Maine Changes Tax Laws to Favor Investment

Stan Rose and Merrill Barter, Managing Directors, Tax Practice
June 2011

On June 20, 2011, the state of Maine enacted budget legislation (L.D. 1043) affecting various Maine taxes. Many changes are quite significant, with the legislation being described by the Senate President as “containing the largest tax cuts in the history of Maine.” A future article will discuss changes related to personal income taxes and estate taxes. This article highlights a few changes focused on business endeavors: the Maine Capital Investment Credit, the Maine New Markets Capital Investment Program and sales/use tax changes related to aircraft.

Background

Since 2002, federal tax laws have allowed taxpayers an immediate deduction of the cost of certain fixed asset acquisitions. These write-offs can be achieved by use of Section 179 deductions or so-call bonus depreciation, both of which take the place of depreciation deductions that otherwise would recover the same costs over much longer periods. Many states, including Maine, historically have not allowed such sizeable federal deductions for state income tax purposes, and have required “add-backs” to spread most of the deduction over longer periods. (More details on the federal deductions can be found here: Tax Relief Act of 2010 – An Overview.) The new budget legislation greatly enhances Maine’s tax deductions for capital expenditures.

Maine Capital Investment Credit

For tax years beginning on or after January 1, 2011, businesses that claim a bonus depreciation deduction on their federal tax return for new property placed in service in Maine during the tax year are entitled to a Maine income tax credit equal to 10% of the federal bonus amount deducted. In 2011, businesses are entitled to deduct bonus depreciation on their federal returns equal to 100% of the property’s cost. Therefore, if 100% of qualified asset additions of $100,000 were placed in service in Maine, a taxpayer would receive a credit equal to 10% of the bonus depreciation, or $10,000. The Maine Capital Investment Credit is a nonrefundable credit – it may not reduce a business’s income tax liability below zero. However, any unused portion of the credit may be carried forward for up to 20 years.

The Maine Capital Investment Credit provides a state benefit linked to federal benefits for businesses that invest within the state borders. The new law also provides a benefit related to Section 179 that is not dependent on in-state investments. For tax years beginning after 2010, the Maine income modifications that neutralized the federal Section 179 deductions are repealed. Based on federal law, a deduction as large as $500,000 is available for 2011.

Maine New Capital Markets Investment Program

Based on the federal New Markets Tax Credit, L.D. 1043 establishes Maine’s New Capital Markets Investment Program, which encourages private-sector investment in economically distressed areas by providing a credit for businesses that invest in “qualified community development entities.” The credit is equal to 39% of the qualified amount invested, and is spread over a 7-year period with 7% allowed in year 3, and 8% in each of years 4 through 7. Pass-through entities such as S corporations and partnerships will allocate the credit to their shareholders and members. Aggregate investments totaling $250,000,000 have been authorized under this program. Some details regarding this program are yet to be finalized. The Finance Authority of Maine is charged with developing an application and certification process to allow a taxpayer to obtain the credit. Also, the text of the budget is somewhat ambiguous regarding the use of the credit. It refers to it as qualifying for a 20-year carry-forward on unused amounts but also as being “fully refundable,” which means the benefit can reduce a recipient’s tax below zero, creating a refund. These characteristics typically are mutually exclusive, and we anticipate further clarification from the State will follow.

Maine Law Eliminating Sales and Use Taxes on Aircraft and Aircraft Parts

Prior to the recently enacted budget, a person who bought a plane out of state without paying sales tax, and who later brought the plane to Maine for more than 20 days during the first year of ownership was subject to a 5% use tax. Also, parts used in service and repair work were subject to a 5% sales tax. Effective July 1, 2011, both taxes are eliminated. As a result, Maine aircraft businesses will be in better position to compete with similar businesses in neighboring states for repair and overhaul work and Maine is a more attractive place for nonresident and resident plane owners.

Conclusion

The changes described above are very significant. For nearly a decade, Maine has “decoupled” from some very beneficial federal tax laws that reward and encourage capital investment. The Maine Capital Investment Credit, revocation of the Section 179 add-back, the New Markets Investment Program and the aircraft sales and use tax break all demonstrate the State’s desire to provide an immediate reward to those who invest here. Several more tax changes were made by L.D. 1043, and those will be discussed shortly in an article to follow.

Adam Swanson, Merrill Barter and Stan Rose contributed to this article, which is provided for information purposes only and should not be relied upon for legal or financial advice. We would be happy to discuss how the tax provisions of L.D. 1043 affect you. For more details about this matter, please contact Merrill Barter or your BNN tax professional at 800.244.7444.

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