The Maine Research Expense Tax Credit: A Strategic Analysis of Innovation Policy, Federal Alignment, and State Revenue Guidance

The Maine Research Expense Tax Credit provides a 5% credit on qualified research expenses exceeding a three-year average base, plus 7.5% on basic research payments to organizations like universities, per 36 M.R.S. § 5219-K. It aligns with federal IRC § 41 standards but restricts eligibility exclusively to qualified research activities and expenditures physically conducted within the State of Maine.

Theoretical Foundations and the Federal Nexus of Research Incentives

The architecture of the Maine Research Expense Tax Credit (R&D Credit) is fundamentally inextricably linked to the federal Credit for Increasing Research Activities, as codified under Section 41 of the Internal Revenue Code (IRC). To understand the state-level incentive, one must first deconstruct the federal framework which serves as its progenitor. The federal R&D tax credit was initially enacted in 1981 through the Economic Recovery Tax Act as a temporary measure to stimulate private sector investment in technological advancement.1 It has since become a permanent fixture of the domestic tax landscape, evolving into one of the most complex and frequently utilized corporate tax incentives in the United States.1

The primary objective of the credit, both at the federal and state levels, is to mitigate the substantial financial risks associated with scientific and technological experimentation. Innovation is characterized by high upfront costs and uncertain returns; by providing a dollar-for-dollar reduction in tax liability, the government effectively subsidizes a portion of the development costs, thereby encouraging businesses to pursue projects that might otherwise be economically unfeasible.3 Maine’s adoption of these federal standards represents a policy of “piggybacking,” where the state leverages federal definitions and administrative precedents to minimize the compliance burden on taxpayers while ensuring that the incentive targets genuine innovation.3

The federal framework distinguishes between two primary sections of the code: Section 174 and Section 41. Section 174 governs the deduction and amortization of research and experimental (R&E) expenditures. Historically, these could be expensed immediately, though the Tax Cuts and Jobs Act of 2017 now requires that these costs be capitalized and amortized over five years for domestic research.6 Section 41, conversely, provides the actual tax credit, which is calculated based on a subset of Section 174 expenses known as Qualified Research Expenses (QREs).2 For an activity to generate a credit in Maine, it must first satisfy the definition of a Section 174 expense and then meet the specific “Four-Part Test” mandated by Section 41.2

Maine Statutory Framework: 36 M.R.S. § 5219-K

The specific authority for the Maine Research Expense Tax Credit resides within Title 36 of the Maine Revised Statutes, Section 5219-K. Enacted in 1995, this statute establishes a non-refundable credit available to individuals, corporations, estates, and trusts.5 The statute is designed to reward incremental increases in research spending, adhering to the principle that a tax credit should incentivize new or additional investment rather than merely subsidizing existing business operations.3

Under Section 5219-K, the credit is calculated as the sum of two components. First, the taxpayer is allowed 5% of the excess of qualified research expenses for the taxable year over the “base amount”.7 The “base amount” is defined as the average annual amount spent on qualified research expenses over the previous three taxable years.8 If a taxpayer has not historically conducted research in Maine, the base amount for the initial period is effectively zero, providing a significant incentive for new R&D operations to locate within the state.9 Second, the credit includes 7.5% of “basic research payments” as defined by IRC Section 41(e)(1)(A), which typically involve payments to universities or scientific research organizations for the purpose of advancing basic knowledge.8

A critical nuance of the Maine statute is the geographic limitation. While the federal credit considers all domestic research, Section 5219-K explicitly states that the terms “qualified research expenses” and “basic research payments” have the same meanings as under the Code but “apply only to expenditures for research conducted in this State”.8 This requires a rigorous bifurcation of costs for companies with multi-state operations. A software firm headquartered in Portland with a secondary development team in Boston must meticulously exclude the wages and supplies associated with the Massachusetts team when calculating the Maine state credit.9

Administrative Guidance from Maine Revenue Services (MRS)

The Maine Revenue Services (MRS) provides technical oversight and administrative guidance for the implementation of the R&D credit. Because the state credit is dependent on federal definitions, the MRS relies heavily on federal Form 6765, Credit for Increasing Research Activities, which must be completed and attached to the Maine income tax return to support any claim.5 Furthermore, taxpayers must complete the Maine Research Expense Tax Credit Worksheet, which facilitates the state-specific calculation and the application of Maine’s unique limitations.10

The MRS guidance clarifies several procedural requirements that are often overlooked by taxpayers. For example, if a business undergoes a short taxable year, the qualified research expenses must be prorated according to federal regulations to ensure the base amount calculation remains mathematically consistent.10 Additionally, the MRS emphasizes the necessity of contemporaneous records. To withstand an audit, a taxpayer must be able to produce project records, laboratory notes, and payroll documentation that were generated at the time the research was conducted.12 Reconstruction of research activities years after the fact is generally insufficient to satisfy the evidentiary standards of the MRS.

