The Massachusetts Climatetech Research and Development Tax Credit: A Comprehensive Analysis of MGL c. 63, § 38SS

MGL c. 63, § 38SS provides a specialized tax credit for certified climatetech companies, allowing a 10% credit on incremental qualified research expenses and a 15% credit on basic research payments. Administered by the Massachusetts Clean Energy Center in consultation with the Department of Revenue, this incentive aims to accelerate the commercialization of technologies essential for reaching the Commonwealth’s net-zero carbon goals.

The Legislative Context of Climatetech Innovation

The enactment of MGL c. 63, § 38SS represents a critical milestone in the economic and environmental strategy of Massachusetts. This provision was established as a core component of the “Mass Leads Act” (H. 5100), a comprehensive economic development bill signed by Governor Maura Healey in November 2024.1 The Act authorized nearly $3.5 billion in capital investments and tax incentives, specifically designed to position Massachusetts as a global leader in emerging sectors such as climatetech, artificial intelligence, and advanced life sciences.1 Within this broad legislative framework, the Climatetech Tax Incentive Program (CTIP) was allocated $300 million over a ten-year period, operating under a strict annual cap of $30 million.1

The introduction of Section 38SS is not merely a fiscal adjustment but a strategic response to the existential challenge of climate change. The “Massachusetts Climatetech Economic Development Strategy and Implementation Plan (2025)” highlights that a significant portion of the emissions reductions required to reach net-zero by 2050 will depend on technologies that are not yet on the market.6 By creating a specific research and development (R&D) credit for climatetech, the legislature intended to bridge the “valley of death” between laboratory innovation and commercial deployment. This targeted approach mirrors the successful model used in the life sciences sector, where specialized credits helped build the world’s leading biotech hub in Cambridge and Boston.7

The Climatetech Tax Incentive Program is administered by the Massachusetts Clean Energy Technology Center (MassCEC) in consultation with the Department of Revenue (DOR).4 This dual-agency oversight ensures that the technical merits of a company’s research—its potential for carbon reduction and technological advancement—are evaluated by energy experts, while the fiscal integrity and tax compliance aspects are managed by revenue officials.5 This administrative structure signifies a shift toward a more discretionary, award-based model of tax incentives, a departure from the purely statutory nature of traditional research credits.7

Shared Fiscal Caps and Incentive Layering

The $30 million annual cap for the Climatetech Tax Incentive Program is shared among several distinct incentives. This structure requires the MassCEC to be highly selective in its awards, prioritizing companies that demonstrate the greatest potential for high-impact innovation and job creation.4

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The Meaning and Mechanics of MGL c. 63, § 38SS

The text of Section 38SS establishes a credit against the corporate excise tax for a business corporation that has been certified by the MassCEC as a “Certified Climatetech Company”.5 The credit is calculated as the sum of 10% of the excess of qualified research expenses (QREs) for the taxable year over a base amount, plus 15% of the basic research payments made during that year.14

The definitions of “qualified research expenses” and “basic research payments” are largely derived from Section 41 of the Internal Revenue Code (IRC).14 This linkage provides a familiar framework for tax professionals, as it aligns state-level reporting with federal R&D standards. However, Section 38SS introduces several unique Massachusetts-specific modifications. Most notably, Section 38SS(b) specifies that for a qualified climatetech company, research and development costs include those qualified research expenditures that are performed both inside and outside the Commonwealth.14 This is a significant departure from the standard Massachusetts research credit under Section 38M, which generally restricts qualifying activity to research conducted within the physical borders of Massachusetts.18

The Out-of-State Provision and Geographical Flexibility

The allowance for out-of-state research expenses under Section 38SS(b) reflects the nature of modern climatetech innovation. Developing climate solutions often requires specialized testing environments—such as high-altitude atmospheric testing, oceanic wave tanks, or geothermal drilling sites—that may not be available within the geographic constraints of Massachusetts.6 By allowing these costs to be included in the QRE calculation, the legislature acknowledged that a Massachusetts-based company may need to look outward to solve global problems.

