The Maine Board of Tax Appeals (Board) disallowed a resident individual taxpayer’s claim for a Maine income tax credit for taxes paid to Connecticut by the taxpayer’s limited liability company (the Company). The Company, treated as an S corporation for federal purposes, paid Connecticut’s entity-level tax on pass-through entities (a tax that operates as a workaround to the federal state and local tax (SALT) deduction cap, benefiting pass-through entity owners). The taxpayer received an offsetting Connecticut personal income tax credit for the same amount paid by the Company. After that offsetting 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 Company’s Connecticut tax paid because it was functionally a tax on his own personal income as the owner of, and recipient of flow-through income from, a pass-through entity. Even though the Company’s income passed through to the taxpayer, the Board explained that Maine’s credit is limited to taxes imposed on individuals and cannot be claimed for taxes paid by a separate business entity. Second, the Board dismissed the taxpayer’s argument that he could claim the credit for the amount of Connecticut income tax imposed upon him as an individual. Citing administrative guidance, the Board clarified that Maine’s credit applies to income taxes imposed by another state after application of credits; here, the taxpayer had no Connecticut personal income tax liability after using Connecticut’s offsetting credit for the Company’s tax paid.
This decision highlights a potential issue with many states’ new pass-through entity-level taxes intended as workarounds to the federal SALT deduction cap, namely, paying the entity-level tax in one state may impact an individual’s personal income tax credit for taxes paid in another.
[Individual Taxpayer] v. Maine Revenue Servs., Docket No BTA-2020-1 (Me. Bd. Tax App. Mar. 1, 2021).