Tax Changes in Biennial Budget

The recently enacted biennial budget for fiscal years ending June 30, 2012 and June 30, 2013 contains several taxpayer friendly provisions as well as some substantial revisions to Maine’s Administrative Tax Appeal process. Among the tax changes are: • The deadline for filing an appeal of a tax assessment has been extended from 30 to 60 days.•The Maine standard deduction and personal exemptions have been conformed to their federal counterparts. • Some tax-related penalties for the failure to file a tax return have been reduced. •The top income tax rate has been lowered from 8.5% to 7.95%.•The Maine estate tax exemption amount has been doubled from $1 Million to $2 Million (beginning January 1, 2013).LD 1371, An Act To Promote Fair and Efficient Resolutions in Tax Disputes, was enacted to streamline the tax appeal process in the State of Maine. As explained in the July 2011 Newsletter of the Federal and State Tax Section of the Maine State Bar Association, The major goals of the law are to make the process of appealing a tax assessment more fair and less burdensome for taxpayers at the administrative level, and to create a more robust Taxpayer Advocate to assist taxpayers who are dealing with issues at Maine Revenue Services. The bill was strongly supported by both the Maine Society of Certified Public Accountants and the Maine State Chamber of Commerce. It will be effective on July 1, 2012.This Act eliminates Maine Revenue Services’ (“MRS’”) existing appeals office which reports to the State Tax Assessor and replaces it with an Independent Appeals Office, led by a Chief Appeals Officer who will be hired by the Commissioner of Administrative and Financial Services. The Chief Appeals Officer will be required to exercise independent judgment when ruling on an appeal. To help maintain this independence, the Chief Appeals Officer and any subordinate appeals officers will not be permitted to have any ex parte communications with either MRS or the taxpayer. Appellate decisions will no longer require approvals of the division that issued the assessment and other Maine Revenue officials before being issued. Another change is the creation of a 90 day period beginning when a taxpayer files a request for reconsideration before the Independent Appeals Office will consider the request. During this time, the MRS division that issued the assessment and the taxpayer are encouraged to resolve issues the taxpayer has raised through informal discussion and settlement negotiations.LD 1371 also creates the office of the Maine Taxpayer Advocate, who will be selected by the Commissioner of Administrative and Financial Services and who will have the authority to help taxpayers with problems they may have with Maine Revenue Services. The Advocate is empowered to investigate taxpayer complaints and make recommendations to the State Tax Assessor with respect to those complaints. The Advocate is also required to submit an annual report to the Governor and Legislature concerning any systemic problems Maine Revenue Services may have in dealing with taxpayers.******Starting a Business in Maine Under Maine business organization law and federal tax law, there are several types of business organization forms which business people can use to conduct their business: •Sole proprietorships: informal business “entity” owned by an individual. Business income and losses taxed on the owner’s tax return. The main disadvantage is that the owner is liable for everything. Many tax breaks are also not available to sole proprietorships.• General partnerships: unincorporated business owned by multiple people. May exist without a written agreement. Each partner has the ability to manage the business, including the right to make legally binding decisions on behalf of the partnership, and each partner is equally liable for business debts and other liabilities. Partnerships file a separate tax return, with each partner receiving a Schedule K-1 which reflects the business’ loss or gain.•Limited partnerships or limited liability partnerships: type of partnership which has a written agreement setting forth each partner’s respective level of liability. A “general” partner has unlimited personal liability while the liability of a “limited” partner is typically limited to the amount of his/her investment. • Corporations: most common business form.åÊ A corporation is a “legal” person which can sue or be sued under its own name. A corporation is created by filing Articles of Incorporation with the Secretary of State. Bylaws must also be adopted by the incorporators or initial board of directors. Shareholders enjoy limited liability for business debts but the failure to observe corporate formalities, such as the maintenance of detailed records, may allow creditors to “pierce the corporate veil” to reach the personal assets of shareholders. A corporation may be either a subchapter C or subchapter S corporation. The income of a C corporation is taxed twice – once to the corporation itself when earned, and again to shareholders when distributed to them. S corporations do not file a corporate tax return; all tax liability is passed through to the shareholders on a Schedule K-1. S corporations are, however, subject to several eligibility requirements. •Limited liability companies (LLCs): formed by filing a Certificate of Formation with the Secretary of State. Under the new LLC Act, all Maine LLCs must now have a written limited liability company agreement. LLC members enjoy limited liability for business obligations (like corporate shareholders or limited partners) and, like partnerships, are taxed on their share of the LLC income. Choosing the right entity for your business involves both legal and practical considerations.åÊ If you wish to start a business and have any questions on how to proceed, please do not hesitate to contact us; with our extensive experience in commercial and business law, we will walk you through the process and match you with the type of entity that best fits your business needs.