However, this flexibility is balanced by the certification requirements. To become a “Certified Climatetech Company,” an entity must demonstrate that it is actively increasing its footprint within Massachusetts and creating employment in the Commonwealth.9 The MassCEC uses its discretionary authority to ensure that the primary economic benefit of the incentive remains anchored in the state, even if specific laboratory or field tests occur elsewhere.9

Calculation of the Incremental Base

The credit under Section 38SS is an “incremental” credit, meaning it incentivizes growth in R&D spending rather than just the maintenance of existing research levels.14 The “base amount” is typically determined by the average annual gross receipts of the taxpayer for the four taxable years preceding the credit year, multiplied by a fixed-base ratio that reflects the company’s historical R&D intensity.17

For newer companies or those with volatile spending, the “Alternative Simplified Method” (ASC) may be a viable option, depending on future regulations promulgated by the Commissioner. In the context of the Section 38M credit, the ASC has become a popular choice, offering a credit equal to 10% of the current year’s QREs that exceed 50% of the average QREs from the three preceding years.17 While Section 38SS draft instructions emphasize the incremental calculation, the DOR has the authority to adopt similar simplification rules to accommodate the fast-paced growth of the climatetech sector.14

Contextualizing § 38SS with the Legacy § 38M Research Credit

To understand the value of Section 38SS, it must be compared to the legacy Massachusetts research credit governed by MGL c. 63, § 38M. Established in 1991, Section 38M has been a cornerstone of the state’s innovation economy, providing a 10% incremental credit for any business corporation conducting research in the Commonwealth.17

Statutory Entitlement vs. Discretionary Award

The most profound difference between the two credits lies in their administrative nature. Section 38M is a statutory entitlement; if a corporation meets the criteria of the tax code, it can claim the credit on its return without prior approval from an outside agency.7 In contrast, Section 38SS is a discretionary award granted through the Climatetech Tax Incentive Program. A company must apply to the MassCEC, compete for a portion of the $30 million annual cap, and be formally certified before it can claim the Section 38SS credit.4

This distinction is crucial for business planning. While Section 38M provides a predictable baseline of support, Section 38SS offers a potentially larger, more flexible incentive that can include out-of-state expenses, provided the company aligns with the state’s strategic climate goals.9

Refundability and Carryforward Limitations

A persistent challenge for early-stage climatetech firms is that research credits are generally non-refundable. Both Section 38M and Section 38SS are primarily “use-it-or-lose-it” incentives that can only be applied against an existing corporate excise tax liability.7 If a company has no tax liability—as is common for startups with high R&D spend and no revenue—the credit must be carried forward to future years.7

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The lack of refundability in Section 38SS stands in contrast to the Climatetech Jobs Credit (§ 38TT) and the Climatetech Capital Investment Credit (§ 38RR), both of which are 90% refundable.5 This suggests that the legislature views the R&D credit as a tool for established or mid-stage companies with existing tax liabilities, while using the jobs and capital credits to provide immediate cash flow to earlier-stage ventures.5

State Revenue Office Guidance: TIR 25-5 and TIR 24-16

The Massachusetts Department of Revenue (DOR) has provided essential guidance on the implementation of these new laws through Technical Information Releases (TIRs). TIR 25-5 is the definitive document for the Climatetech Tax Incentive Program, explaining the eligibility criteria, the role of MassCEC, and the fiscal limitations of the program.5

Analyzing TIR 25-5

TIR 25-5 clarifies that the climatetech incentives are effective for taxable years beginning on or after January 1, 2024.5 The DOR emphasizes that the MassCEC has the discretion to determine the amount of the credit awarded to each certified company.5 This “consultation” between MassCEC and the Commissioner of Revenue is intended to ensure that the total awards across all participating companies do not exceed the $30 million annual limit.4

