For C Corporations operating in Massachusetts, not only do they face a potential state income tax, but an obscure tax that taxes the “net worth” of the Company. As a result, even a Company that has losses could tend to pay a tax in the state. You see, Massachusetts assesses an excise tax of .26% of the year-end “net worth” of a Company. So, for companies with a large amount of cash on their balance sheet or that just raised a large round toward the end of the year, this can add up to tens of thousands of dollars in additional taxes.
A creative way to avoid this additional tax is to set up a wholly-owned corporation (a sub) that is a Massachusetts Securities Corporation, or MSC. This type of corporation (MSC) in Massachusetts is not taxed on its net worth. As a result, if a sub is formed and the cash on hand is moved into the sub’s separate bank account, the net worth tax can be eliminated. It is a requirement that the cash should be invested within low-risk investments within the parameters of MBL c 6338(b) and maintained in the subs tax I.D. bank account at year-end.
Of course, there are costs to maintain the sub and file the subsidiary annual returns. Legal fees to set up the sub can be in the $5,000-$10,000 range. In addition, if the Company has R&D credits in Mass., the net worth tax can be offset somewhat against this tax making the need for the MSC not as powerful. Separate books and records should be maintained, and usually, a separate Board of Directors is formed. Cash is usually transferred back up to the parent Corp quarterly for working capital needs.
For more information about the usefulness to you, feel free to reach out to a KN+S tax professional.
Jeffrey Solomon, CPA, CVA, Managing Shareholder at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.