Conformity Bill Sent to Maine Governor

An income tax conformity bill is finally sitting on Maine Gov. LePage’s desk waiting for his action.

In addition to updating the state’s IRC conformity date, the bill would make several other significant changes concerning corporate and personal income tax and sales tax.

At press time, Gov. LePage has not taken any action on the bill. If enacted, the bill would take effect immediately and apply as noted below.

Conformity Date

The bill would change Maine’s IRC conformity date to March 23, 2018. The current conformity date is December 31, 2016.

The amendment would generally conform Maine law to the following recent federal legislation:

  • Consolidated Appropriations Act of 2018 (P.L. 115-141);
  • Bipartisan Budget Act of 2018 (P.L. 115-123);
  • Tax Cuts and Jobs Act of 2017 (P.L. 115-97); and
  • Disaster Tax Relief and Airport and Airway Extension Act of 2017 (P.L. 115-63).

However, the bill would also decouple Maine law from many of the recent federal changes.

The conformity date change would apply to tax years beginning after 2016.

Corporate Tax Brackets

The bill would also expand the corporate income tax brackets beginning in 2018. The current rate structure for taxable corporations consists of:

  • 3.5% on income not over $25,000;
  • 7.93% on income not over $75,000;
  • 8.33% on income not over $250,000; and
  • 8.93% on income of $250,000 or more.

The rate structure for tax years beginning after 2017 would consist of:

  • 3.5% on income not over $350,000;
  • 7.93% on income not over $1.05 million;
  • 8.33% on income not over $3.5 million; and
  • 8.93% on income of $3.5 million or more.

NOL Deductions

The Tax Cuts and Jobs Act limits federal NOL deductions for tax years beginning after 2017 (IRC Sec. 172). Under the new federal law, NOLs may only reduce 80% of a taxpayer’s taxable income in carryback and carryforward years.

The bill would reverse, for Maine tax purposes, the effects of the new federal limit on NOL deductions. It would create a state deduction for NOL carry-forward deductions disallowed for federal tax purposes by the limit.

These provisions would apply to tax years beginning after 2017.

AMT for Corporations

The bill would eliminate the corporate alternative minimum tax for tax years beginning after 2017.

Foreign-Earned Income

Several changes would be made in response to international tax provisions in the federal Tax Cuts and Jobs Act if the bill is enacted.

First, the bill would create an addback for the repatriation (transition) tax deduction under IRC Sec. 965. This addback would apply to tax years beginning after 2016.

The bill would also create an addback for the new global intangible low-taxed income (GILTI) deduction under IRC Sec. 250. This addback would apply to tax years beginning after 2017.

Deductions would be allowed for:

  • 50% of apportionable Subpart F income included in federal gross income (IRC Sec. 952) for tax years beginning after 2016;
  • 80% of apportionable deferred foreign income included in federal gross income (IRC Sec. 965) for tax years beginning after 2016; and
  • 50% of apportionable GILTI included in federal gross income (IRC Sec. 951A) for tax years beginning after 2017.

The deduction for dividends received certain from affiliated foreign entities would also be amended. Dividend income would no longer include:

  • Subpart F income;
  • GILTI included in federal taxable income; and
  • deferred foreign income included in federal gross income.

This change to the dividends received deduction would apply tax years beginning after 2016.

Standard Deduction

Maine’s standard deduction would be the same as the federal standard deduction (IRC Sec. 63). Currently, the standard deduction is a fixed amount that is adjusted annually for inflation.

In addition, the bill would increase the amount at which the standard deduction begins to phase out.

The standard deduction changes would apply to tax years beginning after 2017.

Itemized Deductions

The bill counters the new federal $10,000 limitation on itemized deductions for state and local taxes (IRC Sec. 164). Property taxes not deducted for federal purposes because of the limit would be added to the taxpayer’s Maine itemized deductions.

In addition, the bill would increase the amount at which the Maine itemized deduction begins to phase out.

The itemized deduction changes would apply to tax years beginning after 2017. The federal limitation applies to tax years beginning after 2017 as well.

Personal Exemptions

Maine would decouple from the federal personal exemption provisions if the bill is enacted. Currently, the Maine personal exemption deduction is equal to the total amount of deductions allowed for federal tax purposes. However, the federal personal exemption deduction is temporarily repealed for the 2018 through 2025 tax years (IRC Sec. 151).

The bill would establish a $4,150 Maine personal exemption deduction. Taxpayers filing a joint return would be able to claim the deduction for their spouse as well. The deduction would not be allowed for anyone who is claimed as a dependent on another taxpayer’s return.

The deduction would be phased-out for higher-income taxpayers.

Both the personal exemption amount and phase-out thresholds would be subject to annual inflation adjustments.

The changes would apply to tax years beginning after 2017.

Education Savings Plans

The Tax Cut and Jobs Act allows taxpayers to use education savings plans to pay for elementary or secondary school tuition (IRC Sec. 529). Maine would follow this federal extension of 529 Plans beginning January 1, 2018, if the bill is enacted.

Dependent Exemption Credit

A new, nonrefundable dependent exemption tax credit would be added by the bill. The credit would be equal to $300 for each child or dependent claimed for federal child tax credit purposes. Partial credits would be available for certain nonresidents and part-year residents.

The credit would be phased-out for higher-income taxpayers.

The new credit would be available for tax years beginning in 2018 and thereafter.

Domestic Production Activities Deduction

The Maine addback for the federal domestic production activities deduction (IRC Sec. 199) would be eliminated. The federal deduction was repealed for tax years beginning after 2017 by the federal Tax Cuts and Jobs Act. The Maine changes would also apply to tax years beginning after 2017.

Family and Medical Leave Credit

A credit for employer-paid family and medical leave would be created if the bill is enacted. The credit would be applied against Maine the income tax and insurance premiums tax.

The credit would be equal to the federal credit enacted by the Tax Cut and Jobs Act (IRC Sec. 45S). It would be a nonrefundable credit. In addition, the credit would not be carried forward or back to any other tax year.

The Maine credit would apply to tax years beginning after 2017. The federal credit expires December 31, 2019.

Sales and Property Tax Fairness Credits

The bill would amend the sales tax fairness credit and the property tax fairness credit in several ways. First, the bill would replace references to exemptions claimed with references to dependents claimed under the federal child tax credit.

It would also remove the requirement to add the federal domestic production activities deduction to income for credit purposes. The federal deduction was repealed for tax years beginning after 2017 by the federal Tax Cuts and Jobs Act.

In addition, the bill would require annual inflation adjustments for the credits beginning in 2019.

Finally, for the property tax fairness credit, the bill would increase the:

  • credit amount from 50% to 100% of the benefit base above 6% of the taxpayer’s income; and
  • credit cap from $600 to $750 for taxpayers under 65 years of age and from $900 to $1,200 for taxpayers over 65.

The credit changes would apply to tax years beginning after 2017.

Fiduciary Adjustment

The Tax Cuts and Jobs Act created a 20% deduction for qualified business income from a pass-through entity (IRC Sec. 199A). The deduction applies for the 2018 through 2025 tax years.

A resident estate or trust’s income is subject to essentially the same modifications as an individual in determining Maine taxable income. These modifications together constitute the Maine “fiduciary adjustment.”

The bill would require an addback to the Maine fiduciary adjustment for the federal pass-through income deduction.

S.P. 612, as passed by the Maine Legislature on August 30, 2018

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