March 18, 2021

Maine Legislature Votes to Conform with Federal Law for PPP Loans and Unemployment Benefits

By Eric Purvis, Partner, Tax & Business Services

State & Local Tax

After much anticipation, Maine taxpayers received good news on March 21 when the Maine Legislature voted to approve a bill requiring the state to fully conform with federal tax provisions for businesses that received Payroll Protection Program (PPP) loans and individual taxpayers who received unemployment benefits in 2020. The legislation passed shortly after the U.S. Congress passed the American Rescue Plan (“ARP”), which contained tax provisions that apply retroactively to 2020.

Taxpayers have been on a roller-coaster ride regarding the taxation of PPP loans, and for Maine taxpayers, the ride was an extended one. Faced with the prospect of having to pay tax on forgiven PPP loans, on February 9, 2021, Maine Governor Janet Mills proposed making the first $1 million in PPP loans tax-free on Maine tax returns. The proposal was an effort at striking a “middle ground between those who oppose conforming to the federal government’s double benefit and those who support full conformity, while ensuring that tax relief is delivered to Maine’s most vulnerable businesses.”¹

While welcomed by some Maine taxpayers, the proposal created uncertainty for Maine businesses with forgiven PPP loans that were trying to file their 2020 tax returns, since the proposal was not yet law. Were PPP loans taxable in Maine or not?

Exclusion for Unemployment Benefits

While the PPP discussion was taking place in Augusta, Congress was crafting the ARP, a nearly $2 trillion package to provide additional relief to Americans hard hit by COVID-19. The ARP was passed by Congress on March 10 and was signed into law by President Biden on March 11. The ARP includes many tax provisions, most of which are prospective. However, it also contains a major provision that applies retroactively to 2020.

Under this provision, up to $10,200 of unemployment benefits received in 2020 are not taxable for taxpayers with Modified Adjusted Gross Income (“MAGI”) of less than $150,000. The $10,200 is intended to cover 17 weeks of the $600 federal unemployment benefits previously enacted under the Coronavirus Aid, Relief & Economic Security (CARES) Act.

On March 12, the IRS issued guidance² in calculating the amount of benefits that are excludable from income and how to report unemployment income and the related exclusion. Included in the guidance is a new Unemployment Compensation Exclusion Worksheet to help calculate a taxpayer’s MAGI for purposes of the exclusion. Once the amount of excludable income is determined, taxpayers are instructed to report the full amount of unemployment benefits received on Line 7, Unemployment Compensation, of Form 1040 Schedule 1. On Line 8, Other Income, of the same Schedule 1, the taxpayer should enter the amount of excludable benefits as a negative number, and enter “UCE” as the description. For those who have received unemployment benefits but have not yet filed their returns, the IRS suggests waiting until revised forms and instructions are available before considering filing.

Married spouses may both exclude up to $10,200 of unemployment benefits, provided their MAGI is less than $150,000. The adjustments to determine MAGI do not include a deduction for an IRA contribution. If a taxpayer is close to the $150,000 threshold, she/he could make a deductible IRA contribution to reduce MAGI below $150,000. If a taxpayer filed his or her tax return prior to passage of the ARP, the IRS “strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other steps at this time.”³ More guidance will be forthcoming for taxpayers in this situation.

Maine Conformity

Back to Maine. Late at night on March 11, the Maine Legislature passed the supplemental budget, which contained provisions to fully conform to the federal taxation of PPP loans and exclusion of unemployment benefits for 2020. PPP loans in their entirety, and not just the first $1.0 million, are not taxable in Maine, and associated expenses remain fully deductible. Taxpayers also get the same state relief for unemployment benefits as they do on their federal tax returns. Passage of the supplemental budget provides welcome tax relief to Maine taxpayers as well as long-awaited certainty in filing 2020 tax returns.