Statutory Analysis of the Maine Research Expense Tax Credit: The 5% Incremental Framework and Regulatory Implementation

The Maine Research Expense Tax Credit provides a 5% credit on the portion of in-state qualified research expenses that exceeds a taxpayer’s three-year average spending level. This incremental incentive specifically targets businesses that actively increase their innovation investments within Maine’s borders, rather than merely maintaining existing research levels.1

The Conceptual and Legal Foundation of 36 MRSA Section 5219-K

The legislative intent behind Maine Revised Statutes Title 36, Section 5219-K is to reduce the financial risk and after-tax cost of research and development (R&D) activities conducted specifically within the state.3 By providing a non-refundable income tax credit, the state aims to stimulate private investment in technological innovation, which is viewed as a primary driver for high-quality job creation and long-term economic growth.2 The credit is structured to reward “incremental” spending—a design choice intended to ensure that state revenue is utilized to catalyze new activity rather than subsidizing a company’s static base of operations.2

The legal framework relies heavily on federal definitions found in the Internal Revenue Code (IRC), yet it maintains strict geographic boundaries. While the credit leverages the technical standards of IRC Section 41, it applies exclusively to expenditures for research activities physically performed in Maine.1 This creates a nuanced compliance environment where taxpayers must distinguish their federal Qualified Research Expenses (QREs) from their Maine-specific QREs.4

Administrative Oversight by Maine Revenue Services

Maine Revenue Services (MRS) is the sole authority responsible for administering the Research Expense Tax Credit.2 Unlike some industrial incentives that require pre-certification from economic development agencies, this credit is claimed directly through the tax filing process.3 The State Tax Assessor is empowered by statute to adopt rules necessary for the implementation of the credit, including rules for the apportionment of tax thresholds among members of a controlled group and the aggregation of activities across related corporate entities.1

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Technical Deconstruction of the 5% Credit Percentage

The heart of the Maine R&D incentive is the calculation of 5% of “excess” Qualified Research Expenses.1 To understand the meaning of this percentage, one must look at three interdependent variables: the definition of a QRE, the calculation of the base amount, and the determination of the excess.5

Qualified Research Expenses in the Maine Context

Maine law adopts the definition of QREs from IRC Section 41, but restricts the scope to activities conducted in-state.1 A QRE typically consists of three primary cost buckets: wages, supplies, and contract research.4

The “in-state” requirement is a critical distinction for the 5% calculation. If a company has a research team where half the members work in a laboratory in Portland, Maine, and the other half work in a facility in Portsmouth, New Hampshire, only the wages paid for the work performed in Portland qualify for the Maine credit.4 This geographic limitation extends to contract research; even if a Maine-based company pays a consultant for R&D, that research must be physically conducted within Maine borders to be included in the QRE total for the state credit.5

The Three-Year Average Base Amount

The “base amount” serves as the benchmark for the incremental credit.5 Under 36 MRSA § 5219-K(1), the base amount is defined as the average annual qualified research expenses spent by the taxpayer over the previous three taxable years.1 This rolling average creates a moving target: as a company increases its R&D spending, its base amount for future years also increases, effectively requiring continuous growth in innovation investment to continue generating the credit.2

For new businesses or those initiating research activities for the first time in Maine, the base amount for the first year is effectively zero.5 In the second year, the base is the QRE amount from the first year. In the third year, it is the average of the first two years. By the fourth year, the standard three-year rolling average is fully established.5 This structure provides a significant “startup” advantage, allowing 5% of the entire first-year R&D budget to be claimed as a credit.5

The Determination of “Excess” QREs

The “excess” is the mathematical difference between the current year’s Maine QREs and the calculated base amount.6 If the current year’s spending is less than or equal to the average of the previous three years, the excess is zero, and no credit is generated for that period.5 This incremental focus distinguishes Maine’s policy from states that offer “flat” credits on all R&D spending.2

$$\text{Maine Credit} = 0.05 \times ( \text{Current Year Maine QREs} – \text{3-Year Average Maine QREs} )$$

The 5% rate is lower than the federal regular credit rate (which can reach 20%) and the federal alternative simplified credit rate (14%), reflecting Maine’s position as a smaller fiscal actor that stacks its incentive on top of federal benefits.5

State Revenue Office Guidance and Legal Application

Maine Revenue Services provides guidance primarily through tax worksheets, instructional bulletins, and periodic tax alerts.3 The application of the law requires a precise adherence to both state statutes and the federal regulations they incorporate.1

The Four-Part Test for Qualifying Activities

To determine if an expense qualifies for the 5% credit, MRS guidance requires the activity to meet the federal “Four-Part Test” outlined in IRC Section 41(d).4

