Corporate Close-Up: Maine’s Update to Federal Conformity Brings Corporate Tax Changes As Well

Maine’s legislature passed 2018 Me. S.P. 612 and updated its tax conformity statute last week in response to federal tax reform, as first reported by Aaron Nicodemus in the Daily Tax Report: State. As the article discusses, S.P. 612 moves Maine’s conformity date to March 23, 2018, thereby incorporating most tax changes resulting from federal tax reform.

While individual tax changes, specifically the preservation of a modified personal exemption, were the public focus of the legislation, there are significant changes for corporate income tax purposes that are worth highlighting.

Corporate Tax Bracket Revision

S.P. 612 enacts new tax brackets for corporate income taxpayers without modifying any of the applicable graduated rates. Now corporations are subject to a 3.5 percent rate on the first $350,000 of Maine taxable income, while the maximum rate of 8.93 percent only applies to those taxpayers whose taxable income exceeds $3,500,000. Maine’s middle brackets of 7.93 percent and 8.33 percent will apply to those with Maine taxable income between $350,000 and 3,500,000.

Deduction for Foreign Source Income

With the creation of the one-time deemed dividend under I.R.C. § 965 and the new global intangible low-taxed income (GILTI) stream of income, the Legislature sought to ameliorate the effects of these inclusions on the Maine corporate tax base. Accordingly, independent deductions were created for 50 percent of Subpart F income, including GILTI income, and an 80 percent deduction for I.R.C. § 965 income.

To prevent corporate taxpayers from benefiting from both these deductions and corresponding federal deductions, Maine also requires an addback for any amounts deducted under I.R.C. § 965(c) and for any GILTI amounts deducted under I.R.C. § 250(a)(1)(B). Likewise, the bill excludes Subpart F Income, I.R.C. § 951A and I.R.C. § 965 dividends from Maine’s standard dividend deduction.

The bill further clarifies that any amount excluded under these new deductions, or from Maine’s standard dividend deduction, may not be included in the sales factor of the apportionment formula.

Adjustments to Net Operating Loss Deduction and Other Changes

S.P. 612 decouples from the limitation on net operating loss deduction under I.R.C. § 172(a)(2) as long as Maine income is not reduced below zero and the deduction has not been previously used.

Finally, S.P. 612 repeals the Maine alternative minimum tax for all taxpayers, including corporations, and conforms to the repeal of the domestic production activities deduction under I.R.C. § 199.

So, while Maine has largely brought itself into alignment with federal tax reform, practitioners should be aware of the nuances of the new tax brackets and dividend deductions for corporate taxpayers.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What other issues affecting corporate taxpayers, if any, did the legislature not address in its response to federal tax reform?

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