On January 25th, Maine Governor Janet Mills submitted a budget proposal to the Legislature that included a supplemental budget for fiscal year 2021 and a biennial budget for fiscal years 2022-2023. The budget proposal aims to help Maine families and businesses weather the pandemic and help the state stay ahead of projected revenue shortfalls. Combined across 2021 to 2023, the Maine Revenue Forecasting Committee estimates revenue shortfalls could reach $650 million.
“By tightening our belts wherever possible and maximizing non-General Fund resources such as federal funds, I am proposing in the supplemental and biennial budgets to continue rebuilding public health infrastructure and hold steady critical investments in health care, education and economic development,” stated Governor Mills in her letter to the 130th Legislature.
Maintaining a balanced budget that combats the pandemic and projected revenue shortfalls would undoubtedly present challenges. Some changes proposed in the supplemental budget could have significant effects on Maine taxpayers. The supplemental budget aims to make appropriations and allocations for these government expenditures by conforming to or decoupling from specific federal tax laws, including many relating to tax relief provisions enacted as part of the CARES Act and the Consolidated Appropriations Act, 2021 (CAA).
Proposed Conformity to Federal Law
Internal Revenue Code (IRC) of 1986, as amended through December 31, 2020 – Currently, Maine’s tax code conforms to the Internal Revenue Code of 1986, as amended through December 31, 2019. Amended state returns are often required when state laws lag behind federal laws. The supplemental budget proposes Maine conform to IRC, as amended through December 31, 2020, which generally applies retroactively to tax years beginning on or after January 1, 2018, and to any prior tax year specifically provided for in the IRC. When a federal change or correction affects a taxpayer’s Maine income tax liability, taxpayers have 180 days to file an amended Maine return.
TCJA NOL Limitation & CARES Act Deferral – Under the TCJA, NOLs are subject to a limitation of 80% of taxable income. The supplemental budget proposes Maine adopt the federal 80% limitation. The CARES Act suspended the 80% limitation for tax years beginning before January 1, 2021, to increase liquidity for businesses. The supplemental budget also proposes Maine conforms to the CARES Act suspension during the 2018 and 2019 tax years.
Proposed Decoupling from Federal Law
CARES Act & CAA Provisions for PPP Loan Forgiveness – The CARES Act allowed for the forgiven portion of a PPP loan to be excluded from federal taxable income, even if it would otherwise be treated as cancellation-of-debt income. Under the CAA, eligible business expenses paid using forgiven PPP funds may be deducted from federal taxable income. The supplemental budget proposes Maine decouple from these provisions. The proposal requires taxpayers to add back the forgiven portion of the loan to the extent they claimed a federal deduction for ordinary and necessary business expenses “that qualify for and are a basis of said loan forgiveness” retroactively to tax years beginning after January 1, 2019. If a loan is not forgiven during the tax year, the taxpayer is still required to add back the amount they “reasonably expect” will be forgiven. Should actual forgiveness differ from what was reasonably expected and added back, they may file an amended return.
CARES Act Provision for Excess Business Loss Limitation Deferral – The supplemental budget proposes that Maine decouple from the CARES Act’s deferral of the excess loss limitations for non-corporate taxpayers. The CARES Act deferred the application of the excess business loss limitation for tax years 2018, 2019, and 2020, allowing some taxpayers to claim a refund from an additional NOL in those years. The supplemental budget would require an add-back of that excess loss, and, for Maine income tax purposes, the disallowed excess loss can be deducted in future years.
CARES Act Provision for Interest Expense Limitation – The CARES Act increased the interest expense limitation from 30% to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 and 2020. The supplemental budget proposes Maine taxpayers add back the amount of interest deducted at the federal level that exceeds the 30% threshold. As long as no more than 25% of the amount is used as a Maine deduction in any one tax year, the taxpayer would be allowed to recoup the lost Maine deduction starting in 2021.
CARES Act Provision for Qualified Improvement Property (QIP) – The CARES Act corrected a TCJA drafting error that inadvertently made QIP subject to a 39-year depreciable life by retroactively allowing for a 15-year depreciable life, making QIP eligible for bonus depreciation starting in 2018. The supplemental budget proposes the exclusion of QIP placed in service in 2018 and 2019 from the Maine Capital Investment Credit.
CARES Act Provision for Charitable Deduction Limit Increase – For C corporations, the CARES Act increased the charitable contribution deduction ATI limitation from 10% to 25% for charitable contributions made in 2020, and the CAA extended the provision through 2021. The supplemental budget proposes Maine not conform to this increase specifically for tax years beginning after January 1, 2019, and before January 1, 2020. The proposal allows for taxpayers claiming the deduction for tax years beginning before January 1, 2020, to recoup the lost Maine deductions in subsequent tax years beginning before January 1, 2025.
TCJA Provision for GILTI and FDII Deductions – While Maine has always decoupled from the federal global intangible low-taxed income deduction enacted under the TCJA, the supplemental budget proposes Maine expand nonconformity to include both the 50% GILTI deduction and the 37.5% foreign-derived intangible income (FDII) deduction for tax years beginning on or after January 1, 2020.
CARES Act & CAA Provisions for Economic Injury Disaster (EIDL) Assistance Advances Forgiveness – The supplemental budget proposes Maine decouple from the CARES Act and CAA provisions that excluded EIDL loan forgiveness from federal gross income and allowed for the deduction of related expenses. The supplemental budget provides a state addition modification for instances where the CAA provisions result in a decrease to federal taxable income.
CAA Provision for Business Meals Deduction – The CAA allows for a 100% deduction for business meal expenses paid or incurred after December 31, 2020, and before January 1, 2023. The supplemental budget proposes Maine decouple from this provision and would require an add-back of any increased deduction for tax years beginning on or after January 1, 2021.
What Happens Next?
With the budget proposal now in the state appropriations committee’s hands, negotiations between lawmakers will follow. In her January 27th press release, Governor Mills calls the proposal a “starting point,” recognizing “there is more work to be done.”
In terms of PPP funds, the Mills Administration would prefer to provide the same beneficial tax treatment as the federal government. For Maine to fully conform to federal treatment of PPP loans, the state’s estimated cost is $100 million, so the proposed nonconformity was necessary to maintain a balanced budget. But Mills continues to seek other options.
“The Federal government recognized the value of their efforts when, in late December, it declared that it would provide a double tax benefit on proceeds appropriately spent. Unfortunately, at that time, it did not also offer compensation to the states for the loss of that tax revenue,” stated Governor Janet Mills. “I am asking my departments to take a fresh look at whether there may be any newly-available Federal funds that would allow Maine to maintain our balanced budget and adopt the same additional benefit the Federal government is offering to the numerous entities that received PPP.”
My team at ARB will be watching the situation closely, so stay tuned for updates as negotiations ensue. Feel free to contact me if you have questions and visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by David Jean, CPA, CCIFP, CExP
David Jean is a firm principal and the Practice Leader for ARB’s Business Advisory, Construction & Real Estate, and Succession Planning Services Groups. David focuses primarily on financial accounting and consulting for construction, real estate, and manufacturing companies. He is a member of The Certified Public Accountant Advisory Council, an exclusive, 10-member council formed to serve as the resource team for the National Association of Surety Bond Producers (NASBP).