The Tax Impact of Maine’s New Budget Legislation

By Merrill Barter March 16, 2021

Maine’s Fiscal Year 2021 Supplemental Budget Conforms to PPP Loan Forgiveness and Exemption for Unemployment Compensation, but Decouples from Other CARES Act Provisions

In the early morning hours of Friday, March 12, the Maine House and Senate finally agreed on a compromise and passed a supplemental budget for the 2021 fiscal year.  Governor Mills commended the leadership of both parties for working together to “reach a sensible, bipartisan agreement”.

The law includes several tax provisions that will affect Maine individuals and businesses. It updates Maine’s tax statutes to conform to the Internal Revenue Code (IRC) as in effect on December 31, 2020, retroactive to tax years beginning on or after January 1, 2018, with some exceptions. The result is that Maine now conforms to the majority of the federal tax changes enacted in the legislation passed during the past year to provide relief to individuals and businesses.

Following is a summary of the state tax law changes included in the supplemental budget, including provisions that “decouple” Maine from the IRC.

Favorable Changes

Tax Treatment of Forgiven PPP Loans

The most scrutinized feature of this legislation is its full conformity with the federal tax treatment of debt forgiveness related to Payroll Protection Program (PPP) loans. Maine businesses that had PPP loans forgiven may now exclude the debt forgiveness from taxable income and deduct the related business expenses in the same manner that they can for federal income tax purposes.

Tax-Free Unemployment Compensation

Maine now also conforms to the new federal exemption of unemployment compensation included in the federal American Rescue Plan Act of 2021 that was signed into law in Washington just last week. Individuals who received unemployment compensation in 2020 of up to $10,200, and whose income was less than $150,000 (regardless of filing status), will not have to pay federal or Maine income tax on this income.

Net Operating Losses (NOLs)

Maine now conforms to the 80% NOL limitation included in the Tax Cuts and Jobs Act (TCJA). Maine also conforms to the deferral of this limitation for tax years 2018 through 2020. The 80% limitation now applies beginning after the 2020 tax year.

Credit for Taxes Paid to Other States

Maine treats wages earned while working within the state as Maine-source income. During the Pandemic, some states, most notably Massachusetts, have required that employers continue to withhold their state’s income tax on the wages of nonresident employees who were working within the state immediately prior to the Pandemic and the resultant state shutdown, even if those employees are now telecommuting from their home state. As a result, Maine residents who were commuting to Massachusetts immediately prior to the Pandemic and forced to telecommute due to the state shutdown faced the possibility that the wages attributable to their time working from home would be double taxed. Both Massachusetts and Maine would treat the wages as taxable income earned within their state.

Fortunately, the supplemental budget includes a provision that will prevent the above situation from occurring. A Maine resident in the situation described above will be able to take a credit for the tax paid to Massachusetts (or another state that treats nonresident telecommuters in the same manner under its laws) on the wages earned while working from home. Absent this provision, no credit would be available for taxes paid to Massachusetts on these wages.

Unfavorable Changes

Excess Business Loss Limitation Deferral

Under the TCJA, losses realized by non-corporate taxpayers – owners of pass-through businesses and sole proprietorships – were limited to $250,000 (single) or $500,000 (joint). Taxpayers carried forward excess losses to subsequent years as a net operating loss. The CARES Act suspended these loss limitations for tax years beginning in 2018 through 2020. Maine decouples from this provision; the losses realized by business owners will be limited pursuant to the TCJA provisions. Taxpayers must carry forward excess losses and deduct them in future years.

Business Expense Limitation

The CARES Act increased the business interest expense limitation imposed under the TCJA from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020. Maine decoupled from this provision. Taxpayers must calculate the limitation using 30% of their adjusted taxable income, and any difference must be added-back when computing Maine taxable income. Taxpayers can deduct the cumulatively disallowed interest beginning in 2021, but no more than 25% of that amount can be deducted in a single year.

Qualified Improvement Property (QIP)

For federal income tax purposes, beginning in 2018, QIP has a 15-year depreciable life, and is eligible for bonus depreciation. Maine’s treatment of QIP now conforms to the federal treatment retroactively to tax years beginning in 2018. However, the required bonus depreciation addition modification for QIP placed in service in Maine during 2018 and 2019 may not be included in the calculation of the Maine Capital Investment Credit. The adjustment related to this property will be recaptured through a subtraction modification over the property’s remaining useful life.

For tax years beginning in 2020 and thereafter, the QIP bonus adjustment for property placed in-service in Maine during the tax year is includible in the Capital Investment Credit calculation.

Charitable Contribution Limits – Corporations

Pursuant to the CARES Act, corporations were able to deduct additional charitable contributions for tax years beginning in 2019. Maine decouples from this provision, and an addition modification will be required. The resultant charitable contribution carryover will be recovered through a subtraction modification in tax years 2020 through 2024.

Conclusion

The tax conformity provisions included in the supplemental budget are for the most part beneficial for Maine individuals and businesses. The few decoupling modifications will add complexity to Maine tax returns, and there could be opportunities to amend returns filed for 2018 and 2019 to take advantage of some of the changes included in the legislation.

If you have questions about how the tax law changes included in the supplemental budget may affect you, please contact your BNN service provider at 800.244.7444.