1. Permitted Purpose: The research must be intended to develop a new or improved business component, such as a product, process, software, technique, formula, or invention. The goal must be to improve functionality, performance, reliability, or quality.4
2. Elimination of Uncertainty: At the outset of the project, there must be a degree of technical uncertainty regarding the capability or method of achieving the desired result, or the appropriate design of the component.4
3. Process of Experimentation: The taxpayer must engage in a systematic process of evaluating alternatives to resolve the uncertainty. This often involves modeling, simulation, systematic trial and error, or other scientific methods.4
4. Technological in Nature: The process of experimentation must fundamentally rely on the principles of “hard science,” such as engineering, physics, chemistry, biology, or computer science.4

Expenditures that fail any part of this test—such as routine quality control, market research, or aesthetic design—cannot be included in the Maine QRE total.4

Aggregation and Controlled Groups

Maine law includes specific provisions for corporations that are members of a controlled group, as defined by IRC Section 41(f)(1)(A).1 For the purpose of determining the 5% credit, the State Tax Assessor may aggregate the activities of all member corporations.1 This prevents companies from splitting into multiple entities to manipulate the three-year base amount.4

In a combined return environment, a credit generated by an individual corporation must first be applied against the tax liability attributable to that specific entity.1 If that corporation has excess credit, it may be shared with other members of the unitary group, provided those members have their own tax liability and have not exceeded their own limitations.1

Limitations on Credit Utilization

While a taxpayer may generate a significant credit based on 5% of excess QREs, Maine law imposes strict ceilings on how much of that credit can actually be used to reduce tax liability in a given year.1

The “100/75” Rule for Corporations

For corporate taxpayers, the Research Expense Tax Credit is limited to 100% of the first $25,000 of tax due (before other credits) plus 75% of the tax due in excess of $25,000.1 This ensures that even the most R&D-intensive large corporations contribute at least a portion of their income tax to the state’s general fund.2

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Non-Refundability and the 15-Year Carryforward

The credit is non-refundable, meaning it cannot reduce a taxpayer’s liability below zero.1 However, any portion of the credit that remains unused due to the “100/75” limitation or a lack of tax liability may be carried forward for up to 15 succeeding taxable years.1 This extended carryforward period is particularly valuable for the biotechnology and high-tech sectors, where companies often incur massive R&D costs years before they become profitable.4

Comprehensive Calculation Example: The 5% Increment in Practice

To demonstrate the application of the law and MRS guidance, consider “Acadia Aerospace,” a hypothetical Maine-based engineering firm.

Step 1: Historical Expense Analysis

Acadia Aerospace has documented the following Maine-only QREs for the prior three years:

• Year -3: $1,200,000
• Year -2: $1,400,000
• Year -1: $1,600,000

The Base Amount is the average of these three years:

$$B = \frac{\$1,200,000 + \$1,400,000 + \$1,600,000}{3} = \$1,400,000$$

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Step 2: Current Year Expenditure and Excess

In the current tax year, Acadia Aerospace spends $2,000,000 on qualifying Maine research (wages for engineers in Bangor, supplies for carbon-fiber testing, and contract research performed by a lab in Orono).4

The Excess QRE is calculated as:

$$\text{Excess} = \$2,000,000 – \$1,400,000 = \$600,000$$

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Step 3: Calculating the Gross Credit

The Maine credit is 5% of the excess:

$$\text{Gross Credit} = \$600,000 \times 0.05 = \$30,000$$

Acadia also made a $100,000 basic research payment to the University of Maine which exceeded the federal base.1 This adds a 7.5% credit component:

$$\text{Basic Research Credit} = \$100,000 \times 0.075 = \$7,500$$

$$\text{Total Current Year Credit} = \$30,000 + \$7,500 = \$37,500$$

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Step 4: Applying Limitations

Assume Acadia Aerospace has a total Maine corporate income tax liability of $50,000 before credits.6 We must apply the “100/75” limitation:

1. 100% of the first $25,000 = $25,000
2. 75% of the remaining $25,000 ($50,000 – $25,000) = $18,750
3. Maximum Allowable Credit = $25,000 + $18,750 = $43,750

Since the total generated credit ($37,500) is less than the maximum allowable limit ($43,750), Acadia Aerospace can use the full $37,500 to reduce its tax due to $12,500 ($50,000 – $37,500).1 If the credit had been $50,000, the company could only have used $43,750, carrying the remaining $6,250 forward to the next year.5

Statistical Insights and Economic Evaluation

The impact of the Research Expense Tax Credit is documented through periodic reports from the Maine State Tax Expenditure Report and evaluations by the Office of Program Evaluation & Government Accountability (OPEGA).2

Revenue Impact and Participation

The credit results in a significant but targeted revenue loss for the state.2 Statistical data suggests that while the credit is available to all, it is utilized by a relatively small segment of the Maine business population.2