The State Tax Assessor is also granted the authority to aggregate the activities of all corporations that are members of a “controlled group” of corporations, as defined by IRC Section 41(f)(1)(A).8 This prevents businesses from artificially inflating their credit by shifting research expenses between related entities. When filing a combined return, the credit generated by an individual member corporation must first be applied against the tax due of that specific member. Only if an excess exists may it be applied against the tax due of other group members, and even then, only to the extent that the other member can utilize the credit under the prescribed statutory limitations.8

The Four-Part Test in a Maine Context

The eligibility of any research activity for the Maine R&D credit is contingent upon its ability to pass the federal Four-Part Test. This test is the gatekeeper of the credit and is designed to differentiate between routine engineering or product development and true technological experimentation.

Part 1: The Permitted Purpose Test

The activity must relate to a new or improved business component of the taxpayer. A “business component” is defined as any product, process, computer software, technique, formula, or invention that is held for sale, lease, or license, or used by the taxpayer in its trade or business.2 The research must be intended to improve the functionality, performance, reliability, or quality of the component.2 In Maine’s manufacturing sector, this frequently applies to the development of more efficient production lines or the creation of more durable industrial components.9

Part 2: The Elimination of Uncertainty Test

Qualified research must be undertaken to discover information that eliminates uncertainty regarding the capability, method, or appropriate design of a business component.2 Uncertainty exists if the information available to the taxpayer does not establish whether the team can develop the component, how they will develop it, or what the final design should be.2 For a Maine biotechnology firm, this might involve uncertainty about whether a specific molecular compound will remain stable when subjected to certain environmental stressors.9

Part 3: The Process of Experimentation Test

A taxpayer must engage in a systematic process of experimentation to resolve the identified uncertainty. This involves the evaluation of one or more alternatives through modeling, simulation, systematic trial and error, or other analytical methods.2 The process must fundamentally involve the “experimental or laboratory sense”.2 It is not enough to simply try different things; the taxpayer must follow a scientific methodology where results are measured and used to refine subsequent attempts.2

Part 4: The Technological in Nature Test

The process of experimentation must fundamentally rely on the principles of the physical or biological sciences, engineering, or computer science.2 Activities relying on the social sciences, economics, or humanities do not qualify.2 For instance, a Maine-based information technology company developing an original algorithm for predictive maintenance relies on computer science and engineering, thereby satisfying this test.7 Conversely, a company conducting a study on consumer behavior to determine the best color for a product’s packaging would fail this test, as it relies on psychology and market research.2

Categorization of Qualified Research Expenses (QREs)

Once an activity is determined to be “qualified research,” the taxpayer must identify the specific costs associated with that activity. Maine law follows the federal categorization of QREs, divided into in-house research expenses and contract research expenses.6

Qualified Wages

Wages are typically the largest component of an R&D claim. They include the portion of an employee’s W-2 (Box 1) wages that is allocable to “qualified services”.2 Qualified services encompass the actual conduct of research, the direct supervision of research, and the direct support of research.2 Direct supervision refers to first-line management; the work of high-level executives who are merely overseeing budgets or administrative departments is excluded.2 Direct support includes the work of lab assistants cleaning equipment or machinists fabricating a prototype.2

A significant benefit for Maine taxpayers is the “substantially all” rule. If at least 80% of an employee’s services during the taxable year are qualified services, then 100% of their wages may be treated as QREs.2 This provides administrative relief for employees who are primarily dedicated to innovation but perform occasional routine tasks.

Qualified Supplies

Supplies include any tangible property used in the conduct of qualified research, provided the property is not land or improvements to land and is not subject to depreciation.6 This generally covers chemical reagents, raw materials for prototyping, and electricity or fuel used directly in the lab.6 In the Maine manufacturing context, the costs of materials destroyed during stress testing are quintessential qualified supplies.2

Contract Research Expenses

If a taxpayer hires a third party to conduct research on their behalf, a portion of the payment can be included as a QRE. Generally, only 65% of the amount paid for contract research is eligible for the credit.3 For the expenses to qualify, the research must be performed in Maine, the taxpayer must bear the economic risk of the research (meaning they pay even if the research fails), and the taxpayer must retain substantial rights to the results.2

Mathematical Mechanics: The Credit Calculation and Limitations

The computation of the Maine Research Expense Tax Credit requires a multi-step process that accounts for both current-year innovation and historical baseline spending. The formulaic approach ensures that the credit is truly “incremental,” rewarding those who expand their research footprint in the state.

