Maine’s Legislature is taking a significant step to support local businesses with the introduction of a pass-through entity tax (PTET). Under Maine’s PTET, partnerships and S corporations that elect this option can reduce their federal income taxes while slightly increasing state taxes. This is achieved by allowing the entity to deduct state income tax payments from its ordinary income, resulting in lower federal taxable income for owners. In return, owners receive a refundable credit against their Maine personal income tax. If enacted, the PTET bill, LD 191, would be effective for tax years beginning on or after January 1, 2025.
Addressing SALT Deduction Limitations
The PTET addresses the limitation on the deduction of state and local taxes (SALT) imposed by the federal Tax Cuts and Jobs Act (TCJA) of 2017, which capped SALT deductions at $10,000. By providing a workaround to this cap, the PTET helps mitigate its impact. Additionally, the PTET is exempt from the alternative minimum tax (AMT), offering an advantage that was not available for SALT deductions under AMT rules.
If the bill is enacted, Maine would finally join the majority of states in adopting such legislation, leaving only five states with individual income taxes yet to implement a PTET.
Changes from LD 1891 to LD 191
LD 191 builds on an earlier proposal, LD 1891, but reflects significant changes. LD 1891 included broader economic initiatives, such as the Child Care Tax Credit, aimed at addressing workforce challenges. However, these provisions were removed from LD 191, streamlining the legislation to focus solely on implementing the PTET. While the narrower scope may disappoint those hoping for broader economic incentives, the passage of LD 191 ensures critical relief for Maine’s businesses structured as pass-through entities.
For a deeper look at ARB’s tracking of the progress of PTET legislation in Maine, read our earlier coverage:
- Update on Maine LD 1891 Testimony Recap
- Boosting Economic Growth Through Pass-Through Entity Tax and Child Care Tax Credit
Looking Ahead
LD 191’s targeted approach addresses a key tax challenge created by federal policy, offering meaningful relief to Maine business owners. Business owners and professionals are encouraged to review these changes and consult their tax advisors to evaluate the PTET’s implications for their businesses. Leveraging this new tax election can help businesses optimize their tax strategies, reduce federal liabilities, and remain competitive. ARB will continue to follow this important issue as it develops and provide updates.
John Hadwen is a Principal at ARB. He specializes in providing individuals and businesses with comprehensive tax compliance and consulting services related to closely-held business, manufacturing, construction & real estate, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.
