The Statutory Framework and Strategic Application of the Maine Research Expense Tax Credit: A Comprehensive Analysis of Tax Due Under This Part

In the specific context of the Maine Research Expense Tax Credit, “Tax Due Under This Part” refers to the total tax liability calculated under Part 8 of Title 36 of the Maine Revised Statutes, representing the taxpayer’s primary Maine income tax obligation before the application of most credits. This statutory phrase functions as a definitive ceiling, ensuring that the nonrefundable Research Expense Tax Credit can offset but never exceed the net income tax liability generated by a corporation, individual, or trust within the state’s jurisdictional boundaries.

The phrase “Tax Due Under This Part” is the cornerstone of Maine’s tax credit architecture, serving as a boundary between the calculation of a credit’s face value and its practical utility on a tax return. For a business or individual claiming the Research Expense Tax Credit under 36 M.R.S. § 5219-K, the total credits earned through innovative investment in Maine must be reconciled against the specific tax obligations defined within Part 8 of Title 36.1 This reconciliatory process is not merely a matter of subtraction; it involves a sophisticated interaction between the state’s conformity with federal tax law, the nuances of Maine-specific modifications to income, and the administrative directives issued by Maine Revenue Services (MRS). To understand the Research Expense Tax Credit fully, one must investigate the legal definition of Part 8, the mechanical limitations imposed by Subsection 3 of the credit statute, and the extensive guidance provided by the local revenue office regarding apportionment, combined reporting, and credit sequencing.

The Jurisdictional Scope of Part 8: Defining the Tax Base

To evaluate the meaning of “Tax Due Under This Part,” it is necessary to identify the chapters and provisions that constitute Part 8 of Title 36. This segment of the Maine Revised Statutes, titled “Income Taxes,” serves as the primary engine for the state’s revenue collection from individuals and businesses.2 Part 8 encompasses Chapter 801 through Chapter 841, detailing everything from the initial determination of taxable income to the final enforcement provisions.2

When a taxpayer calculates the Research Expense Tax Credit, the statute explicitly states the credit is allowed against the tax due under “this Part”.1 This phrasing is a restrictive legal term of art. It implies that the credit cannot be used to offset taxes found in other parts of Title 36, such as Part 2 (Property Taxes), Part 3 (Sales and Use Tax), or Part 4 (Business Taxes like the Insurance Premiums Tax).4 This distinction is critical for large enterprises that may have diverse tax footprints. For example, a financial institution subject to the Maine Franchise Tax under Chapter 819 (which is within Part 8) can utilize the R&D credit, whereas an insurance company subject to the Insurance Premiums Tax under Part 4 generally cannot, unless specific exceptions apply.6

The Structural Components of Part 8

Part 8 is organized into several key chapters that define the “tax due” before credits are applied. The calculation begins with federal taxable income, which is then adjusted through Maine-specific addition and subtraction modifications.6 These modifications ensure that Maine’s tax policy goals are met while maintaining a baseline of conformity with the Internal Revenue Code (IRC).

The “tax due” under these chapters is the figure that remains after all income modifications and apportionments have been applied, but typically before any credits are deducted.1 For a corporation filing Form 1120ME, this corresponds to the gross tax liability derived from the Maine graduated rate schedule.6

Statutory Mechanics of the Research Expense Tax Credit

The Research Expense Tax Credit, governed by 36 M.R.S. § 5219-K, provides an incentive for technological innovation by offering a credit against the tax due under Part 8.1 The credit is incremental, meaning it focuses on encouraging businesses to increase their R&D spending relative to their own historical benchmarks.9

Calculation Methodology Under Section 5219-K

The total credit allowed to a taxpayer is the sum of two distinct calculations.1 First, the taxpayer identifies 5% of the excess, if any, of the qualified research expenses (QREs) for the taxable year over a “base amount”.1 The base amount is defined as the average annual amount spent on qualified research expenses in Maine over the three immediately preceding taxable years.1 Second, the taxpayer adds 7.5% of basic research payments as determined under the Code, Section 41(e)(1)(A).1

A critical nuance in this calculation is the requirement that all expenditures be for research conducted specifically in the State of Maine.10 While the definitions of “qualified research” and “basic research” are inherited from the federal IRC Section 41, the state’s application is strictly limited to in-state activities.1 This alignment with federal rules reduces the administrative burden on taxpayers, as they can utilize the data compiled for their federal Form 6765, though they must extract and isolate the Maine-specific component for their state filing.12

The Limit on Reduction: The Floor of Zero

Under 36 M.R.S. § 5219-K(2), the credit allowed for any taxable year may not reduce the tax due to less than zero.1 This confirms the nonrefundable nature of the standard Research Expense Tax Credit. In contrast to refundable credits, which can result in a cash payment from the state if the credit exceeds the tax liability, the R&D credit can only serve to eliminate a positive tax balance.10 Any credit generated in excess of the “tax due under this Part” is not lost but is subject to the carryover provisions discussed later in this report.1

