Maine’s LD 1891, a legislative initiative aimed at enhancing economic growth, introduces key measures focused on pass-through entity taxation and child care support. This comprehensive legislation seeks to provide benefits for both businesses and families, addressing critical aspects of the state’s economic landscape.
Pass-Through Entity Tax:
LD 1891 introduces a pass-through entity tax (PTET), a significant move to support businesses structured as partnerships, LLCs, and S corporations. Pass-through entities are a common form of business structure where income passes through the business to the individual owners, avoiding double taxation.
If the tax is adopted, partnerships and S corporations that elect PTET would decrease their federal income tax while slightly increasing existing state taxes. This tax would allow the entity to reduce its ordinary income by the amount of the income tax paid, resulting in lower federal taxable income for the owners. The owners would receive a refundable credit against their state personal income tax.
The PTET is necessary due to the federal Tax Cuts & Jobs Act (TCJA) of 2017, which placed a limitation on the deduction of state and local taxes (SALT) on federal personal tax returns. The PTET is designed to mitigate the impact of this limitation by providing a workaround for the $10,000 cap on SALT itemized deduction.
Additionally, the PTET is not subject to the alternative minimum tax (AMT). Designed to limit tax benefits for high-income earners and applied in addition to regular income tax for certain individuals, estates, and trusts, the AMT had been commonly imposed on SALT deductions, but the same is not true for PTET.
Maine is one of the 6 remaining states with a state individual income tax that has not implemented the PTET.
Benefits of Pass-Through Entity Tax:
1. Tax Fairness: The pass-through entity tax ensures that businesses are taxed at the individual owner level, promoting fairness and equity in the tax system. This can be particularly beneficial for small and medium-sized enterprises (SMEs) that often operate as pass-through entities.
2. Encouraging Entrepreneurship: By reducing the tax burden on pass-through entities, LD 1891 encourages entrepreneurship and supports the growth of small businesses. This can stimulate job creation, innovation, and economic development within the state.
Child Care Tax Credit:
In addition to the pass-through entity tax, LD 1891 also addresses the crucial issue of childcare by introducing a business supported child care tax credit. Recognizing the challenges faced by families in balancing work and child care responsibilities, this tax credit aims to alleviate financial burdens associated with child care expenses.
To qualify for this credit business can provide child care assistance through dependent care assistance programs or operating on-site childcare facilities, to offer childcare services to their employees.
Benefits of Child Care Tax Credit:
1. Financial Relief for Families: The child care tax credit provides financial relief for families, helping them cover the costs of childcare services. This is particularly valuable for working parents who rely on childcare to pursue their careers.
2. Workforce Participation: By making childcare more affordable, LD 1891 aims to increase workforce participation, especially among parents. This can contribute to a stronger and more productive labor market, benefiting both families and the overall economy.
Maine LD 1891 represents a proactive approach to addressing economic challenges by implementing measures that support both businesses and families. The pass-through entity tax and child care tax credit are integral components of this legislation, fostering tax fairness, encouraging entrepreneurship, and providing crucial financial support to families. As Maine looks to strengthen its economic foundation, LD 1891 stands as a testament to the state’s commitment to inclusive and sustainable growth.For more information, visit https://legislature.maine.gov/. We also invite you to reach out to your local representative to comment on this bill.
John Hadwen joined ARB in 2021 as a tax director. 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.