The core formula for the incremental portion of the credit is expressed as:

$$C_{inc} = 0.05 \times (QRE_{curr} – B)$$

Where:

• $C_{inc}$ is the incremental credit amount.
• $QRE_{curr}$ is the total Qualified Research Expenses incurred in Maine during the current tax year.
• $B$ is the Base Amount, calculated as $\frac{\sum_{i=1}^{3} QRE_{curr-i}}{3}$.8

If the current year’s QREs do not exceed the three-year average, the incremental portion of the credit is zero.3 To this amount, the taxpayer adds the basic research component:

$$C_{basic} = 0.075 \times (BP_{curr})$$

Where $BP_{curr}$ represents basic research payments made to qualified organizations in Maine.3

The Corporate Limitation Rule

Maine law imposes a unique limitation on how much of the generated credit a corporation can use in a single year. This is designed to ensure a minimum level of tax revenue for the state treasury. The credit is limited to:

1. 100% of the first $25,000 of the corporation’s tax due (before any credits).
2. 75% of the tax due that exceeds $25,000.3

For individuals and smaller corporations with tax liabilities of $25,000 or less, the credit is limited simply to the amount of tax due, as the credit cannot reduce the tax liability below zero (non-refundability).9 Any unused portion of the credit resulting from these limitations or a lack of tax liability may be carried forward for 15 taxable years.8

Comprehensive Application Example: Precision Dynamics LLC

To illustrate the practical application of the Maine R&D credit, consider a hypothetical medium-sized manufacturing firm, Precision Dynamics LLC, located in Auburn, Maine. The company develops advanced composites for the aerospace industry.

Current Year Financial Data (2024)

• Qualified Wages (In-State): $800,000
• Qualified Supplies (In-State): $150,000
• Contract Research (UMaine – Orono): $100,000
• Total Basic Research Payments: $50,000
• 2024 Maine Tax Liability (Pre-Credit): $45,000

Historical Research Spending (In-State)

• 2023 QREs: $700,000
• 2022 QREs: $650,000
• 2021 QREs: $600,000

Step 1: Calculate Current Year QREs

The total QREs for 2024 are the sum of wages, supplies, and 65% of contract research:

$$QRE_{2024} = \$800,000 + \$150,000 + (0.65 \times \$100,000) = \$1,015,000$$

.3

Step 2: Calculate the Base Amount

The base amount is the average of the previous three years:

$$B = \frac{\$700,000 + \$650,000 + \$600,000}{3} = \$650,000$$

.8

Step 3: Calculate the Incremental Credit

The 5% credit applies to the excess over the base:

$$\text{Excess} = \$1,015,000 – \$650,000 = \$365,000$$

$$C_{inc} = 0.05 \times \$365,000 = \$18,250$$

.7

Step 4: Calculate the Basic Research Credit

The 7.5% credit applies to the basic research payments:

$$C_{basic} = 0.075 \times \$50,000 = \$3,750$$

.3

Step 5: Total Potential Credit

$$\text{Total Potential Credit} = \$18,250 + \$3,750 = \$22,000$$

Step 6: Apply Limitations

Because Precision Dynamics is a corporation with a tax liability of $45,000, we must apply the statutory limit:

$$\text{Limit} = \$25,000 + (0.75 \times (\$45,000 – \$25,000)) = \$25,000 + \$15,000 = \$40,000$$

.3

Since the potential credit of $22,000 is less than the $40,000 limit, and also less than the total tax liability of $45,000, the company can utilize the full $22,000 credit in 2024, reducing their net tax due to $23,000.7

Statistical Insights and Economic Efficacy

The performance of the Research Expense Tax Credit is tracked by the Maine Revenue Services Office of Tax Policy and reviewed periodically by the Office of Program Evaluation and Government Accountability (OPEGA). Data from recent tax expenditure reports provides a window into the scope and scale of the credit’s utilization across the state.

