Understanding the Massachusetts Corporate Excise Tax
C corporations operating in Massachusetts are subject to a unique form of corporate excise that includes both an income measure and a net worth-based tax. Importantly, this net worth tax applies to a company’s Massachusetts apportioned taxable net worth, not its total net worth. This distinction matters significantly for companies with operations spread across multiple states.
Massachusetts assesses an excise tax of 0.26% on the corporation’s Massachusetts apportioned net worth. As a result, companies that report book losses may still owe material excise taxes, particularly if they maintain sizeable cash balances at year end. For VC backed companies that have recently raised capital, this can lead to unexpected tax exposure.
A Strategic Solution: The Massachusetts Securities Corporation (MSC)
One planning strategy commonly used in Massachusetts is the formation of a wholly owned subsidiary classified as a Massachusetts Securities Corporation (MSC) under Massachusetts General Law (M.G.L.) c. 63 Section 38B.
An MSC receives a favorable tax treatment: its net worth is excluded from the parent corporation’s taxable net worth for Massachusetts excise tax purposes. This exclusion arises from Massachusetts statute, not from any change in Generally Accepted Accounting Principles (GAAP) accounting. The parent’s consolidated net worth does not decrease when cash is transferred to the MSC; rather, the state simply does not include the MSC’s assets in the parent’s net worth tax base.
To utilize this structure, a company forms an MSC and transfers excess cash into the subsidiary, where it must be invested in qualifying securities. Because the MSC’s net worth is excluded from the parent’s apportioned net worth calculation, the parent’s net worth tax liability may be significantly reduced or eliminated.
Why MSCs Matter for Venture Capital (VC)-backed Companies
VC backed companies often close large funding rounds late in the year, increasing their balance sheet cash and, in turn, their Massachusetts apportioned net worth. Even with low or no net income, this can yield a meaningful excise tax obligation.
For example, a company that completes a $20 million fundraising round may see its taxable net worth jump materially. Depending on its Massachusetts apportionment percentage, this can produce excise tax liabilities ranging from modest to tens of thousands of dollars. These dollars reduce runway, delay hiring plans and divert capital from core development.
By moving excess capital into an MSC and ensuring the subsidiary meets all qualification requirements, companies can free up those dollars for strategic initiatives instead of paying avoidable state taxes.
Compliance and Operational Considerations
While MSC benefits can be substantial, companies should understand the compliance framework:
Qualification Requirements
To maintain MSC status under Massachusetts law, the subsidiary generally must:
- Derive at least 80% of its income from qualifying investment activities
- Invest assets in qualifying securities under M.G.L. c. 63 Section 38B
- Maintain a separate bank account, books and governance structure
Costs and Administrative Items
- Formation and Legal Costs: Typically, $5,000 – $10,000
- Governance: Distinct records, separate tax filings and in some cases a separate board
- Cash Management: Funds can be moved back to the parent as needed, provided the MSC continues to meet its qualification tests; no quarterly requirement exists in statute
- Interaction With Tax Credits: Companies benefiting from significant MA research and development (R&D) tax credits may already offset much of their excise liability, potentially reducing the incremental value of an MSC
Is an MSC Right for Your Business?
For VC backed and high growth companies with material year end cash balances and significant Massachusetts apportionment, an MSC can be a highly effective tax planning strategy. However, the decision should be based on a holistic evaluation of:
- Massachusetts apportionment percentage
- Net worth tax exposure
- R&D tax credits (if applicable)
- Setup and compliance costs
- Long term cash management practices
Your Guide Forward
If you’re evaluating whether an MSC structure aligns with your tax strategy, Cherry Bekaert’s tax professionals can help assess the benefits, analyze your apportionment exposure and guide you through formation and compliance.
Contact us today to explore how this approach can strengthen your runway and optimize your Massachusetts tax position.
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