Workaround: No income tax credit for the Maine taxpayer who paid the Connecticut flow-through tax


The Maine Board of Tax Appeals (Board) denied a resident taxpayer’s claim for a Maine income tax credit for taxes paid in Connecticut by the taxpayer’s limited liability company (the Company). The Company, treated as an S corporation for federal purposes, paid Connecticut entity-level tax on flow-through entities (a tax that functions as a workaround to the federal and local tax deduction cap (SALT), benefiting owners of intermediary entities). The taxpayer received a compensatory Connecticut personal income tax credit for the same amount paid by the Company. After this offset credit, the taxpayer owed no Connecticut income tax.

First, the Board rejected the taxpayer’s argument that he was entitled to a credit for the Connecticut tax paid by the company because it was functionally a tax on his own personal income as an owner. and beneficiary of the middle income of an entity transfer. Even though the company’s income has passed through to the taxpayer, the board explained that the Maine credit is limited to taxes imposed on individuals and cannot be claimed for taxes paid by a separate business entity. Second, the Board rejected the taxpayer’s argument that he could claim the credit for the amount of Connecticut income tax imposed on him as an individual. Citing administrative guidelines, Council clarified that the Maine credit applies to income taxes imposed by another state after the credits have been applied; here, the taxpayer had no Connecticut income tax payable after using the Connecticut offset credit for tax paid by the corporation.

The ruling highlights a potential problem with the new entity-level taxes passed on from many states, designed as workarounds to the federal SALT deduction cap, namely that paying the tax at the entity level in a state can affect an individual’s personal income tax credit for taxes paid. in other.

[Individual Taxpayer] v. Maine Revenue Serv., File n ° BTA-2020-1 (Me. Bd. Tax App. March 1, 2021).

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