Source: Maine State Tax Expenditure Reports.3

While approximately 175 taxpayers claim the credit annually, the OPEGA 2021 evaluation highlighted several critical findings regarding the effectiveness of this policy. OPEGA noted that research generally supports the idea that innovation is an economic driver, but the specific impact of the Maine credit is difficult to quantify due to a lack of granular data.4 Furthermore, the report pointed out that despite the long-standing availability of the R&D credit, Maine has historically performed poorly on broader innovation metrics, such as the share of the workforce employed in high-tech R&D positions.4

OPEGA identified that the “incremental” structure of the credit, while designed to encourage growth, can inadvertently exclude consistent innovators. A business that spends $10 million annually on research in Maine but does not increase that spending will never receive a credit, whereas a business that spends $1 million but increases it to $2 million receives a significant windfall.4 This “hurdle” effect is a common criticism of incremental credits, leading some states to adopt “flat” credits based on total R&D spending, though Maine has thus far maintained its incremental approach.4

Historical Context: The Super Credit (36 M.R.S. § 5219-L)

Any comprehensive analysis of Maine’s R&D tax policy must address the history of the “Super Credit for Substantially Increased Research and Development.” This credit was an additional layer of incentive established in 1997 to reward companies that made extraordinary increases in their research footprint.5

The Super Credit was available for tax years beginning before January 1, 2014.13 It was calculated as the excess of current-year QREs over a “super credit base amount,” which was significantly higher than the standard base. The super credit base was defined as the average amount spent on research in the three years preceding 1997, increased by 50%.12 The Super Credit provided a more substantial offset, potentially covering up to 50% of a taxpayer’s remaining tax liability.5

While the ability to generate new Super Credits expired a decade ago, the program allowed for a 10-year carryforward period.13 Legislative attempts to restore or update the Super Credit, such as LD 308, have been introduced in recent sessions but have largely resulted in “Ought Not to Pass” designations or being carried over indefinitely without enactment.5 The sunsetting of the Super Credit reflects a broader shift in Maine’s economic development strategy toward more targeted, sector-specific programs.5

Synergy with the Pine Tree Development Zone (PTDZ) Program

The Research Expense Tax Credit does not exist in a vacuum; it is often used in conjunction with the Pine Tree Development Zone (PTDZ) program. The PTDZ program is Maine’s flagship economic incentive, providing a nearly 100% income tax credit for up to ten years for businesses that create “quality jobs” in specific industries and geographic tiers.23

The interaction between the R&D credit and the PTDZ credit is governed by rules designed to prevent the “doubling up” of tax benefits. For a business certified under the PTDZ program, the tax liability attributable to “qualified business activity” is already largely eliminated by the PTDZ credit.24 However, because the R&D credit can be carried forward for 15 years, it remains a valuable tool for PTDZ businesses. A startup in a development zone can accumulate R&D credits during its initial years of operation and then utilize those credits after its PTDZ certification period expires, effectively extending its window of tax relief.9

The Future Landscape: The Dirigo Business Incentives Program

The most significant shift in Maine’s business tax environment is the transition to the Dirigo Business Incentives program, effective January 1, 2025.27 This program is set to supersede the PTDZ program and eliminate the Maine Capital Investment Credit, consolidating Maine’s incentive offerings into a more streamlined framework.27

The Dirigo program explicitly targets the research and development sector, listing “engineering, architecture, and scientific research and development services” as an eligible business sector.27 Key features of the Dirigo program include:

1. Capital Investment Credit: A 10% credit (5% in York, Cumberland, and Sagadahoc counties) for investments in “eligible business property” used exclusively in the certified activity.28
2. Worker Training Credit: A $2,000 per-employee credit for those who complete a qualified employee training program during the tax year.27
3. Refundability: Unlike the standard R&D credit, the Dirigo credit is refundable up to $500,000 per tax year.28

This shift toward refundability addresses one of the primary criticisms of the existing R&D tax credit.4 By providing cash back to pre-revenue startups, Maine aims to compete more effectively with states like Massachusetts and New York, which already offer refundable research incentives.4 The Dirigo program represents a modernization of state policy, moving away from purely incremental “excess spending” credits toward rewards for significant capital outlay and human capital development.27

Sector-Specific Guidance: Navigating Industry Requirements

The application of the R&D credit varies significantly depending on the nature of the industry and the specific technical challenges being addressed.

