Owners of a pass-through entity could not claim a Maine personal income tax credit for taxes the entity’s business paid to New Hampshire. The credit for taxes paid to other jurisdictions is only allowed for taxes imposed on an individual taxpayer. It does not apply to taxes imposed on a business, even if the individual claiming the credit owns the business.
Pass-Through Took Credit on Federal Return
The business paid both the New Hampshire business profits tax and business enterprise tax. On its federal return, the business deducted the New Hampshire taxes from its rental income. Thus, the taxpayers’ share of the business’ income on the Schedule K-1 was based on the reduced amount. This income was reflected on the taxpayer’s federal tax returns.
When the taxpayers filed their Maine returns, they did not claim a credit for the New Hampshire taxes paid. The Maine returns relied on the federal AGI reported in federal returns. Therefore, their Maine income did not include income that the business received but then paid in New Hampshire taxes.
Later, the taxpayers filed amended returns, claiming tax credits for their portion of the New Hampshire taxes paid by the business.
Pass-Through Owners Denied Individual Maine Credit
Maine residents may claim a personal income tax credit for “income tax imposed on that individual” by another state. The taxpayers claimed that the New Hampshire taxes imposed on the business were actually income taxes on the individual owners. This, they said, was because of the “flow-through” nature of income realized by a pass-through entity. However, the plain meaning of an “income tax imposed on [an] individual” excludes taxes imposed on, and paid by, businesses.
In addition, the taxpayers did realize some tax benefit because the New Hampshire taxes were excluded from their federal AGI. If the tax credit was applied as the taxpayers suggested, it would result in a windfall for them. They would enjoy both:
- the deduction from their AGI for the New Hampshire taxes paid by the business, and
- a credit for a proportionate share of the New Hampshire taxes paid.
Since tax credits must be construed narrowly, the credit cannot be interpreted to provide such a windfall to the taxpayers.
No Commerce Clause Violation
In addition, the Maine credit for taxes paid to other jurisdictions was not unconstitutional as applied to the taxpayers. The law did not:
- discriminate against interstate commerce, or
- fail to relate to the services provided by the state.
Therefore, it did not violate the U.S. Constitution’s Commerce Clause.
Goggin v. State Tax Assessor, Maine Supreme Judicial Court, No. BCD-17-459, August 2, 2018, ¶200-898