Savvy Massachusetts Companies Receiving Outside Financing Should Consider This Tax Planning Opportunity Before Year-End

Massachusetts corporations receiving large cash infusions from equity investors may be surprised to find that the mere act of depositing the cash into their bank account can trigger thousands of dollars in excise taxes, whether they generate taxable income. Massachusetts Security Corporations (“MSCs”) can be used to solve this problem.

How Can My Company Owe Tax Without Any Income?

Massachusetts imposes a corporate tax consisting of two separate components:

An income tax (currently 8%), and
An excise tax, assessed at 0.26% on the greater of a corporation’s tangible personal property or net worth, regardless of profitability.

This net worth excise tax frequently catches early stage and growth stage companies off guard—particularly those that raise capital late in the year.

Example

Assume the following scenario: ABC Corp. receives $10 million of outside equity financing during its first tax year. The company spends $1 million on deductible operating expenses. Year end balance sheet reflects $9 million of cash and $9 million of equity

Tax impact:

Income tax
$1 million tax loss × 8% = $0
Excise tax
Property measure: $0 × 0.26% = $0
Net worth measure: $9,000,000 × 0.26% = $23,400

Total Massachusetts tax liability: $23,400

Surprised to find a company that incurs $1M in tax-deductible losses is subject to a tax bill in excess of $23,000? You are not alone.

Is There a Solution?

Yes. Companies expecting large “net worth” excise taxes should consider transferring cash to a wholly owned Massachusetts Security Corporation. This tax vehicle is not subject to the Massachusetts net worth tax. In our previous example, utilizing an MSC would have reduced ABC Corp’s tax liability from $23,400 to $456 (the minimum excise tax), resulting in almost $23,000 in tax savings!

How Do I Utilize a Massachusetts Security Corporation?

Establish a Massachusetts Security Corporation, as defined under M.G.L. c. 63, § 38B, that is wholly owned by ABC Corp.
Transfer cash, not required for immediate working capital, to the MA Security Corp. before year-end.
Invest the cash within the MA Security Corp. in low-risk investments that are within the parameters of M.G.L. c. 63 §, 38B(b ½) and 830 CMR 63.38B.1(4)(b)
Periodically remit dividends to ABC Corp. to ensure future liquidity needs are met

What’s the Catch?

Of course, tax planning is never simple and “one size does not fit all.” Additional requirements must be considered:

To be classified as a MA Security Corporation, companies must submit an application to the Commissioner prior to the end of the year in which the classification is to be effective.
Massachusetts does not adopt the 100% “dividends received deductions”. As the wholly owned security corporation. If they remit dividends to ABC Corp (parent), they will only qualify for a 95% dividends received deduction. This may not be a concern if ABC Corp. does not have an expectation for profits in the near-term, as the dividend income can be fully sheltered, only offsetting their net operating loss.
The revenue generated by the MA Security Corp. is subject to a maximum income tax rate of 1.32%, and the minimum excise tax of $456 still applies, so there will still be some tax at the subsidiary level.
The MA Security Corp. needs to stay within defined parameters as not to jeopardize their classification, including but not limited to:
Ensure they are properly investing
Maintain separate books and records from their shareholders
Act independently and not be principally used as a bank account for the shareholder

Proper modeling of the expected Massachusetts tax and the cost of implementing this structure is important before hastily implementing this structure:
As of 2025, Massachusetts now uses single factor sales apportionment for most companies. Companies with substantial Massachusetts payroll or property, but minimal Massachusetts sales, may face materially lower Massachusetts income apportionment than in prior years.
Massachusetts research and development tax credits may already offset a significant portion of the anticipated tax exposure.
There will be professional fees to establish and maintain this structure. This should be weighed against the potential tax savings.

Companies that are interested in exploring this and other tax planning opportunities should contact a member of Withum’s professional team before year-end. Retroactive classifications are not allowed.