A Comprehensive Analysis of Maine Revised Statutes Title 36, § 5219-K: The Research Expense Tax Credit

Maine Revised Statutes Title 36, § 5219-K establishes a non-refundable income tax credit for businesses increasing their research and development investments within the state, calculated as five percent of expenditures exceeding a three-year average plus seven-and-a-half percent of basic research payments.1 This provision serves as a strategic fiscal lever designed to reduce the high cost of innovation and incentivize the growth of high-technology industry sectors throughout the Maine economy.3

The Research Expense Tax Credit (RETC) represents a cornerstone of Maine’s broader economic development strategy, specifically targeting the financial risks associated with technological advancement and experimental research.3 Originally enacted in 1995 and effective for tax years beginning on or after January 1, 1996, the credit has become a permanent fixture in the state’s tax landscape, distinguishing itself from other incentives that frequently face sunset provisions.1 By aligning state definitions with the federal Internal Revenue Code (IRC) Section 41, Maine provides a familiar regulatory framework for taxpayers while maintaining strict controls that ensure the credit only subsidizes activities conducted physically within state borders.6 This alignment allows Maine Revenue Services (MRS) to leverage federal standards for qualifying research, thereby streamlining the administrative burden on both the state and the taxpayer.3 However, the statute also introduces several state-specific limitations, such as a bifurcated cap on corporate utilization and a rolling three-year average for the base amount, which create a unique profile for the Maine credit compared to its federal counterpart.1

Statutory Architecture and Core Provisions

The legal structure of § 5219-K is divided into seven critical subsections that define the scope, limitations, and administrative requirements of the credit.1 The first subsection establishes the entitlement to the credit, mandating that any taxpayer subject to tax under Part 8 of Title 36 is eligible if they satisfy the expenditure requirements.1 The credit amount is functionally split into two parts: an incremental research expense component and a basic research payment component.2 The incremental portion is set at 5% of the excess of qualified research expenses (QREs) for the taxable year over the base amount, while the basic research component provides a 7.5% credit for payments made to qualified organizations like universities or scientific research institutes.1 This dual-rate structure incentivizes both the internal development efforts of businesses and their external collaborations with academic institutions.2

The second subsection prohibits the credit from being refundable, ensuring that it can only be used to offset an existing tax liability and cannot result in a direct payment from the state treasury.1 This reflects a conservative fiscal policy intended to reward profitable or maturing businesses while limiting the state’s exposure to early-stage startups that may not yet generate tax revenue.3 To mitigate the impact of this non-refundability on capital-intensive industries, the fifth subsection allows for a 15-year carryover period.1 This extended window is crucial for industries like biotechnology and advanced manufacturing, where the timeline from research investment to revenue generation is often measured in decades.2 The statute also grants the State Tax Assessor the authority to adopt necessary rules for implementation, providing a mechanism for the revenue office to respond to changes in federal law or emerging economic trends.1

Federal Conformity and the Four-Part Test

Maine’s RETC is fundamentally a “conformity” credit, meaning its foundational definitions are borrowed from the Internal Revenue Code (IRC) Section 41.1 This policy of conformity is intended to minimize the “compliance gap” between federal and state filings, as most businesses claiming the Maine credit are already calculating their federal research activities on IRS Form 6765.6 Specifically, § 5219-K(1) stipulates that terms such as “qualified research expenses,” “basic research,” and “qualified organization” must be interpreted according to the federal standards.1 However, the state introduces a critical “in-state” restriction: while the definitions are federal, the expenditures must be tied to activities conducted exclusively within the State of Maine.6

To qualify for the credit, a project must satisfy the rigorous federal “Four-Part Test”.6 First, the research must be “technological in nature,” relying on principles of physical or biological sciences, engineering, or computer science.6 This excludes social sciences, arts, or humanities research.6 Second, the research must have a “permitted purpose,” which is the creation of a new or improved business component—defined as a product, process, software, technique, or formula.2 Third, the activity must be intended to “eliminate uncertainty” regarding the capability, method, or design of the component.6 Finally, the taxpayer must engage in a “process of experimentation,” which involves a systematic evaluation of alternatives through modeling, simulation, or trial and error.6

This definition encompasses both “revolutionary” breakthroughs and “evolutionary” improvements to existing products.13 For example, a Maine-based manufacturer attempting to refine a chemical process to reduce waste would likely qualify, provided the refined process is intended to improve performance or reliability and involves technical experimentation.6 Conversely, activities such as routine data collection, market research, or aesthetic styling do not meet the criteria.2 Maine Revenue Services emphasizes that taxpayers must maintain contemporaneous documentation, such as lab notes, testing protocols, and project records, to substantiate that their activities meet these four requirements.6

