Does Lacerte calculate Massachusetts D-IS & calculate the tax on Mass Qualified small business stock gains at 3%?

[madeleinerose]

For 2018 I have a federal gain exclusion for several QSBS sales. For Massachusetts these excluded gains need to be added back, however they do not appear to be without a Massachusetts override in  screen St Inc 50-191.  Further 2 of the transactions are Massachusetts QSBS and should be taxed at 3% and should show on Massachusetts Schedule D-IS line 25. I have checked the box in the schedule D input for Massachusetts qsbs.  I have contacted support and found that the issue is in "investigations"  I was hoping someone has a work around.

[George4Tacks · Accepted solution]

I just did a dummy return and it seems to work. Reading the F1 at the check box for MS QSBS is see the stock must be held 3 years or more. The gain shows on page 1 line 25, then page 5 line 27 as 3%

Check for the latest update

From F1

Massachusetts qualified small business stock MA Dispositions Screen 17; Code 1005

Select the box if the disposition is Massachusetts qualified small business stock.

Effective for tax years beginning on or after January 1, 2011, Massachusetts qualified small business stock is taxed at a rate of 3% instead of 5.1%. In order to qualify for the 3% rate, investments must have been made within five years of the corporation's date of incorporation and must be in stock that generally satisfies the definition of "qualified small business stock" under IRC Section 1202 (c), other than the requirement that the stock be stock of a C corporation. In addition, the stock must be held for three years or more and the investments must be in a corporation which (a) is domiciled in Massachusetts, (b) is incorporated on or after January 1, 2011, (c) has less than $50 million in assets at the time of investment, and (d) complies with certain of the "active business" requirements of Section 1202 of the Internal Revenue Code, i.e., Section  1202 (e)(1), (e)(2), (e)(5), and (e)(6).

[Nick D]

Somehow this is STILL an issue on Oct 13, 2021.  I prepared a dummy return with a QSBS transaction.  If there is only the single transaction I can get the MA D-IS to be prepared properly without overrides but the Federal taxation of the Sec 1202 transaction is wrong.  It appears as though the transaction has to appear as taxable on the Fed return in order to get the D-IS to prepare correctly.  Yes - the disposition is entered correctly with the MA box checked for QSBS.

Lacerte fail?

[JimS_1]

@Nick D @madeleinerose @George4Tacks 

I'm curious if anyone found any solution for this besides what folks have listed above.  

One caveat that I found:  I believe MA follows the IRC in effect as of 2005, thus there is no 100% exclusion, but there is a 50% exclusion of the QSBS gains (based on Sec 1202 in 2005).  That means that 50% of gains are taxable, and then (assuming the transaction meets the additional requirements of MA), the 50% gains are taxed at 3%.

If I'm right about this, I don't think there is a way to do this in Lacerte. 

Or maybe I'm completely off??

[Nick D]

I did and didn't find an answer.  Apparently Lacerte determines the MA tax differently than ProFx.  Ask 10 CPAs and get 10 different answers.  Some (including a regional firm partner) said zero %.  Some agreed with Lacerte's approach while others agreed with ProFx.  I'm assuming the are simply trusting their software.  MA will not comment.

I did find this basic guidance:

Sec. 1202 provides special treatment for the sale of “qualified small business stock” by noncorporate shareholders. Prior to the enactment of the Economic Development Reorganization Act, Massachusetts provided no such incentives. The act provides for Part C taxable income (generally, income from the sale of capital assets held for more than one year) to be taxed at 3% instead of 5.3% for investments that meet the following qualifications (MA Gen. Laws ch. 62, §4):

• The investment is in a corporation domiciled in Massachusetts;
• The corporation was incorporated on or after January 1, 2011;
• The corporation had assets of less than $50 million at the time of the investment; and
• The corporation complies with the active business requirement of Sec. 1202.

In addition, the investment must be made within five years from the date of incorporation and held for three years or more.

There is an important distinction between the federal and the Massachusetts provisions. While the federal reduction in the gain applies only to C corporations, the Massachusetts reduction in the tax rate also applies to S corporations.

[JimS_1]

Thanks for the reply @Nick D 

I reached out to the Rules & Regs Bureau of the DOR via email and received a response (within 10 days!  Much faster than anything I'd ever receive from IRS...) via letter that confirmed my understanding.  They summarized at the end that: "If your client meets the requirements under the Code and GL Chapter 62, Sec 4(c), there would be a 3% tax on 50% of the capital gains from the sale of qualifying stock".

So now I have to figure out a way to do this in Lacerte...  That may mean I have to prepare a duplicate client and use one to file federal with the 100% exclusion and one to file state while somehow finagling the Schedule D-IS to actually show the 50% capital gain to get just that portion taxed at 3%.   I'm sure I won't get it to exactly do this correctly, but as long as I get it to calculate using the right amount of cap gains I should be good.

Wish me luck!  🙂

[Nick D]

Kudos on good sleuthing!  I spent maybe 8 hours on the research including discussions with heavy hitters at regional sized firms, local CPE people who specialized in MA taxation, and of course other CPAs.  Each had a different answer to the question as do the big tax softwares like Lacerte who was not helpful at all with this issue.

Lacerte has it's limitations and the further away from TX you are the more obvious so workarounds are a regular piece of the puzzle.  I would force a US/MA difference so the tax comes out properly to your research.  If the net difference is zero does it really matter how you get there?  Lacerte is no help.