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The upward trend in revenue loss from FY 2022 to FY 2025 reflects a potential increase in R&D activity among Maine’s established firms or a broader recovery in innovation spending following economic shifts.9 However, OPEGA’s evaluations have highlighted that the concentration of benefits remains high, with large corporations in sectors like biotechnology and manufacturing claiming the lion’s share of the 5% incremental credit.16

Performance Evaluation and OPEGA Findings

A 2022 OPEGA evaluation concluded that Maine’s R&D credit is common among states (70% of states have one), but that Maine’s overall R&D performance has historically been poor despite the credit’s availability.3 The report noted that the incremental structure (the 5% of excess) might be a barrier for some businesses that have high but static research costs, as they cannot exceed their three-year base and thus receive zero benefit.3

The evaluation also emphasized that factors like academic funding, industry partnerships, and federal grant availability are often more influential in attracting R&D to Maine than the tax credit alone.3 Consequently, OPEGA recommended that the Legislature clarify the credit’s goals and improve data collection to better measure its effectiveness in creating high-quality jobs.3

The Evolution of the Law: LD 643 and Legislative Efforts

The Research Expense Tax Credit has been the subject of recent legislative debate, particularly regarding its competitive standing compared to neighboring states.12

Proposed Doubling of the Credit

In 2023 and 2024, Bill LD 643 sought to significantly expand the credit.16 The proposed changes included:

• Increasing the 5% incremental rate to 10%.12
• Increasing the 7.5% basic research rate to 15%.16
• Reducing the base amount to 50% of the three-year average, which would have substantially increased the “excess” portion eligible for the credit.9
• Raising the 100% threshold for corporations from $25,000 to $50,000.12

Legislative Outcome

Despite arguments that doubling the credit was necessary to promote Maine’s tech economy, the bill failed to pass and was placed in the legislative files as “dead” in March 2024.12 Maine Revenue Services expressed technical and fiscal concerns, noting that the bill would double the revenue loss to approximately $7.5 million annually and primarily benefit a small number of very large corporations.16 As of late 2025, the standard 5% incremental credit remains the prevailing law.1

Interactions with the “Super Credit” (36 MRSA § 5219-L)

Taxpayers should be aware of the distinction between the standard credit and the “Super Credit for Substantially Increased Research and Development”.4 The Super Credit was an additional incentive for research expenses that significantly exceeded a historical base amount.4

While the Super Credit is no longer available for new investments (it applied primarily to tax years beginning before 2014), many established Maine companies still carry forward unused Super Credits.4 These carryforwards have different limitations: they cannot reduce the tax due in any single year to an amount less than the tax due in the preceding taxable year after other credits.4 This “floor” prevents the Super Credit from being used to completely eliminate a corporation’s tax liability during a transition year.4

Comparison with Federal and Regional Incentives

The Maine 5% incremental credit is designed to complement, not replace, federal and other state incentives.5

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Maine’s choice of a three-year rolling average for its base amount differs from the federal “Regular Credit” method, which often uses a fixed-base percentage tied to receipts from the 1980s.5 By using a recent three-year average, Maine’s 5% credit is more responsive to a company’s current growth trajectory, though it also “punishes” companies that have consistently high research budgets but no year-over-year growth.5

Strategic Implications for Businesses and Pass-Through Entities

For businesses organized as S-corporations, partnerships, or LLCs, the Research Expense Tax Credit flows through to the individual owners.6

Pass-Through Mechanics

The entity calculates the total Maine QREs and the three-year base at the entity level, determining the total credit generated.5 This credit is then distributed to the partners or shareholders based on their ownership percentage.5 The individual owners then apply their share of the credit against their Maine individual income tax liability on Form 1040ME.6

Combined Reporting for Multi-State Entities

For corporations engaged in a unitary business both within and outside Maine, the credit calculation must be isolated to the Maine portion of the business.1 This requires a detailed “nexus” analysis to ensure that only the wages and supplies consumed in Maine are included in the 5% calculation.4 If a corporation is part of a combined return, it must first apply its own generated credit to its portion of the group’s Maine tax liability before the credit can be shared with other members.1

Conclusion

The 5% credit on excess Qualified Research Expenses remains the cornerstone of Maine’s tax strategy for innovation. By strictly adhering to the incremental model and federal technical definitions, 36 MRSA § 5219-K provides a predictable framework for businesses to recover a portion of their R&D investments. While the non-refundable nature and the 15-year carryforward period require sophisticated tax planning, the credit serves as a vital signal of Maine’s commitment to technological growth. As legislative efforts continue to weigh the balance between fiscal responsibility and competitive incentives, the current 5% mechanism stands as a targeted tool for businesses that are actively expanding their scientific and engineering capabilities within the State of Maine.

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