Defining Qualified Research Expenses (QREs)

The calculation of the Maine RETC begins with identifying the total Qualified Research Expenses (QREs) incurred during the tax year.2 Consistent with federal guidelines, Maine recognizes three primary categories of research costs, provided they are attributed to work done in Maine.2 The integration of these expenses into the state tax return requires a careful carve-out of Maine-specific data from the broader federal figures.14

Wages represent the largest component of most R&D claims, often accounting for approximately 60% of the total credit value.2 Eligible wages include those paid to employees directly involved in research, as well as those who directly supervise or support the research staff.6 This includes individuals performing “first-level” supervision, such as a lab manager overseeing a team of scientists, but generally excludes high-level executives unless they are hands-on in the experimental process.6 For the purpose of the Maine credit, the employee must physically perform the work within the state, even if the employer is headquartered elsewhere.2

Supplies used in the conduct of research are also qualifying expenses.8 This includes materials, chemicals, and prototypes, but explicitly excludes land, improvements to real property, and depreciable equipment.6 While the purchase of a research lab itself is not a QRE, the chemicals and prototypes used inside that lab are eligible.6 Finally, contract research expenses—amounts paid to third parties like consultants or outside engineering firms—can be included, though they are typically limited to 65% of the actual amount paid, reflecting the federal standard incorporated by Maine law.8

Calculation Methodology and the Base Amount

The Maine RETC is an “incremental” credit, meaning it is designed to reward businesses that increase their research spending over time rather than those with stagnant R&D budgets.3 The calculation is based on the “excess” of current-year QREs over a specific “base amount”.1 This base amount is calculated as the average annual research expenditure over the three taxable years immediately preceding the current tax year.1 If a taxpayer has fewer than three years of prior research activity, the base amount is the average of the available prior years, which may be zero for a startup in its first year of research.2

The mathematical formula for the generated credit is expressed as follows:

$$Total Credit = +$$

Where $QRE$ represents Qualified Research Expenses and $BRP$ represents Basic Research Payments.1

This rolling three-year average creates a “moving target” for businesses.3 A company that experiences a massive spike in research spending in one year will see its base amount rise in subsequent years, necessitating even higher spending to continue qualifying for the incremental credit.15 This structure has been criticized by some economic development groups as a “penalty” for sustained excellence, but it remains the standard mechanism to ensure the state only subsidizes “new” or “increased” innovation.3

In the case of a short tax year (less than 12 months), the qualified research expenses must be prorated according to federal regulations.12 This ensures that the base amount is not artificially deflated by a partial year of activity, which would otherwise lead to an inflated credit in the following year.14 Maine Revenue Services guidance specifies that these calculations must be meticulously documented on the Research Expense Tax Credit Worksheet.6

Corporate Limitations and Thresholds

While individual taxpayers and pass-through owners are generally limited only by their total tax liability, corporations face a specific and significant statutory cap under § 5219-K(3).1 This provision, often referred to as the “75% limitation,” ensures that corporations with high tax liabilities cannot completely eliminate their tax burden through the RETC alone.8

The limitation is applied through a two-tier calculation:

1. First $25,000 of Tax Due: The credit can offset 100% of the corporation’s first $25,000 in income tax due, determined before the allowance of any other credits.1
2. Tax Due in Excess of $25,000: For any tax liability beyond the initial $25,000, the credit is limited to 75% of that excess amount.1

For example, if a corporation has a total Maine tax liability of $125,000, the maximum credit it could claim in that tax year would be calculated as follows:

$$Max Credit = \$25,000 + [ 0.75 \times (\$125,000 – \$25,000) ] = \$25,000 + \$75,000 = \$100,000$$

In this scenario, the corporation must still pay at least $25,000 in tax (25% of the $100,000 excess), regardless of how many research credits it has generated or carried forward.1 Any generated credit that exceeds this annual limitation is not lost but is instead carried forward to the next year, subject to the 15-year expiration rule.1 This mechanism ensures that the state’s general fund receives a minimum contribution from large profitable entities while still providing a robust incentive for those companies to keep their research operations in Maine.7

Pass-Through Entities and Individual Owners

A substantial portion of Maine’s innovation economy is comprised of S-corporations, Partnerships, and Limited Liability Companies (LLCs).2 For these “pass-through” entities, the RETC is calculated at the entity level but is not paid by the entity itself.2 Instead, the credit “flows through” to the partners, members, or shareholders in proportion to their ownership interest in the business.14

Individual owners claim their share of the credit on their personal Maine income tax return (Form 1040ME) by attaching the appropriate credit worksheet.2 Crucially, the $25,000/75% corporate limitation does not apply to individual taxpayers.7 For an individual owner, the credit is limited only by their total Maine tax liability for the year; they can use the credit to reduce their tax due all the way to zero, though any excess beyond their liability must be carried forward.2

