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Maine Revenue Services Explains IRC § 965 Deferred Foreign Income Taxation

Maine Revenue Services (MRS) issued guidance and amended the Maine corporate income tax return instructions last week to explain Maine’s conformity to federal taxation of deferred foreign income, also called deemed repatriated income or Internal Revenue Code (IRC) § 965 income.

The federal Tax Cuts and Jobs Act requires shareholders of foreign corporations to report their pro rata “accumulated post-1986 deferred foreign income,” as that term is defined in IRC § 965, in the tax year beginning before January 1, 2018. Pursuant to Maine’s recent tax conformity legislation, Maine will also tax deferred foreign income, subject to several key differences.

First, for federal tax purposes, all shareholders are permitted to deduct amounts in accordance with the participation exemption described in IRC § 965(c). According to MRS, there is no corresponding participation exemption deduction for Maine corporate income tax purposes—but the deduction is allowed for individual and fiduciary income tax filers. Corporations are instead permitted an 80% deduction of deferred foreign income. We note that the existing 50% dividends received deduction does not apply to deferred foreign income. In addition, the 80% deferred foreign income deduction is subtracted from both the numerator and denominator of the sales factor for apportionment purposes.

Second, for federal tax purposes, a shareholder may elect to pay its net deferred foreign income in installments over the course of eight years. S corporation shareholders may elect to defer payment of the deferred foreign income. Maine does not provide for either election.

Taxpayers may need to amend their returns to reflect deferred foreign income. MRS will abate interest and penalties that would otherwise apply to 2017 amended Maine income tax returns to the extent that the interest and penalties are associated with the federal tax law changes addressed by the recently-enacted Maine tax conformity legislation, and if the amended return is filed no later than March 11, 2019. To qualify for abatement, affected taxpayers should write “TAX CONFORMITY” across the top of their return.

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About this Author

Sarah H. Beard, Pierce Atwood, Litigation attorney

Sarah Beard litigates cases involving state and local tax issues at all levels, and offers transaction planning, regulatory and legislative experience to assist clients in reaching their financial goals.

Sarah has more than 25 years of experience advising businesses on state and local tax issues.  Her practice covers all state and local taxes but concentrates on assisting businesses with Maine income tax and sales and use tax issues.  Her practice includes state and local tax controversy work at administrative levels and in court, as well as counseling and...

(207) 791-1378
Jonathan Block tax lawyer Pierce Atwood Law Firm

Jon Block represents and advises clients with Maine, New Hampshire, and Massachusetts tax problems. Jon litigates tax cases at the administrative level and through all levels of the court system, advises clients on transactional and multistate tax issues, obtains advance rulings for clients, and does a substantial amount of legislative and government relations work in the tax area. Jon's substantive expertise in state and local tax encompasses corporate and individual income tax, business profits tax, sales and use tax, property tax, excise tax, transfer tax, and other state and local taxes. Jon also advises expanding and relocating companies on taking maximum advantage of available tax and economic development incentives. Jon's client base includes large, medium and small businesses as well as individuals.

Jon has been integrally involved with designing, drafting, and enacting many of Maine's tax exemptions and economic development programs, and works hard to keep many of these programs on the books. Jon is also the state's leading expert on domicile and residency issues involving individual taxpayers.

(207) 791-1173
Kris J. Eimicke, tax lawyer, Pierce Atwood

Kris Eimicke concentrates his practice on tax issues and economic development programs, with a special emphasis on state and federal new markets tax credit (NMTC) programs, renewable energy tax credits, historic rehabilitation tax credits, and the newly created opportunity zone program. Kris also regularly advises businesses, tax-exempt organizations, and individuals on tax issues related to a variety of business transactions, as well as representation before the Internal Revenue Service, state revenue agencies, and the courts on tax matters. 

(207) 791-1248
Olga J. Goldberg, Pierce Atwood, tax lawyer

Olga J. Goldberg advises clients in complex state and local tax matters, including transaction planning and tax compliance. She represents clients on tax controversy matters from the administrative level through litigation and appeal or settlement. Olga’s practice covers all types of state and local taxes, including corporate income, business profits, franchise, sales and use, and property tax, with a focus on New England and Texas taxes.

Olga regularly speaks and writes on a wide range of state and local tax matters, and is actively involved in IPT and COST.

(207) 791-1180