Businesses that have been approved for Pine Tree Development Zone (PTDZ) status by the Maine Department of Economic and Community Development are eligible for an income tax credit designed to eliminate their Maine income tax on the additional activity that results from expanding their operations in qualifying industries in Maine. This can be an extremely generous tax credit, but it requires more forethought than most other income tax benefits because the business must go through the application process before it hires the additional people or adds assets.
Calculating the Pine Tree Development Zone Tax Credit – Corporations
The basic calculation of the credit for C-corporations is fairly simple compared to the calculation for individuals and pass-through businesses.
- Calculate Maine income tax without regard for the PTDZ credit or any other Maine tax credits.
- Add up all of the additional Maine payroll and the value of all of the Maine property in the qualifying business activity since the company received its PTDZ certification.
- Add up all of the Maine property and payroll.
- Divide the amount from #2 by the amount from #3. This is called the apportionment factor.
- Multiply the company’s income tax from step 1 the apportionment factor calculated in step 4.
Keep in mind that property the company owns is valued at cost, but property that the company leases is included in the calculation at a rate of 8-times its annual lease payment. Note that real estate, personal property, leased property, and payroll all factor into this formula. That means that a company which is adding a small number of qualifying jobs but making significant capital investments in the targeted industries can receive a credit against a substantial portion of its Maine income taxes.
Calculating the Pine Tree Development Zone Tax Credit – Pass-throughs
S-Corporations, partnerships, and LLCs with Pine Tree Development Zone businesses have no corporate-level income tax to take a credit against. These businesses report their total income and their PTDZ income out to their owners. The PTDZ income divided by the total income is called the apportionment factor, and is used at the individual level for calculating the income tax credit.
Calculating the Pine Tree Development Zone Tax Credit – Individuals
In addition to the regular PTDZ tax credit worksheet, individuals must include worksheet PTE and a copy of their Pine Tree Development Zone certificate with their Maine income tax returns. Worksheet PTE performs a two-step calculation. First, it figures out what percentage of the taxpayer’s income comes from the PTDZ business and then multiplies that apportionment factor to determine the PTDZ tax credit from the business. The PTDZ credit cannot reduce Maine tax below zero and it cannot be carried forward to later years, but it is applied before all other tax credits. This means that the PTDZ credit can cause other credits which are refundable or eligible to be carried forward to drive income tax below zero or provide a benefit in future years.
Tax Tip: Owners of PTDZ businesses who add funds to a tax deferred account such as an IRA, 401(k), SEP, Simple, or HSA can increase their PTDZ credit percentage for the year, which may make those accounts more attractive than they usually are because those contributions will reduce federal and Maine income tax without reducing the PTDZ tax credit.
The Pine Tree Development Zone Tax Credit – Multiple Businesses
The Maine income tax forms and guidance documents are silent about how an individual who owns interests in multiple PTDZ businesses should calculate the tax credit. Each of the worksheets refers only to Pine Tree Development Zone Business in a singular sense. This author believes that taxpayers who own interests in multiple PTDZ businesses should file separate worksheets to determine the credit separately for each business. They should then include a statement totaling the credits attributable to each PTDZ business and report the total credit on schedule A of their Maine income tax returns.
Maine Revenue Service – Pine Tree Development Zone Tax Credit
Maine Revenue Service – Worksheet for claiming the income tax credit
Maine Revenue Service – Worksheet PTE