Maine Tax Law is Updated to Conform to Late 2015 Federal Changes

(Maine Capital Investment Tax Credit is Extended)

Merrill Barter, Managing Director, Tax Practice
March 12, 2016

Maine’s lawmakers finally agreed to follow recent federal tax law changes, and their delay no longer will continue to hold up the filing of some taxpayers’ 2015 state income tax returns.

Background

For federal purposes, the enhanced Section 179 deduction was made permanent, and the 50% “bonus depreciation” deduction was extended through 2019. However, these changes took place in December 2015, retroactively applying to the beginning of the year. Until now, Maine had not decided how to handle these changes for state income tax purposes. 2015 state tax return forms were created assuming Maine would conform to these changes, creating uncertainty regarding whether such returns should be filed, and if so, would they need to be amended. This dilemma was discussed a few weeks ago in our newsletter, and by Andy Smith, who appeared on WGAN’s Inside Maine program, available now via podcast.

Just days before the March 15 corporate tax return filing deadline, Governor LePage signed legislation (L.D. 1583) that will conform Maine’s income tax statutes to the federal law as of December 31, 2015, more or less as expected. Unlike prior years where the federal laws were extended only one year at a time, we now have federal and state guidance that applies for many years into the future, which finally allows for proper planning. Here is how the Section 179 and bonus depreciation deductions are handled under the new Maine rules:

Section 179

The state continues to conform to the federal Section 179 limit allowing immediate deduction of as much as $500,000 of eligible property placed in-service during 2015.

Bonus depreciation/Maine Capital Investment Tax Credit

Similar to prior years, the state does not conform to bonus depreciation, and the Maine Capital Investment Credit is reinstated, with the add-back modifications and credits being calculated in the same manner as for 2014, with one difference, explained below, related solely to the credit percentage.

Assets for which bonus depreciation is used for federal purposes are subject to two alternative sets of rules for Maine purposes, depending on whether the asset is placed in service within the state borders.

  1. Non-credit property (assets placed in service outside Maine):
  2. For assets placed in service outside Maine, bonus depreciation is not used, and the assets are instead depreciated using regular tax “MACRS” depreciation. This results in an addback to Maine income in year one, which is recovered over the depreciable life of the asset. The mechanics are explained in a Guidance Document available on the Maine Revenue Services website. (Although it has not been updated since 2013, the portion describing 2013 additions for non-credit property is still applicable for non-credit assets.)

  3. Credit property (assets placed in service inside Maine):
  4. For assets placed in service in Maine, the total depreciation allowed under federal rules (which consists of partly “bonus” and partly “MACRS”) in year one is compared to the depreciation allowed in year one if only MACRS applied. That difference is treated as an income addback, but in its place a credit (dollar for dollar reduction of tax) is allowed, equal to 8% or 9% of income. The remaining cost of that asset (the portion not qualifying as a credit) is depreciated over the tax life of the asset using MACRS depreciation. (That depreciation matches federal depreciation, so no separate “tracking” is required.) The credit must later be recaptured in full if the property for which the credit was taken is not used in Maine for the entire 12 months after it is placed in service.

    The credit is equal to 9% of the add-back modification for C-corporations, and 8% of the add-back modification for individuals. Note that this is a change from 2014, when the credit was 9% for both corporations and individuals. Please note also that the Maine Capital Investment Worksheet that appeared on the Maine Revenue Services website until very recently (and used by most tax preparation software!) calculated the credit using 9% for individuals. Therefore, any individual income tax returns filed on which the credit was taken should be amended to reduce the credit to 8% of the addition modification. Maine Revenue Services has updated the Worksheet, a copy of which can be found here.

Please contact Merrill Barter or your BNN tax advisor at 1.800.244.7444 for assistance applying these rules to your specific circumstances.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.