Maine has issued guidance on how to report IRC Sec. 965 repatriation income and related deductions for 2017 state tax income tax returns.
Federal Deferred Foreign Income
Generally, deferred foreign income is the accumulated post-1986 deferred foreign income of a deferred foreign income corporation. For tax year 2017, each shareholder of a foreign corporation must include in federal taxable income (corporations) or federal adjusted gross income (individuals) their pro rata share of the accumulated post-1986 deferred foreign income (as determined by the foreign corporation on either November 2, 2017, or December 31, 2017, whichever amount is greater) reduced by the shareholder’s applicable participation exemption amount under IRC Sec. 965(c).
Treatment of Deferred Foreign Income in Maine
Accumulated post-1986 deferred foreign income is subject to Maine income tax. However, the related federal deduction for the participation exemption is not allowed for taxable corporations, but is allowed for individual and fiduciary income tax purposes. For taxable corporations, Maine law allows a deduction equal to 80% of the apportionable deferred foreign income, net of the foreign earnings and profits deficit deduction (IRC Sec. 965(b)), that is included in federal gross income.
Corporate Income Tax Filers
For corporate filers, the instructions provided by Maine Revenue Services provide guidance on how to:
– report deferred foreign income and increase Maine income for the federal participation exemption deduction;
– claim deductions for subpart F income and deferred foreign income;
– apply certain restrictions to the Maine foreign dividends received deduction; and
– adjust total sales in calculating the Maine apportionment factor.
Corporate taxpayers should note that the deduction amount for 80% of deferred foreign income and 50% of subpart F income must be excluded from the sales factor apportionment calculation, or from any other apportionment formula employed to attribute income to Maine. Further, the 50% deduction for apportionable dividends from affiliated corporations not included in the taxpayer’s combined report may not be taken with respect to deferred foreign income or subpart F income.
Individual Income Tax Filers
If an individual income tax filer has properly reported any 2017 tax year deferred foreign income on the 2017 federal form (Form 1040, line 21), it is already included in federal adjusted gross income and, therefore, already included in Maine taxable income. Because the deferred foreign income amount includable in federal adjusted gross income is fully taxable to Maine, there are no state modifications or special reporting requirements on the Maine individual income tax return.
Fiduciary Income Tax Filers
If the 2017 tax year deferred foreign income amount distributed to beneficiaries was properly reported on the 2017 federal form (Form 1041, line 8 and on Forms K-1 issued to beneficiaries), there are no Maine modifications required on the state fiduciary income tax return. However, if the 2017 tax year amount was not distributed to beneficiaries, this amount must be included on 2017 Maine Form 1041ME.
Unlike federal law, the state does not allow an election to pay the Maine tax liability associated with deferred foreign income in annual installments and does not allow an election by S corporation shareholders to defer payment of the tax liability.
Penalty and Interest Abatement
To avoid the assessment of penalties, an amended return must be filed whenever there is a change or correction affecting the taxpayer’s Maine income tax liability within 180 days from the date of the change or correction. However, Maine Revenue Services will abate interest and penalties that would otherwise apply to 2017 amended Maine income tax returns to the extent that the interest and penalties are associated with the federal tax law changes addressed by the recently enacted Maine tax conformity bill, and if the amended return is filed no later than March 11, 2019. Maine Revenue Services will also abate interest and penalties that would otherwise apply to 2017 original Maine income tax returns to the extent that the interest and penalties are associated with the federal tax law changes addressed by the recently enacted Maine tax conformity bill if the return is filed no later than October 15, 2018. To qualify for abatement, affected taxpayers should write “TAX CONFORMITY” across the top of their return.
Maine Tax Alert, Vol. 28, No. 11, Maine Revenue Services, October 2018, ¶200-905