Schedule C-2: Excess Deductions Against Trade or Business Income (2024)

Who files this form

Schedule C-2 is for taxpayers who file Massachusetts Schedule C or Schedule E and want to use qualifying excess 5.0% deductions to offset certain interest, dividends or capital gains.

The form lists two requirements:

• The excess deductions must be adjusted gross income deductions allowed under MGL Ch. 62, § 2(d).
• The income being offset must be effectively connected with the active conduct of a trade or business, or be income allowed under IRC § 469(d)(1)(B) to offset passive activity losses.

Complete lines 1 through 6 to determine whether you have excess deductions. If line 6 is zero or greater, stop. If it is less than zero, complete the rest of the schedule as directed.

What you'll need

Have the applicable returns and schedules available:

• Your Massachusetts return: Form 1, line 10; Form 1-NR/PY, line 12; Form NRCR, line 5a; or Form 2, line 7 supplies the income or loss for line 1.
• Abandoned Building Renovation Deduction information, if applicable: Schedule C, line 30; Schedule E, line 57; or Form 2, Schedule E, line 3.
• Additional adjusted gross income deductions: Schedule Y for Form 1 or Form 1-NR/PY, total of lines 2 through 9b and 10; or Form 2, line 8. The form refers Form 2 filers to the Form 2 instructions.
• Schedules B and D, as applicable: These supply the income amounts used to calculate the allowable offsets.

Attach a statement for amounts reported as effectively connected with the active conduct of your trade or business on lines 7a, 10a and 13a.

Common mistakes

• Using excess deductions against income that does not qualify. The form warns that excess 5.0% deductions generally cannot offset interest other than Massachusetts bank interest, dividends or capital gains. The stated trade or business and passive activity requirements must be met.
• Continuing after a stop instruction. If line 6, 9 or 12 is zero or greater, omit the rest of the schedule.
• Leaving out required statements. Lines 7a, 10a and 13a each direct you to attach a statement for the trade or business income reported there.

Questions people ask

How do I know whether I have excess deductions?

Complete lines 1 through 6. If line 6 is less than zero, you have excess deductions. If it is zero or greater, you have no excess deductions and should omit the rest of the schedule.

What income does Schedule C-2 consider for offsets?

The schedule considers qualifying Schedule B capital gains, interest other than from Massachusetts banks, dividends and Schedule D long-term capital gains. The income must meet the stated active trade or business or passive activity requirements.

How is each allowable deduction limited?

Line 8 is the smaller of line 6, treated as a positive amount, or line 7. Line 11 is the smaller of line 9, treated as a positive amount, or line 10. Line 14 is the smaller of line 12, treated as a positive amount, or line 13. Follow the stop instructions before calculating each later deduction.

Where do I carry the allowable deductions?

For Forms 1, 1-NR/PY or MA NRCR, carry line 8 to Schedule B, line 14; line 11 to Schedule B, line 8; and line 14 to Schedule D, line 18. For Form 2, carry them to Schedule B, line 16; Schedule B, line 10; and Schedule D, line 17, respectively.

Official sources

• https://www.mass.gov/lists/dor-tax-forms-and-instructions