One of the more rigorous aspects of TIR 25-5 is the discussion of recapture. If a climatetech company’s certification is revoked by the MassCEC—due to a failure to meet job creation targets, salary requirements, or other milestones established in its certification agreement—the DOR is authorized to recapture the tax benefits previously claimed.5 The Commissioner intends to promulgate specific regulations to handle these recapture events, which could lead to significant back-tax liabilities for companies that over-promise and under-deliver.5

The Context of TIR 24-16

While TIR 24-16 primarily addresses the “Affordable Homes Act,” it is frequently cited in the 2025 corporate tax instructions as a foundational document for understanding the state’s broader push for tax credit transparency and transferability.15 For climatetech companies, TIR 24-16 provides insights into how the DOR manages multi-year credits and the “Good Standing” requirements that serve as a prerequisite for any state-sponsored incentive.25 The emphasis on electronic filing and the mandatory reporting of “net-new” job metrics highlights a broader trend toward data-driven tax administration in the Commonwealth.23

Defining the “Climatetech” Sector: Chapter 23J, Section 1

To qualify for the credit under Section 38SS, a company must operate within the defined climatetech sector. The Massachusetts General Laws provide a comprehensive definition that encompasses several sub-sectors of the energy and environmental economy.6

Key Climatetech Sub-Sectors

The “Massachusetts Climatetech Economic Development Strategy” identifies five “North Star” goals for the industry, which align with the activities eligible for the R&D credit 6:

1. High-Performance Buildings: Research into insulation materials, heat pump efficiency, smart glass, and energy management software.6
2. Clean Transportation: Development of EV battery chemistries, charging hub infrastructure, and autonomous robotic maintenance for low-emission maritime shipping.6
3. Net-Zero Grid: Innovation in grid-scale storage, long-duration batteries, and AI-driven grid balancing algorithms.6
4. Agriculture, Food, and Nature: Development of nanoparticle-based fertilizers (“nanofertilizers”) to reduce nutrient loss and methane abatement technology for landfills.27
5. Industrial Decarbonization: Low-temperature chemical processes for processing lithium or producing iron and aluminum from industrial waste.27

The diversity of these fields means that “qualified research” can take many forms, from traditional chemical engineering and materials science to advanced software development and robotics.6

Administrative Procedures for Certification and Award

The process of claiming the Section 38SS credit begins long before a tax return is filed. It starts with the MassCEC certification cycle, which is typically conducted once per year.9

The Application Lifecycle

The MassCEC application period for the Climatetech Tax Incentive Program usually opens in mid-December and closes in mid-February.11 During this time, companies must submit a detailed proposal that includes:

• Technical Description: A clear explanation of the climatetech research and how it contributes to emissions reductions.9
• Economic Projections: Forecasts for capital investment and job creation in Massachusetts over a five-year period.9
• Good Standing Certificates: Documentation from the Secretary of the Commonwealth and the DOR proving that the company is current on its corporate filings and taxes.9

After the submission, the MassCEC Board of Directors reviews the applications and votes on the awards. Once approved, the company is designated a “Certified Climatetech Company” for a period of five years.9

Annual Reporting and Compliance

Certification comes with ongoing responsibilities. Every certified company must file an annual report with the MassCEC within 30 days of the end of each calendar year.9 This report must certify whether the company has met its specific targets for job creation and R&D spending. The company also authorizes the DOR to share its tax return and wage reporting information with the MassCEC to verify these claims.24

This high level of transparency is a hallmark of the new generation of Massachusetts tax incentives. It ensures that public funds (in the form of foregone tax revenue) are effectively driving the intended economic and environmental outcomes.5

Filing and Compliance: Applying § 38SS on the Corporate Excise Return

For corporations ready to claim the credit, the process is integrated into the standard Massachusetts corporate excise filing system. The 2025 draft instructions for Form 355, 355U, and 63-FI provide the necessary roadmap.15