This creates a distinct advantage for research-heavy businesses organized as pass-through entities.2 By avoiding the corporate limitation, owners of these firms can realize the tax benefits of their R&D investments more quickly than if they were organized as C-corporations.2 Maine Revenue Services instructions require pass-through entities to provide each owner with their share of the credit via Schedule K-1, and individual taxpayers must enter the entity’s name, ID number, and their ownership percentage on the state worksheet to validly claim the credit.14

Combined Returns and Controlled Groups

Maine tax law provides specific aggregation rules for related business entities to prevent companies from splitting their operations into multiple shells to maximize the $25,000 threshold.1 The State Tax Assessor has the authority to aggregate the activities of all corporations that are members of a “controlled group” as defined by the federal IRC § 41(f)(1)(A).1 This aggregation applies regardless of whether the entities are incorporated or not, as long as they are under “common control”.1

For corporations that file a Maine combined return (a “unitary” group), the application of the RETC follows a “member-first” priority rule 1:

1. Individual Member Application: A credit generated by a specific member corporation must first be applied against the tax liability attributable to that specific company’s portion of the combined return.1
2. Sharing Excess Credits: If a member corporation has generated more credit than its own tax liability can absorb, it may apply that excess against the tax due of another member of the same unitary group.1
3. Group Limitations: The sharing of credits is still subject to the 75% limitation described in subsection 3.1 No member corporation can use shared credits to reduce its tax due below the statutory limits.1
4. Carryforward Continuity: Any unused, unexpired credits are carried forward by the specific individual corporation that originally generated them, even if that corporation later leaves the unitary group.1

This framework allows large corporate groups to optimize their tax position in Maine while ensuring that the credit remains tied to the entity that actually performed the qualifying research activities.1

Guidance from Maine Revenue Services

The administration of the RETC falls under the jurisdiction of Maine Revenue Services (MRS), which provides guidance primarily through Instructional Bulletin No. 50 and the annual tax return instruction booklets.3 Unlike some other state agencies, MRS does not have a mandate to monitor the economic effectiveness of the credit; its role is purely ministerial—verifying the mathematical accuracy of the claims and ensuring adherence to the statutory definitions.7

To successfully claim the RETC, taxpayers must submit a completed Research Expense Tax Credit Worksheet along with their Maine income tax return.2 Furthermore, MRS requires a copy of the federal Form 6765 (“Credit for Increasing Research Activities”) to be attached.6 This is critical because the state auditor uses the federal form to verify the base period amounts and the classification of expenses as “qualified research”.7

Recent updates to MRS guidance emphasize the shift toward electronic filing through the Maine Tax Portal (MTP).17 Corporations are generally required to make estimated tax payments unless their total liability (after credits) is less than $1,000.17 If a taxpayer discovers an error in a previous claim, they must generally file an amended return rather than attempting to “catch up” the credit in a subsequent tax year.17 MRS also reminds retailers and researchers that state-specific resale certificates from other states are not valid in Maine, which is relevant for R&D firms that may be purchasing supplies across state lines and attempting to claim sales tax exemptions concurrently with the RETC.19

Economic Performance and OPEGA Evaluation

In 2021-2022, the Office of Program Evaluation and Government Accountability (OPEGA) conducted a comprehensive review of the RETC to determine if the state was receiving a sufficient return on its investment.7 The evaluation concluded that while the credit is a common and necessary tool for regional competitiveness, Maine has historically performed poorly on key innovation metrics despite the credit’s presence.3

National Science Foundation data cited by OPEGA indicates that Maine lags behind other states in terms of a highly skilled R&D workforce and private-sector innovation investment.7 In 2020, Maine’s total R&D spending rose slightly from 1% to 1.1% of state GDP, but this remains significantly below the national average and the performance of neighboring states like Massachusetts.15

OPEGA identified a critical “transparency gap” in the current statute.3 Because MRS is not required to collect detailed data on the specific industries or job types supported by the credit, policymakers have historically lacked the information needed to refine the incentive.3 Recommendations from the OPEGA report included memorializing clearer goals for the credit, improving data collection, and amending the design to ensure broader accessibility for the intended beneficiaries.3

The Legislative Horizon: LD 794 and Proposed Expansion

The Maine Legislature is currently considering a major overhaul of § 5219-K through Legislative Document 794 (LD 794), also known as “An Act to Promote Research and Development in the State by Increasing the Research Expense Tax Credit”.21 This bill represents a direct response to the OPEGA findings and a bipartisan effort to improve Maine’s standing in the high-tech sector.22

