COVID-19: Maine Income Tax Does Not Conform to FFCRA and the CARES Act
Maine Revenue Services (MRS) has informed taxpayers that Maine does not conform to the federal tax changes enacted in the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Instead, Maine conforms to the Internal Revenue Code as in effect on December 31, 2019. In a Tax Alert issued July 12, 2020, MRS highlighted changes to 2018 and 2019 income tax forms and instructions in response to the FFCRA and CARES Act.
Due to Maine’s nonconformity, various federal income tax relief provisions will not generate Maine tax benefits. Of particular concern to Maine business taxpayers is that Maine businesses will have to pay state income tax on the portion of Paycheck Protection Program (PPP) loans that is forgiven. As discussed below, taxpayers will, however, be able to subtract the amount of ordinary and necessary business expenses paid using the forgiven loan proceeds. Having to pay Maine income tax on forgiven PPP loans is likely to cause increased financial pain for many Maine businesses already suffering from economic dislocation due to the coronavirus pandemic. It will also complicate Maine income tax filings.
MRS warns that some taxpayers may be required to file amended returns as a result of Maine’s nonconformity and that such returns are due within 180 days of when there is a change or correction affecting a taxpayer’s Maine income tax liability.
Corporate Income Tax. The significant considerations for Maine tax purposes are discussed below. Corporate taxpayers whose 2018 or 2019 federal income tax return reflects FFRCA and CARES Act changes may be required to file a new Additional Worksheet to Report Certain “Other” Modifications to Maine Income Related to Federal Tax Law Changes Enacted After December 31, 2019 (Additional Worksheet) for the applicable tax year, in addition to an amended Maine tax return. 2018 Worksheet, 2019 Worksheet.
Federal suspension of 80% net operating loss limitation does not apply. Under the CARES Act, the federal 80% limitation on net operating losses (NOLs) enacted under the Tax Cuts and Jobs Act (TCJA) is temporarily suspended for the 2018 and 2019 tax years. Maine did not conform to the NOL deduction limitation in those years, and MRS advises that taxpayers that take an additional NOL deduction for federal income tax purposes should not subtract the additional amount for Maine purposes.
Nonconformity to federal depreciation of qualified improvement property. The CARES Act makes a technical correction to the TCJA that allows taxpayers to depreciate qualified improvement property (QIP) placed in service after 2017 using a 15-year recovery period instead of a 39-year recovery period. The change qualifies QIP for the 100% bonus depreciation deduction, beginning in 2018. Maine has not conformed to this change, and continues to require that taxpayers use a 39-year recovery period. Maine taxpayers must add back the difference between the bonus depreciation deduction (or depreciation under a 15-year recovery period, as applicable) and depreciation using a 39-year recovery period.
Nonconformity to increased 50% business interest expense deduction. The CARES Act increases the federal deduction for business interest expense from 30% to 50% of federal taxable income for the 2019 and 2020 tax years. Maine does not conform to this change, and taxpayers must prepare a pro forma Form 8990 to recalculate their interest expense deduction limitation.
Nonconformity to exclusion from gross income of Paycheck Protection Program loan forgiveness. Under the CARES Act, the portion of the Paycheck Protection Program loan that is forgiven is excluded from gross income, even if otherwise treated as cancellation of indebtedness income. Maine does not conform to this change, and taxpayers must increase their taxable income by the amount of loan forgiveness and decrease taxable income by the amount of ordinary and necessary business expenses paid using the forgiven loan proceeds. Our understanding is that further legislation addressing the federal impact of the exclusion is likely.
Subtraction for federal income increase due to paid leave credits. For federal tax purposes, a taxpayer must increase its income by the amount of payroll tax credits for paid family and sick leave under FFCRA and for the Employee Retention Credit under the CARES Act. For Maine tax purposes, these credits are not allowed, and taxable income must be decreased by the amounts included in federal taxable income as a result of these credits.
Nonconformity to increased charitable deduction limitation. The CARES Act increased the charitable deduction limitation to 25% for both cash and qualified food donations made during 2020. Maine has not conformed to this increase, and the deduction for Maine purposes remains a maximum of 10% for cash contributions and 15% for qualified food contributions.
Individual Income and Fiduciary Income Taxes. Individual and fiduciary tax year 2018 and 2019 income tax forms and instructions have also been updated to reflect Maine’s nonconformity to the FFCRA and the CARES Act. Similar to corporate income tax, for individual and fiduciary income taxes, Maine has not conformed to the federal tax changes related to QIP depreciation, to the business interest expense deduction limitation, to the treatment of forgiven PPP loan amounts, and to the income tax treatment of Employee Retention Credit. Maine also continues not to impose the 80% NOL limitation repealed by the CARES Act.
In addition, Maine has not conformed to the CARES Act deferral of the limitation on excess business losses for noncorporate taxpayers to tax years beginning after December 31, 2020. To calculate the limitation on losses, taxpayers must complete a pro forma federal Form 461.