Schedule CMS: The Credit Manager Schedule

The Climatetech Qualified Research Expenses Credit must be reported on “Schedule CMS”.15 This schedule serves as a centralized hub for all credits claimed by a corporation. The taxpayer must enter the specific credit code for Section 38SS and provide the certification number assigned by the MassCEC.15

In a combined filing under Section 32B (Form 355U), the credit generated by an individual member corporation is first applied against the excise attributable to that specific company.14 If the member has an excess credit, it may be applied against the excise of other group members, provided they are part of the same combined group and subject to the standard 75% excise limitation.14 Unused credits remain with the corporation that generated them and are carried forward rather than being transferred as part of a group-wide pool.14

The Role of Section 30 and Basis Reduction

For the purposes of determining net income, Massachusetts follows a specific rule regarding the deduction of research expenses. Under Section 38SS(c), the deduction from gross income that may be taken for expenditures qualifying for the credit must be reduced by the amount of the credit allowable.14 This prevents a company from receiving both a full deduction and a full credit for the same dollar of expense, essentially requiring the company to “add back” the value of the credit to its taxable income.14

Financial Modeling: A Practical Example of § 38SS in Action

To demonstrate the application of the law, consider a hypothetical corporation, “Advanced Battery Systems, Inc.” (ABS), which is developing high-density solid-state batteries in Worcester, MA.

Step 1: Certification and Award

In February 2025, ABS is awarded a Climatetech R&D credit for its work on cobalt-free cathodes. The MassCEC authorizes a maximum credit of $250,000 for the 2025 tax year.9

Step 2: Determining Qualified Research Expenses (QREs)

ABS tracks its 2025 expenses as follows:

• R&D Scientist Salaries (in MA): $2,000,000
• R&D Technician Salaries (in MA): $500,000
• Cathode Materials and Supplies: $300,000
• Contract Research at UMass (65% of $200k): $130,000
• Total QREs for 2025: $2,930,000 17

Step 3: Calculating the Incremental Base

ABS had the following QREs in previous years:

• 2024: $2,000,000
• 2023: $1,500,000
• 2022: $1,000,000
• Average QRE (prior 3 years): $1,500,000 17

Using an incremental approach, the base is determined to be $1,500,000.

• Incremental QREs: $2,930,000 – $1,500,000 = $1,430,000

Step 4: Applying the Statutory Credit Rate

The credit is 10% of the incremental spend.

• Calculated Credit: $1,430,000 * 0.10 = $143,000 14

Step 5: Excise Limitation Analysis

ABS has a Massachusetts corporate excise liability of $150,000 before any credits are applied.

• The $25,000 Rule: ABS can offset the first $25,000 of its liability at 100%.
• Remaining Liability: $150,000 – $25,000 = $125,000.
• The 75% Rule: ABS can offset 75% of the remaining liability ($125,000 * 0.75 = $93,750).
• Total Allowable Credit for 2025: $25,000 + $93,750 = $118,750 14

Step 6: Final Tax Due and Carryforward

• Credit Applied: $118,750.
• Final Excise Due: $150,000 – $118,750 = $31,250.
• Unused Credit: $143,000 – $118,750 = $24,250.
• Carryforward: $24,250 may be carried forward for up to 15 years.14

ABS must also remember the $456 minimum tax floor; since $31,250 is greater than $456, the credit utilization is fully optimized within the statutory caps.7

Economic Impact and Statistical Overview

The launch of the Climatetech Tax Incentive Program comes at a time when Massachusetts is already a leader in climate innovation. As of early 2024, the state’s clean energy sector employed over 100,000 people, but the Mass Leads Act aims to significantly expand this number.6

Investment and Job Goals

The Mass Leads Act and the associated climatetech strategy set ambitious benchmarks for the next decade of development.1

These statistics demonstrate a massive mobilization of state capital. The legislature is effectively betting that $1 in tax incentives will leverage several dollars in private venture capital and federal grants. In the life sciences sector, the MLSC Tax Incentive Program has leveraged billions in private investment and created over 19,000 jobs since its inception.8 The climatetech sector is intended to follow a similar trajectory.

