Schedule C-2: Excess Deductions Against Trade or Business Income (2025)

Who files this form

Schedule C-2 applies to taxpayers who file a Massachusetts Schedule C or Schedule E and seek to use excess 5.0% deductions to offset certain interest, dividends or capital gains.

The form allows these offsets only when:

• The excess deductions are adjusted gross income deductions allowed under MGL Ch. 62, § 2(d).
• The income being offset is effectively connected with the active conduct of a trade or business, or is 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 negative, complete the remainder of the schedule as directed.

What you'll need

Have the applicable forms and schedules available for the amounts you report:

• Your Massachusetts return: Form 1, line 10; Form 1-NR/PY, line 12; Form NRCR, line 5a; or Form 2, line 7, for total 5.0% income or loss.
• Schedule C or Schedule E: Schedule C, line 30; Schedule E, line 57; or Form 2, Schedule E, line 3, for the abandoned building renovation deduction.
• Schedule Y or Form 2: For additional adjusted gross income deductions, use the total of Schedule Y, lines 2 through 9b and 10, for Form 1 or Form 1-NR/PY, or Form 2, line 8. The form directs Form 2 filers to see the Form 2 instructions.
• Schedules B and D: For qualifying interest, dividends and capital gains, as applicable.

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

• Continuing when the form says to stop: If line 6, 9 or 12 is zero or greater, omit the remainder of the schedule.
• Missing required statements: Lines 7a, 10a and 13a each require an attached statement for the trade or business income reported there.
• Forgetting to mark a loss: Fill in the loss oval when showing a loss on line 1.
• Using excess deductions against income that does not qualify: The form generally prohibits using excess 5.0% deductions to offset non-Massachusetts-bank interest, dividends and capital gains unless the stated requirements are met.

Questions people ask

How do I know whether I have excess deductions?

Complete lines 1 through 6. A negative amount on line 6 means you have excess deductions. If line 6 is zero or greater, you have none and should omit the rest of the schedule.

What income can the excess deductions offset?

The schedule covers qualifying Schedule B capital gains, interest other than from Massachusetts banks, dividends and long-term capital gains. The income must be effectively connected with the active conduct of your trade or business, or qualify to offset passive activity losses under the rules stated on the form.

How is each allowable deduction limited?

On line 8, enter the smaller of line 6 treated as a positive amount or line 7. On line 11, enter the smaller of line 9 treated as a positive amount or line 10. On line 14, enter the smaller of line 12 treated as a positive amount or line 13.

Where do I carry the allowable deductions?

For Forms 1, 1-NR/PY and 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 those amounts 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