The proposed changes in LD 794 are aggressive and would significantly increase the value of the credit for Maine businesses.21 Key provisions include:

1. Doubling the Credit Rates: The incremental rate would increase from 5% to 10%, and the basic research rate would jump from 7.5% to 15%.21
2. Halving the Base Amount: Instead of using 100% of the three-year average as the base, the bill proposes using only 50% of that average.21 This would make it much easier for companies with stable or even slightly declining research budgets to still qualify for the credit.15
3. Doubling the Corporate Cap: The initial 100%-offset threshold would rise from $25,000 to $50,000, reducing the tax burden for mid-sized corporations.21
4. Enhanced Transparency: The bill mandates a new annual reporting requirement where the State Tax Assessor must provide detailed (anonymized) information to the Department of Economic and Community Development (DECD) regarding expenditures, industry sectors, and payroll growth among credit recipients.21

If enacted, these changes would fundamentally shift the RETC from a modest incremental reward to a major subsidy for R&D activity.15 While this would increase the state’s revenue loss—estimated to exceed $6.3 million per biennium—proponents argue it is a necessary investment to attract high-paying jobs and stop the “brain drain” of skilled graduates leaving the state.15

Interplay with Other Incentives

The RETC does not exist in a vacuum; it is often used in conjunction with other state incentives, most notably the Sales Tax Exemption for R&D.4 Under separate Maine law, businesses can receive a 100% sales tax exemption for machinery and equipment used “directly and exclusively” in research and development.4 This provides an immediate cash-flow benefit at the time of purchase, complementing the long-term income tax savings provided by § 5219-K.2

Furthermore, some businesses may still be carrying forward credits from the “Super Research and Development Credit” (§ 5219-L), which was repealed in 2014.7 The Super Credit provided an additional benefit for research expenses exceeding 150% of the taxpayer’s average for a specific pre-1997 period.6 While new Super Credits can no longer be generated, the existing carryforwards must be managed alongside RETC claims to ensure the proper order of credit application and adherence to different expiration dates.5

Comprehensive Case Study: BioME Technologies

To illustrate the real-world application of § 5219-K, consider “BioME Technologies,” a fictional biotechnology firm based in Bangor, Maine. The company is organized as a C-corporation and has been increasing its investment in a new diagnostic tool for three years.

Step 1: Historical Expense Analysis

BioME must first calculate its base amount by averaging the QREs from the prior three tax years.2

• 2021 QREs: $500,000
• 2022 QREs: $600,000
• 2023 QREs: $700,000
• Base Amount: $(500k + 600k + 700k) / 3 = \$600,000$.2

Step 2: Current Year Calculation (2024)

In 2024, BioME spent $1,000,000 on qualifying research in Maine and made a $50,000 basic research payment to the University of Maine.1

• Excess QREs: $\$1,000,000 – \$600,000 = \$400,000$.2
• Incremental Credit (5%): $\$400,000 \times 0.05 = \$20,000$.2
• Basic Research Credit (7.5%): $\$50,000 \times 0.075 = \$3,750$.2
• Total Generated Credit: $\$23,750$.2

Step 3: Tax Liability and Limitation Application

BioME has a Maine tax liability of $150,000 before credits.14

• Tier 1: 100% of first $25,000 = $25,000 allowed.1
• Tier 2: 75% of excess $(\$150k – \$25k) = 0.75 \times \$125,000 = \$93,750$ allowed.12
• Total Annual Limit: $\$25,000 + \$93,750 = \$118,750$.14

Since the generated credit of $23,750 is significantly less than the $118,750 limit, BioME can use the entire credit in the 2024 tax year, reducing its tax due to $126,250.2 If the company had $200,000 in carried-forward credits from prior years, it would apply those up to the $118,750 limit and carry the remainder forward again.1

Conclusion

Maine Revised Statutes Title 36, § 5219-K represents a vital, if complex, tool for the state’s economic growth. By tying the credit to federal IRC § 41 standards, the statute provides a rigorous and well-understood definition of “innovation” that protects the state from subsidizing non-experimental activities. While the 75% corporate limitation and the non-refundable nature of the credit reflect a conservative fiscal stance, the 15-year carryforward period ensures that even companies in pre-revenue stages can eventually realize the value of their investments.

As Maine continues to lag behind national R&D averages, the current legislative push to double the credit’s value and ease the base-amount requirements signals a shift toward a more aggressive industrial policy. Whether the existing § 5219-K structure remains or is superseded by the proposed LD 794 reforms, businesses and tax professionals must remain diligent in their documentation and calculation practices. For the Maine economy, the Research Expense Tax Credit is not merely a tax reduction—it is an invitation for companies to build, experiment, and grow within the Pine Tree State.

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