Carbon Mitigation Potential

Beyond economic growth, the R&D credit is a tool for climate mitigation. The Commonwealth has mandated a reduction of greenhouse gas emissions from approximately 64 million metric tons of CO2 equivalent to net-zero by 2050.6 The technologies being incentivized under Section 38SS—such as intelligent, grid-connected heat pumps and methane abatement tools—are essential for hitting these legally binding targets.6

Strategic Implications for the Climatetech Industry

For a business corporation operating in Massachusetts, Section 38SS is more than a tax break; it is an invitation to join the state’s strategic “team.” The “Team Massachusetts” approach, as outlined by the Healey-Driscoll administration, seeks to coordinate all aspects of state government to support high-growth industries.1

Interaction with the Single Sales Factor Transition

A critical, often overlooked context for the Section 38SS credit is the transition to single sales factor apportionment. Starting January 1, 2025, nearly all corporate excise filers in Massachusetts will apportion their income based solely on the sales factor.29 This represents a shift away from the traditional three-factor formula that included property and payroll.30

This transition is highly favorable for climatetech companies that conduct their research and manufacturing in Massachusetts but sell their products globally.29 By eliminating the payroll and property components of the tax formula, the state is effectively lowering the tax burden on physical investment and local hiring.29 When layered with the Section 38SS credit, a company can significantly reduce its effective tax rate while building out its Massachusetts infrastructure.5

The Role of Financial Institutions in Climate Innovation

The recent State Street case and the subsequent TIR 25-3 have confirmed that financial institutions are eligible for research tax credits.19 This is particularly relevant for the “climate fintech” sub-sector—companies developing insurance products for flood risk, carbon credit trading platforms, or green bond certification software.1 These firms, which may be classified as financial institutions for tax purposes, can now utilize Section 38SS to offset their excise liability for the software and algorithmic research they conduct to address climate risk.1

Potential Challenges and Risks: The “Recapture” Threat

The discretionary and contract-based nature of the Climatetech Tax Incentive Program introduces a level of risk not found in standard statutory credits. In a typical R&D credit scenario, if a company’s research fails to yield a commercial product, the credit remains valid as long as the research was “qualified” under IRC Section 41.18

However, because the Section 38SS credit is tied to the MassCEC certification agreement, the company’s technical success is often linked to its economic performance.24 If a failed research project leads to layoffs or a failure to meet the “net-new permanent full-time employee” targets, the company risks losing its certification.9 Under TIR 25-5, this revocation triggers a recapture of all tax benefits.5 This creates a high-stakes environment where tax departments must work closely with R&D and Human Resources to ensure that hiring and spending remain in sync with the state’s expectations.24

Conclusion: A New Era of Climate-Focused Industrial Policy

The implementation of MGL c. 63, § 38SS marks a transformative shift in the Massachusetts tax landscape. By moving beyond a general innovation incentive toward a highly targeted, sector-specific research credit, the Commonwealth has signaled its intention to be the primary engine of the global energy transition. This policy recognizes that the “invisible hand” of the market may not move quickly enough to solve the climate crisis, necessitating a “visible hand” of government support to accelerate scientific discovery and commercial scaling.

For the corporate executive or tax strategist, the Section 38SS credit offers a powerful tool to lower the cost of innovation. However, it requires a more engaged form of tax management—one that involves competitive applications, annual reporting, and a long-term commitment to the Massachusetts economy. When combined with the move to single sales factor apportionment and the massive capital infusions of the Mass Leads Act, Section 38SS creates a formidable incentive for companies to build, hire, and innovate within the Commonwealth. As the first awards under this program begin to flow, the success of these companies will be the ultimate measure of whether the Massachusetts model of climate-focused industrial policy can serve as a blueprint for the rest of the world.

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