Maine Governor Janet Mills submitted a supplemental budget, as amended by a change package submitted on January 25, 2021. The supplemental budget is notable for its retroactive conformity to the Internal Revenue Code (IRC) as of December 31, 2020, and for its nonconformity to significant tax relief provisions enacted as part of the CARES Act and the Consolidated Appropriations Act, 2021 (CAA).
Of particular significance, the supplemental budget would decouple from the portion of these federal laws that excludes the forgiven portion of a Paycheck Protection Program (PPP) loan from a taxpayer’s federal taxable income and allows an otherwise available deduction for business expenses paid with forgiven loan proceeds. Our recent client alert, Congress Passes New and Additional Business, Tax Relief Measures in COVID-19 Stimulus Bill, provides further analysis of the CAA.
The supplemental budget would require taxpayers to add back the forgiven portion of the PPP loan to the extent of the related expense deduction. It is estimated that full conformity to federal treatment of PPP loans would cost the state around $100 million.
Parts B, D-H, and U-X of the supplemental budget address Maine’s conformity, or lack thereof, and are discussed below.
Part B – Internal Revenue Code – MAINE CONFORMS
Part B would generally conform Maine tax law to the IRC as of December 31, 2020, subject to the exceptions noted below. Currently, Maine’s tax code conforms to the IRC as of December 31, 2019. This general conformity applies retroactively to tax years beginning on or after January 1, 2018 and to any prior tax year specifically provided for in the IRC.
Part D – Excess Business Loss Limitation Deferral – MAINE DECOUPLES
Part D would decouple from the CARES Act’s deferral of the excess loss limitations for non-corporate taxpayers. Under the Tax Cuts and Jobs Act (TCJA), losses of pass-through businesses and sole proprietors were subject to an excess business loss limitation of $250,000 (single)/$500,000 (joint) at the individual investor level. Any excess loss could be carried forward to the following tax year as a net operating loss (NOL). The CARES Act deferred application of excess business loss limitation for tax years 2018, 2019, and 2020. This allowed some taxpayers to claim an additional NOL in those years, resulting in a refund. Part D of the supplemental budget would require an addback of that excess loss that was allowed under the CARES Act. The disallowed excess loss can then be deducted in future years for Maine income tax purposes.
Part E – Interest Expense Limitation Increase – MAINE DECOUPLES
Part E would decouple from the CARES Act’s increase in the interest expense limitation. The TCJA limited the business interest expense deduction to 30% of adjusted taxable income. Under the CARES Act, the 30% limitation is increased to 50% for tax years beginning in 2019 and 2020. Part E would require Maine taxpayers to add back the amount of interest deducted at the federal level that exceeds the 30% threshold. Taxpayers would be allowed to recoup the lost Maine deduction starting in 2021, provided that no more than 25% of the amount is used as a Maine deduction in any one tax year.
Part F – QIP Placed in Service 2018 & 2019 – Excluded from Maine Capital Investment Credit
Part F would exclude qualified improvement property (QIP) placed in service in 2018 and 2019 from the Maine Capital Investment Credit. QIP is a classification of assets that generally includes certain interior, nonstructural improvements to nonresidential buildings. Due to a drafting error in the TCJA, QIP was subject to a 39-year depreciable life and was not eligible for bonus depreciation. The CARES Act corrected the error to retroactively allow for a 15-year depreciable life, thereby qualifying the property for bonus depreciation starting in 2018. The Maine Capital Investment Credit is analogous to bonus depreciation, and this change would exclude QIP placed in service in 2018 and 2019 from being eligible for the credit.
Part G – Increased Charitable Deduction Limits – MAINE DECOUPLES
Part G would decouple from the additional charitable contribution deduction allowed to corporations pursuant to the CARES Act for tax years “beginning after January 1, 2019 and before January 1, 2020.” These effective dates mean that the state would conform to the additional CARES Act contribution deduction for corporations with tax years that begin on or after January 1, 2020. Taxpayers claiming the deduction for tax years beginning before January 1, 2020 would be allowed to recoup the lost Maine deductions in tax years beginning after January 1, 2020 and before January 1, 2025.
Part H – 80% NOL Limitation Deferral – MAINE CONFORMS
Part H, together with Part B, would adopt the federal 80% taxable income limitation on NOLs enacted by the TCJA, as well as the CARES Act suspension of the limitation during the 2018 and 2019 tax years. The 80% limitation would apply to tax years beginning after 2020.
Part U – GILTI and FDII Deduction – MAINE DECOUPLES
Maine has always decoupled from the federal global intangible low-taxed income (GILTI) deduction, IRC § 250(a)(1)(B), enacted as part of the TCJA. Part U proposes to expand the state addition modification toboth the 50% GILTI deduction and the 37.5% deduction for foreign derived intangible income, starting in tax years beginning on or after January 1, 2020. The stated purpose for the nonconformity is to offset the cost of conforming to other federal changes related to COVID-19, which would result in an estimated $10 million revenue loss.
Part V – PPP Loan Forgiveness – MAINE DECOUPLES, WITH LIMITS
Under Part V, a taxpayer whose PPP loan is forgiven would be required to add back the forgiven portion of the loan to the extent the taxpayer claims a federal deduction for ordinary and necessary business expenses “that qualify for and are a basis of said loan forgiveness.” Under the CARES Act, the forgiven portion of the PPP loan is excluded from federal taxable income, even if it would otherwise be treated as cancellation of indebtedness income. Enacted December 27, 2020, the CAA further clarifies that eligible business expenses paid using forgiven PPP funds may be deducted from federal taxable income.
The supplemental budget proposes a state modification that adds back a portion of the forgiven PPP loan equal to the related expense deduction. Even if a loan is not forgiven during the tax year, a taxpayer must nonetheless add back the amount the taxpayer “reasonably expects” will be forgiven and may file an amended return if actual forgiveness differs from what the taxpayer expects. The addback requirement is retroactive to tax years beginning after January 1, 2019.
Part W – Economic Injury Disaster Assistance Advances Forgiveness – MAINE DECOUPLES
Part W would decouple from the treatment of Economic Injury Disaster Assistance (EIDL) Advances provided under the CARES Act. The CAA confirms that loan forgiveness granted to an EIDL loan recipient will not be included in federal gross income and will not result in denial of a deduction for related expenses. Like Part V, Part W provides a state addition modification for any decrease to federal taxable income resulting from the CAA.
Part X – Business Meals Deduction – MAINE DECOUPLES
Part X would decouple from Section 210 of the CAA, which allows a 100% deduction for business meals where food or beverage is provided by a restaurant, and paid or incurred after December 31, 2020 and before January 1, 2023. Part X requires an addback of any increased deduction for tax years beginning on or after January 1, 2021.