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Maine owner of Connecticut LLC denied tax credit

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The Maine Board of Tax Appeals recently ruled that a resident individual who was an owner in a Connecticut limited liability company (LLC) was not entitled to a credit for income tax paid to Connecticut at the entity level.1 Upholding a decision of the Maine Department of Revenue Services (Department), the Board denied the resident credit based on a finding that the taxpayer had no Connecticut individual income tax liability after receiving a credit for the Connecticut passthrough entity (PTE) tax paid by the LLC. The Board likewise found that the denial of the credit under Maine tax law did not violate the Commerce Clause of the U.S. Constitution.

Background The taxpayer, a Maine resident individual, owned and operated a Connecticut LLC that was treated as an S corporation for federal income tax purposes. In 2018, Connecticut enacted a mandatory entity-level tax on PTEs, with an offsetting income tax credit for PTE owners on their pro rata share of tax paid by the PTE.2 After applying the credit for Connecticut PTE tax paid by the entity, the taxpayer had no remaining Connecticut personal income tax liability. On his Maine personal income tax return, the taxpayer claimed a credit against his Maine income tax liability for the taxpayer’s share of tax paid to Connecticut by the LLC. Upon review, the Department determined that the taxpayer was not entitled to the credit and instead issued an assessment of tax, interest and penalties.3 On appeal to the Board, the taxpayer argued that he was entitled to the income tax credit claimed on his return and that the assessment should therefore be cancelled.

Board of Tax Appeals decision Under Maine tax law, Maine residents may claim a credit against their personal income tax liability on the amount of tax imposed by another state on income derived from sources in that state that is also subject to Maine personal income tax.4 The taxpayer contended that he was entitled to a credit for Connecticut tax imposed upon and paid by the PTE. Additionally, the taxpayer claimed that he was entitled to a credit for the amount of income tax imposed upon him as an individual. Finally, the taxpayer alleged that Maine’s tax scheme is unconstitutional to the extent that no credit is provided under either of these theories.

No credit permitted for tax imposed on the PTE The Board first considered the taxpayer’s argument that he was entitled to a Maine tax credit for Connecticut PTE tax paid, because the income of the PTE flowed through to him and that the PTE tax functioned as a tax upon his own personal income. In its analysis, the Board reviewed a recent Maine Supreme Judicial Court decision, Goggin v. State Tax Assessor, which considered the case of Maine resident taxpayers who owned a New Hampshire LLC and claimed a credit for New Hampshire business profits tax and business enterprise tax imposed on the entity.5 In that case, the court concluded that the plain meaning of the Maine credit statute “excludes taxes that are imposed on, and paid by, business entities.” Applying the court’s reasoning in Goggin, the Board found that the Maine credit statute is limited by its terms to taxes imposed on individuals, and that the taxpayer may not claim a credit for tax imposed on a separate business entity.

No credit permitted when Connecticut income tax liability offset by PTE tax credit Turning to the taxpayer’s argument that he was entitled to a credit for the amount of Connecticut income tax imposed upon him as an individual, the Board specifically examined how the credit is computed. Consulting Department guidance, the Board noted that the credit applies to income taxes imposed by another jurisdiction after the application of other credits.6 Applying this guidance to the taxpayer’s facts, the Board determined that the taxpayer had no remaining Connecticut personal income tax liability after application of all available credits, including the credit for the taxpayer’s share of Connecticut PTE tax paid by the entity. For this reason, the Board concluded that the taxpayer was not entitled to a credit against his Maine personal income tax liability.

Maine income tax scheme does not violate U.S. Constitution Finally, the Board considered the taxpayer’s argument that the Maine personal income tax scheme violates the Commerce Clause of the U.S. Constitution because it permits double taxation. Consulting U.S. Supreme Court precedent, the Board examined whether the credit statute was internally consistent, asking whether identical application of the credit by every state would place interstate commerce at a disadvantage as compared with intrastate commerce.7 The Board noted that the Maine Supreme Judicial Court had previously examined the constitutionality of the credit statute in the Goggin case, finding that if all states had an income tax scheme similar to that of Maine, “there would be no disproportionate taxation of out-of-state income.” For these reasons, the Board concluded that the Maine credit statue did not present a constitutional violation based on the facts presented. Finding that the taxpayer was not entitled to a resident credit for PTE tax paid to Connecticut, the Board sustained the Department’s assessment.

Commentary Since the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), 20 states have adopted entity-level taxes allowing PTEs to deduct taxes paid at the entity level as a workaround to the $10,000 SALT deduction limitation for individual taxpayers. Under this approach, the imposition of tax on PTE income is shifted from the owner to the entity, generating a federal deduction at the entity level, followed by a deduction on the distributive share of the owners’ income. The owner is then permitted to claim a corresponding individual tax credit or an exclusion on the portion of the owner’s pass-through income that was subject to the entity tax. Connecticut was the first state to respond to the TCJA’s SALT deduction limitation through the development of a PTE tax, and to date is the only state that has done so through a mandatory rather than an elective regime. In addition, unlike many other regimes which allow PTE owners to claim a full 100% credit of their pro rata share of tax paid by the PTE, Connecticut only allows an 87.5% PTE tax credit.

The Board’s decision is indicative of the complications surrounding the operation of PTE taxes for PTE owners who are residents of states that have not enacted a similar PTE tax and do not explicitly provide a resident credit for the owner’s share of another state’s PTE tax paid at the entity level. To obtain the full benefit of the workaround to the federal SALT deduction limitation, PTE owners may expect that their resident state provides a credit against their personal income tax liability for state PTE taxes paid by the entity on the owner’s behalf. However, the Board’s decision demonstrates that this will not always be the case, depending on the structure of a state’s PTE tax and the specific language of a resident state’s crediting provision. In reaching its decision to deny the resident credit, the Board relied on a Maine Supreme Judicial Court decision that similarly denied a credit for a resident owner’s share of New Hampshire business profits tax, a mandatory tax that is also imposed at the entity level and precedes the existence of PTE taxes as workarounds to the SALT deduction cap. Curiously, the Board also relied on Department guidance in reaching the conclusion that the taxpayer had zero Connecticut personal income tax liability after the application of the credit for the taxpayer’s share of Connecticut tax paid by the PTE.

Although limited to the facts and circumstances of the taxpayer’s case, the decision suggests that Maine is unlikely to allow a resident credit for other elective state PTE taxes imposed at the entity level and paid on behalf of their owners. This policy could potentially change if Maine decides in the future to adopt its own PTE tax regime. In the meantime, PTEs with Maine resident owners should carefully weigh the benefits of making PTE tax elections in other states against the potential disadvantages for owners who are likely to be denied a resident credit against their personal income tax liability resulting from such election. The issue of potential double taxation for PTE owners illustrates the importance of analyzing the state tax consequences that should be considered alongside the potential federal income tax benefits and risks inherent in participating in state PTE tax regimes.



1 No. BTA-2020-1, Maine Board of Tax Appeals, Mar. 1, 2021.
2 Conn. Act. No. 18-49, Laws 2018, adding CONN. GEN. STAT. § 12-699.
3 The Department cancelled the assessed penalties prior to the filing of the appeal.
4 MAINE REV. STAT. ANN. tit. 36, § 5217-A.
5 Goggin v. State Tax Assessor, 191 A.3d 341 (Me. 2018).
6 Credit for Taxes Paid to Another Jurisdiction, Guidance Document, Maine Revenue Services, Dec. 2019.
7 Citing Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995).



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