Tuesday, January 26, 2021
Maine Governor Janet Mills presented a supplementary budget in the form of a package of amendments presented on January 25, 2021. The supplementary budget is characterized by its retrospective compliance with the Internal Revenue Code (IRC) as of December 31, 2020 and by its non-compliance with key tax relief provisions enacted under the CARES Act and the Consolidated Appropriations Act of 2021 (CAA).
Of particular importance is that the supplementary budget is decoupled from the part of these federal laws that excludes the granted portion of a Paycheck Protection Program (PPP) loan from the taxable income of a taxpayer and allows an otherwise available deduction for business expenses paid with loan proceeds . Our latest customer notification, Congress passes new and additional deals, tax relief measures in COVID-19 Stimulus Bill, provides further analysis of the CAA.
The supplementary budget would require taxpayers to repay the portion of the PPP loan made in the amount of the associated cost deduction. It is estimated that full compliance with the federal treatment of PPP loans would cost the state around $ 100 million.
Parts B, DH, and UX of the Supplementary Budget deal with Maine compliance or non-compliance and are discussed below.
Part B – Internal Revenue Code – MAINE CONFORMS
Part B would generally align Maine’s tax laws as of December 31, 2020 to the IRC, subject to the exceptions listed below. Currently, Maine’s tax code is the IRC as of December 31, 2019. This general compliance applies retrospectively to tax years beginning on or after January 1, 2018, as well as any prior tax years specifically provided for in the IRC.
Part D – Exceeding Business Loss Limit – MAINE DECOUPLES
Part D would detach itself from the postponement of the surplus loss restrictions for non-corporate taxpayers under the CARES Act. Under the Tax Cut and Jobs Act (TCJA), pass-through and sole proprietorship losses were subject to an excessive business loss limit of $ 250,000 (individual) / $ 500,000 (combined) at the individual investor level. Any excess loss could be carried forward to the following tax year as a net operating loss (NOL). The CARES Act has postponed the application of the excessive business loss limit for the 2018, 2019 and 2020 tax years. This allowed some taxpayers to apply for an additional NOL during those years, resulting in a refund. Part D of the supplementary budget would require an increase in the additional loss permitted under the CARES Act. The improper excess loss can then be deducted in future years for Maine income tax purposes.
Part E – Increase in the interest expense limit – MAINE DECOUPLES
Part E would decouple itself from the increase in the interest expense limit through the CARES Act. The TCJA limited the deduction of business interest expenses to 30% of adjusted taxable income. According to the CARES Act, the 30% limit for tax years starting in 2019 and 2020 will be increased to 50%. Part E would require Maine taxpayers to recalculate the federal amount of interest deducted that exceeds the 30% threshold. Taxpayers could redeem the lost Maine withholding from 2021, provided that no more than 25% of the amount is used as a Maine withholding in any tax year.
Part F – QIP put into service 2018 & 2019 – Excluded from Maine Capital Investment Credit
Part F would exclude Qualifying Improvement Properties (QIP) that became operational in 2018 and 2019 from Maine Capital Investment Credit. QIP is a classification of assets that generally includes certain interior, non-structural improvements to non-residential buildings. Due to an editorial error in the TCJA, QIP was subject to a depreciable term of 39 years and was not entitled to bonus depreciation. The CARES law corrected the mistake in order to retrospectively allow a depreciable term of 15 years, which qualified the property for a bonus depreciation from 2018. The Maine Capital Investment Credit is equivalent to a bonus write-off, and this change would exclude QIP, which went live in 2018 and is eligible for credit in 2019.
Part G – Raised Limits for Charitable Deductions – MAINE DECOUPLES
Part G would be decoupled from the additional charitable contribution deduction granted to companies under the CARES Act for tax years “from January 1, 2019 and before January 1, 2020”. These cut-off dates mean that the state would comply with the additional deduction of contributions under the CARES Act for companies with tax years starting on or after January 1, 2020. Taxpayers claiming the deduction for tax years beginning before January 1, 2020, could get the withholding back for lost Maine deductions in tax years beginning after January 1, 2020 and before January 1, 2025.
Part H. – – 80% NOL Limitation Deferral – MAINE CONFORMS
Part H, along with Part B, would take over the TCJA’s 80% limit on federal taxable income for NOLs, as well as the suspension of the CARES law’s limitation during tax years 2018 and 2019. The 80% limit would apply to tax years starting after 2020.
Part U – GILTI and FDII deduction – MAINE DECOUPLES
Maine has always decoupled from the federal global low intangible tax deduction (GILTI), IRC § 250 (a) (1) (B), enacted under the TCJA. Part U proposes to extend the amendment to the state addition to both the 50% GILTI deduction and the 37.5% deduction for non-material income from abroad, starting in tax years beginning on or after January 1. January 2020. The stated purpose for the non-compliance is to offset the cost of adjusting to other federal changes related to COVID-19 that would result in an estimated loss of $ 10 million in revenue.
Part V – PPP Loan Offering – MAINE DECOUPLES, WITH LIMITS
According to Part V, a taxpayer whose PPP loan is granted would have to count back the granted portion of the loan to the extent that the taxpayer claims a federal deduction for ordinary and necessary business expenses “that are qualified for this loan and form a basis for it . “Under the CARES Act, the portion of the PPP loan made is excluded from federal taxable income, even if it would otherwise be treated as a cancellation of debt income. With effect from December 27, 2020, the CAA also clarifies that eligible business expenses that are paid with issued PPP funds can be deducted from taxable federal income.
The supplementary budget provides for a government change in which part of the PPP loan granted is repaid in the amount of the corresponding cost deduction. Even if a loan is not made during the tax year, a taxpayer must still count down the amount the taxpayer “reasonably expects” and can file an amended declaration if the actual forgiveness differs from the taxpayer’s expectations. The addback requirement applies retrospectively for tax years beginning after January 1, 2019.
Part W – Disaster Relief for Economic Injuries Promotes Forgiveness – MAINE DECOUPLES
Part W would become decoupled from handling Economic Injury Disaster Assistance (EIDL) advances provided under the CARES Act. The CAA affirms that granting loans to an EIDL loan recipient is not included in federal gross income and does not result in a denial of deduction for related expenses. Like Part V, Part W includes an additional state amendment for any reduction in federal taxable income due to the CAA.
Part X – Business Meal Deduction – MAINE DECOUPLES
Part X would be decoupled from Section 210 of the CAA, which allows a 100% discount for business lunches where food or drink is provided by a restaurant and paid for or accrued after December 31, 2020 and before January 1, 2023. Part X requires a refund of an increased deduction for tax years beginning on or after January 1, 2021.
© 2020 Pierce Atwood LLP. All rights reserved.National Law Review, Volume XI, Number 26