH

August 21, 2008

Governor Deval Patrick recently signed a revenue generating corporate tax reform bill that would close specific tax loopholes, as well as provide ease and simplicity to the corporate reporting structure of companies doing business in Massachusetts. The bill subjects more out of state businesses to Massachusetts taxes while gradually reducing the corporate tax rate. Most of these law changes are effective for businesses starting January 1, 2009. We, therefore, recommend that these changes be considered as part of the 2008 year end tax planning.

Some of the January, 2009 changes are as follows:

Combined Reporting:

Businesses with affiliated companies must now include the activity of related affiliates in the Massachusetts tax returns. Prior to this law, companies had the ability to shift Massachusetts income to affiliated companies with lower taxing jurisdictions in order to avoid higher Massachusetts taxes. Some examples of affiliated companies are brother/ sister corporations with related management and stock ownership and companies with a parent/subsidiary relationship.

"Check the Box" Rules:

If a non-corporate entity, such as a partnership or an LLC, elects to be taxed as a corporation for federal tax purposes, it must also be treated as a corporation for Massachusetts tax purposes.

S-Corporation Business Structure Changes:

Income from S-Corporations is normally passed on to the shareholder. If a business has gross receipts in excess of $6,000,000, then the S-Corporation is subject to an entity level tax (referred to as the "sting tax"). Over the years, various corporate structures have been set up to avoid the sting tax. The new law effectively abolishes these complex structures.

Massachusetts Business Trusts:

Massachusetts Business Trusts (MBT's) follow the federal rules for tax reporting. If an MBT is an S-Corporation for Federal tax purposes, then it will be an S-Corporation for Massachusetts tax purposes. The S-Corporation would be subject to the entity level sting tax if gross receipts exceed $6,000,000. Additionally, Massachusetts income from MBT's is passed on to the MBT's beneficial interests under the new act. In the past, the MBT would pay the Massachusetts state taxes on income passed on from the S-Corporation. Now the income must be passed on to the beneficial interest holder in the MBT, thus making the benefits of the MBT structure obsolete in most cases.

Disregarded Entities:

Pursuant to the new act, an entity that elects not to be treated as independent of its owner (such as a Foreign or Domestic Corporation), a Single Member Limited Liability Company, or Qualified Subchapter S-Corporation Subsidiary is no longer required to file separate Massachusetts tax returns to calculate the annual excise tax. The parent company will include all income, assets and activities of the disregarded entity on its Massachusetts return for purposes of calculating the Massachusetts income and excise taxes.

Corporate Tax Rate Reduction:

Effective 2010, the Corporate, S-Corporation Sting, and Financial Institution tax rates will gradually decrease annually down to 8%, 2.7%, and 9% respectively through 2012.

If you would like more details about these aspects or any other aspect of the new law, please call us at 508-366-9100.

Sincerely,

Your Friends at Alexander, Aronson, Finning & Co.

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You are receiving this information because you are a valued client or friend of AAF. Please contact Angela Balter by e-mail (abalter@aafcpa.com) or phone (508-366-9100) if you would prefer not to receive this publication.

Any tax advice contained in this e-mail was not intended or written by the practitioner to be used (and cannot be used) by the taxpayer to avoid penalties that may be imposed under the Internal Revenue Code or state or local tax law provisions