Maine’s consideration of a pass-through entity tax (PTET) has drawn attention from across the business community. Supporters say it would make Maine’s tax structure fairer and more competitive, while some critics argue it would mostly benefit high-income business owners. In reality, if carefully designed, a PTET could help a far broader range of Maine businesses — from family-owned shops to growing manufacturers — by improving cash flow, leveling the playing field with other states, and supporting reinvestment in local communities.
What PTET Would Do
A pass-through entity tax allows qualifying businesses — typically S corporations, partnerships, and LLCs — to pay state income tax at the entity level rather than at the individual level. This approach is a response to the $10,000 federal cap on state and local tax (SALT) deductions. By shifting the deduction to the business, PTET lets owners effectively deduct the full amount of state income taxes on their federal returns.
More than 30 states already offer this election, giving their business owners a way to reduce overall tax liability. Maine has studied adopting a similar policy. If enacted, PTET could become a new planning tool for a wide range of Maine businesses.
The Common Criticism and a Broader View
Some policy discussions frame PTET as a “tax break for the wealthy,” suggesting that only high-income business owners stand to gain. While it’s true that larger owners might see greater dollar savings, that view overlooks several ways PTET can help smaller and mid-sized operations. Maine’s economy relies heavily on pass-through entities — from construction firms and professional services to family-run manufacturers. For these businesses, every tax dollar saved can support hiring, pay increases, or new equipment. PTET is not just about tax relief for a few. It’s about removing a disadvantage faced by all pass-through owners compared with C corporations, which already deduct state taxes at the entity level.
Who Could Benefit
If implemented, PTET could support multiple groups across Maine’s business landscape:
- Small and midsized business owners: A PTET deduction can lower overall federal tax, leaving more working capital in the business for expansion or modernization.
- Employees: When owners retain more after-tax income, they’re often able to reinvest in wages, benefits, and training.
- Family businesses and local partnerships: PTET can simplify tax compliance by consolidating tax payments at the entity level instead of managing multiple individual estimates.
- Maine’s broader economy: Adopting PTET keeps Maine competitive with neighboring states, making it easier for businesses to operate across state lines without tax disadvantages.
For many small businesses, the benefit isn’t about large savings — it’s about consistent, predictable cash flow that supports stability and growth.
The Fairness Argument
Without PTET, Maine’s pass-through businesses face an uneven playing field. C corporations can deduct all state taxes as a business expense but S corporation and partnership owners can’t because of the federal SALT cap. A well-designed PTET corrects this imbalance by allowing pass-throughs to deduct the same expenses as other business types. This creates parity and makes Maine’s tax system more equitable for entrepreneurs who have chosen flow-through structures for legitimate business reasons — not for tax avoidance. For a state where many businesses are locally owned and employ Maine residents, ensuring that those businesses are not at a disadvantage supports long-term economic health.
Why Broader Adoption Helps Maine
Beyond individual tax benefits, adopting PTET can yield wider advantages for the state:
- Encourages investment: Businesses that keep more after-tax income are more likely to invest in facilities, technology, and workforce development.
- Enhances competitiveness: Many nearby states already have PTET laws. Maine’s adoption would help level the field for companies competing regionally.
- Improves predictability: Entity-level taxation provides clearer timing for state revenue collection and simplifies compliance for multistate filers.
- Strengthens local economies: When small and mid-sized businesses thrive, local suppliers, contractors, and service providers benefit as well.
PTET is ultimately a business climate issue — one that can help Maine retain and attract businesses that might otherwise relocate to states with more favorable tax structures.
What Business Owners Can Do Now
Although PTET legislation has not yet been finalized, business owners can start preparing by:
- Reviewing their entity structure and ownership composition
- Discussing PTET scenarios with their tax advisor
- Modeling potential cash flow changes if the entity pays tax directly
- Monitoring state legislative updates for an effective date and election process
Preparation ensures that, if Maine adopts PTET, businesses can make timely elections and take advantage of the benefits right away.
Looking Ahead
The conversation about PTET in Maine isn’t just about tax savings — it’s about creating fairness, competitiveness, and opportunity for businesses of all sizes.
While higher-income owners may see the largest individual savings, small and mid-sized businesses stand to gain stability and reinvestment potential that strengthens the entire state economy. If Maine moves forward with PTET, thoughtful implementation and clear communication will help ensure its benefits reach the broad business community it’s meant to serve.
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.
