Maine enacts retroactive federal income tax conformity bill
May 04, 2021
6 min read
After much debate, on March 18, 2021, Maine Governor Janet Mills signed into law the state’s fiscal 2021 Bipartisan Supplemental Budget bill (L.D. 220, enacted as P.L. 2021, ch. 1). With this came several updates to Maine’s tax code. Unfortunately, these tax changes weren’t made law until March 18, three days after Maine residents had to file their 2020 business tax returns. Additionally, Maine Revenue was unable to issue guidance to taxpayers about these changes until April 2021.
Even though 2020 Maine income tax returns for individuals aren’t due until May 17, 2021, it is very possible that many Maine individual taxpayers still might not know that Maine’s tax laws affecting those returns have recently changed, or know how those changes may impact those tax returns.
Among other changes, which are summarized below, this new law updated Maine’s tax statutes to conform to the Internal Revenue Code (“Code”) as of December 31, 2020 (previously December 31, 2019), and it did so on a retroactive basis to tax years beginning on or after January 1, 2018. This is significant because it caused Maine tax law to follow several major federal tax bills enacted after December 2019, such as the CARES Act and the 2021 Consolidated Appropriations Act.
Below is a high-level summary of these recent changes to the Maine income tax code for businesses and individuals:
Taxpayer-favorable changes
- Unemployment compensation exemption: Maine adopted rules similar to those passed in the American Rescue Plan Act of 2021; $10,200 of unemployment compensation for each taxpayer is exempt from taxable income for the 2020 tax year. If your 2020 federal return already exempted the income, no additional modification will be made on the 2020 Maine return. However, for those that filed their 2020 Maine taxes before this law was passed, you may need to file an amended return to claim a refund. Unlike the federal government that is going to fix taxpayers’ returns automatically for this issue, Maine is not likely to follow suit.
- PPP loans and EIDL grants: Maine now fully conforms to the federal treatment of PPP loan forgiveness and of Economic Injury Disaster Loan (EIDL) grants. This means you do not have to report any of the PPP loan forgiveness or grant amount as income on your Maine tax return, even though an earlier proposal from Gov. Mills would have exempted only the first $1,000,000 of PPP loan forgiveness. PPP loan-funded expenses continue to be deductible in Maine under this new law.
- 80% limitation on net operating losses: Previously, Maine allowed net operating losses (NOLs) to reduce 100% of taxable income for individuals. However, Maine now follows federal law for NOLs, specifically, the limitation of NOL deductions to 80% of current year taxable income under the Tax Cuts and Jobs Act (TCJA), and the CARES Act’s suspension of that limitation. This means that for 2020, you can still use your NOL to reduce up to 100% of your taxable income, but beginning in 2021, you will only be able to offset 80% of taxable income. Maine still does not conform to the CARES Act’s enactment of a five-year NOL carryback period for NOLs generated in tax years 2018, 2019 or 2020.
- Codified prior administrative teleworking guidance: During 2020, Maine Revenue Services issued a series of FAQs and tax alerts related to the COVID-19 pandemic. It included information on how income and sales tax nexus would work for businesses that suddenly have remote employees, how wage withholding would work for employees who suddenly found themselves working from home in a state different from their office state, residency questions for people who stayed in Maine for over half the year, as well as how the tax credit for paying taxes to another jurisdiction would work during this pandemic. The new law has codified most of this guidance.
- Maine educational opportunity tax credit: The new law provides that if you worked in Maine immediately prior to the state of emergency, or at any time during the emergency, then you are deemed to have worked in the state for the entire state of emergency for purposes of this credit.
Taxpayer-unfavorable changes
- Qualified improvement property (QIP): Maine now retroactively (to 2018) applies a 15-year life to QIP, conforming to the CARES Act’s treatment of QIP. The catch is that even if you end up going back to 2018 or 2019 and taking federal bonus depreciation on QIP, you won’t be able to take the Maine capital investment tax credit on that property in years prior to 2020. For your 2020 tax return, however, you will be able to claim the credit for any QIP placed in service in Maine that you took bonus depreciation on at the federal level.
- Excess business losses for noncorporate taxpayers (Code Sec. 461(l)): Maine already conformed to this rule, enacted in 2017 under the TCJA. The federal CARES Act removed this limitation for tax years 2018-2020, but Maine has chosen to retain it. As a result, if you have excess business losses in excess of $250,000 (or $500,000 in the case of a joint return), then all such losses above that amount will be disallowed in the current year but allowed in future years in the form of a net operating loss (NOL) carryover.
- Business interest expense limitation (Code Sec. 163(j)): With the CARES Act, federal rules increased this limitation from 30% to 50% of adjusted taxable income (ATI) for 2019 and 2020. Under this 2021 law, however, Maine has chosen to retain the original 30% limit, and did so retroactively to 2019. As a result, if you used the 50% limit while preparing your 2019 Maine return, you may need to go back and amend your return — as well as possibly amend your 2020 return given how late in the 2021 filing season this law was enacted. The good news is that if you end up having to add back any interest expense due to this new provision, you can deduct as much as 25% of that addback in the following years (starting in 2021) so long as it doesn’t reduce your Maine taxable income below zero. Yes, that means it will take at least four years to recover this deduction.
- Charitable contributions deduction: Fiscal year C corporations that were taking advantage of the CARES Act’s increased charitable contributions deduction for 2019 will not get the same treatment in Maine. The addback can be recouped during tax years starting after January 1, 2020 and before January 1, 2025. Yes, this means that some corporations may completely lose these deductions if they can’t recoup them by December 2024. This law change has no impact on calendar year corporations.
- Business meals: Maine will not follow the temporary federal increase of meals deductions from 50% to 100% for tax years 2021 and 2022. This impacts business meals, meals provided to employees for the convenience of the employer, and meals purchased by employees while away for business. It should be noted that unlike the other Maine and federal differences, Maine will not allow this particular addback to be recouped in future years.
- Global intangible low-taxed income (GILTI): GILTI deductions made on a federal tax return must be added back for tax years beginning on or after January 1, 2020.
- Foreign-derived intangible income (FDII): For tax years beginning on or after January 1, 2020, Maine no longer conforms to the federal deduction for FDII. Instead, MRS will study this and determine if Maine’s historical conformity to this particular federal deduction is meeting Maine’s tax policy goals. MRS will offer suggestions for improvements and this will be addressed again in the future.
What’s next?
If you have any questions about this new law, reach out to the tax advisors at Wipfli.
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