Biotechnology and Life Sciences

Maine has made a concerted effort to attract biotechnology firms, offering not only the R&D tax credit but also a specific sales tax exemption for machinery, instruments, and supplies used in biotechnology applications.15 In this sector, the primary challenge is documenting the uncertainty of clinical trials and molecular discovery. MRS guidance suggests that while federal law provides an “Orphan Drug Credit” for rare diseases, Maine taxpayers should ensure their clinical trial costs are appropriately bifurcated to identify only those activities occurring within the state.9

Information Technology and Software

For software companies, the R&D credit often centers on the development of “internal use software” (IUS) vs. software intended for sale. IUS is subject to a higher standard of innovation, requiring that the software be “innovative,” involve “significant economic risk,” and not be “commercially available”.2 Routine web design or the integration of common APIs typically does not qualify. However, the development of a novel blockchain-based security protocol or a unique AI-driven diagnostic tool would likely satisfy the “technological in nature” and “process of experimentation” requirements.7

Manufacturing and Material Science

Manufacturing is the historical backbone of Maine’s R&D claims. Process innovation—developing a new way to manufacture a product that reduces waste, increases speed, or improves precision—is a qualified activity.9 The MRS worksheet requires that these firms be particularly careful with “prototype” costs. If a prototype is sold to a customer, it may be considered a commercial product rather than an experimental model, potentially necessitating a “recapture” of associated R&D costs if not handled correctly during the filing process.2

Recent Legislative Developments: LD 643 and Beyond

In 2023, the 131st Maine Legislature considered LD 643, a bill titled “An Act to Promote Research and Development in the State by Increasing the Research Expense Tax Credit”.32 This bill proposed several aggressive changes to Section 5219-K, including:

• Doubling the credit rate from 5% to 10% for incremental expenses.18
• Increasing the 7.5% basic research rate to 15%.18
• Doubling the limitation threshold from $25,000 to $50,000.18
• Altering the base amount calculation to 50% of the three-year average, which would have made the credit much easier to achieve for consistent spenders.18

Ultimately, the bill was designated as “Ought Not to Pass” in February 2024 and died in committee.32 The failure of this bill suggests that while there is legislative interest in boosting innovation, the state’s current fiscal priorities are focused on the implementation of the Dirigo program rather than a massive expansion of the traditional R&D credit. This highlights the importance for taxpayers to maximize their claims under the existing law, as significant rate increases are unlikely in the near term.28

Audit Risks and Best Practices for Compliance

Given the high value and complexity of R&D claims, they are frequently subject to audit by both the IRS and MRS. To mitigate audit risk, Maine businesses should adopt a “project-based” approach to their R&D accounting.

Contemporaneous Project Folders

Each research project should have a dedicated file containing:

• The initial project proposal detailing the technical objectives and uncertainties.2
• Design documents, blueprints, or source code snippets illustrating the evolution of the project.12
• Test plans and results, including documentation of failed attempts.12
• A breakdown of the personnel hours dedicated to the project, ideally supported by a time-tracking system.2

Allocation of Mixed-Use Expenses

Many lab spaces and employees are used for both research and commercial production. Taxpayers must develop a reasonable and consistent methodology for allocating these costs. For example, if a machine is used 40% of the time for testing new materials and 60% of the time for fulfilling customer orders, only 40% of the associated operator wages and supplies should be included in the R&D claim.2

Review of “Funded” Research

Research is not “qualified” if it is funded by another person or entity.2 If a Maine company is conducting research under a government grant or a fixed-price contract where the client owns the results and pays regardless of the outcome, the research is “funded” and the credit belongs to the funding entity, not the researcher.2 Companies must carefully review their contracts to ensure they retain the economic risk and the substantial rights to the technology they are developing.2

Conclusion: The Strategic Value of the Maine R&D Credit

The Maine Research Expense Tax Credit represents a sophisticated intersection of federal tax theory and state-specific economic goals. While its 5% rate and incremental structure present challenges for some firms, its 15-year carryforward and broad eligibility across business types make it a cornerstone of Maine’s tax relief strategy for innovative enterprises. The credit’s adherence to the federal Four-Part Test provides a stable and predictable environment for businesses, allowing them to leverage the same documentation and accounting processes for both their federal and state returns.

As Maine moves toward 2025 and the introduction of the Dirigo Business Incentives, the landscape of innovation funding will become increasingly diverse. The transition from purely incremental, non-refundable credits toward broader, refundable incentives for investment and training signals a proactive stance by the state to support the next generation of technological growth. For businesses operating in Maine today, success requires a nuanced understanding of these overlapping programs, a commitment to rigorous documentation, and a strategic approach to capital and research planning that aligns with both current statutes and future legislative trends. By effectively navigating these complex rules, Maine companies can significantly reduce their tax burden, reinvest in their technical workforce, and continue to drive the state’s economy forward through the discovery and application of new technology.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/