Administrative Interpretation: Guidance from Maine Revenue Services

Maine Revenue Services (MRS) provides the operative framework for how “Tax Due Under This Part” is calculated on a practical basis. This guidance is primarily disseminated through the instructions for Form 1120ME (for corporations), Form 1040ME (for individuals), and the specific “Research Expense Tax Credit Worksheet”.12

Apportionment and the Single Sales Factor

For multi-state businesses, the “tax due” is heavily influenced by Chapter 821 and MRS Rule 801, which explain the apportionment of income.15 Maine utilizes a single sales factor apportionment formula, which generally favors businesses that conduct significant R&D and manufacturing in Maine but sell their products to out-of-state customers.17

The “tax due” for these entities is not based on their total global or national income, but only on the portion attributed to Maine.7 MRS guidance clarifies that the apportionment factor must only include amounts attributable to the apportionable income base for that specific taxable year.15 This means a taxpayer must first determine their Maine-apportioned taxable income and then apply the state tax rates to arrive at the “tax due under this Part” before the R&D credit can be applied.7

Sequencing and Priority of Credits

MRS Worksheet instructions and Rule 810 provide essential rules for the sequencing of tax credits.6 A common point of confusion for taxpayers is determining the order in which various credits offset the “tax due.” MRS guidance establishes a clear hierarchy:

1. Nonrefundable Credits with No Carryover: These must be applied first, as any unused portion will be lost forever.
2. Nonrefundable Credits with Carryover (like R&D): These are applied next. The Research Expense Tax Credit is particularly valuable here because it allows a 15-year carryover window.1
3. Refundable Credits: These are applied last, as they can provide a benefit even after the tax liability has been reduced to zero.6

This sequencing is vital for the R&D credit because the 15-year carryover ensures that even if the “tax due under this Part” is eliminated by other credits in the current year, the R&D credit remains available for future use.1

The Subsection 3 Limitation: The 100/75 Formula

A major constraint on the definition of “tax due” as it applies to the Research Expense Tax Credit is found in 36 M.R.S. § 5219-K(3).1 For corporations, the law does not allow the credit to offset the entire tax due if the liability is significant. Instead, it imposes a tiered limitation formula that effectively acts as a “mini” minimum tax for large credit generators.1

Quantitative Breakdown of the Limitation

The credit allowed for a corporation is limited to:

• 100% of the first $25,000 of tax due (determined before any credits).
• 75% of the tax due in excess of $25,000.1

This formula means that if a corporation has a “tax due under this Part” of $100,000, its maximum R&D credit utilization for that year would be calculated as follows:

In this scenario, even if the corporation had $100,000 in credits, it would still have a net tax liability of $18,750 ($100,000 – $81,250), with the remaining $18,750 in credits carried forward.1

Application to Individuals and Small Liabilities

For individuals, estates, trusts, and corporations with a total tax liability of $25,000 or less, this 75% restriction does not apply in practice.12 In these cases, the credit is simply limited by the total tax liability (the “tax due”) of the taxpayer.12 This ensures that smaller innovators can use their credits to fully eliminate their Maine income tax burden, while larger corporations must maintain a baseline level of tax contribution.10

Unitary Business Groups and Combined Reporting

Maine’s use of combined reporting for unitary business groups adds a layer of complexity to the attribution of “tax due”.15 Under 36 M.R.S. § 5219-K(4), specific rules dictate how the R&D credit must be applied within a group of affiliated corporations.1

Intra-Group Attribution Rules

The statute mandates that a credit generated by an individual member corporation must first be applied against the “tax due attributable to that company” under Part 8.1 This means that if “Subsidiary A” conducts the research, Subsidiary A’s credit must first offset Subsidiary A’s portion of the group’s total Maine tax liability.1

However, the law provides a flexibility mechanism for “excess” credits.1 If a member corporation has a research credit that exceeds its own attributable tax, it may apply that excess against the tax due of another member of the same unitary group.1 This application is still subject to the 100/75 limitation rule described in Subsection 3, applied at the member level.1

Calculation for Combined Returns

MRS guidance through the Form 1120ME instructions and Rule 810 requires that the group’s total tax liability be apportioned among its members before credits are applied.6 This attribution is based on each member’s separate Maine apportionment factor.6 Consequently, “Tax Due Under This Part” for a member of a unitary group is its allocated share of the combined group’s total tax, which then serves as the baseline for its R&D credit limit.1

Flow-Through Mechanics for Pass-Through Entities

For entities that do not pay corporate income tax—such as S-corporations, partnerships, and limited liability companies (LLCs) treated as partnerships—the “tax due under this Part” is realized at the level of the individual partner or shareholder.11

The K-1 Allocation Process

The pass-through entity (PTE) calculates the total Maine qualified research expenses and basic research payments but does not claim the credit itself.12 Instead, the credit is distributed to the partners or members in proportion to their respective interests in the entity.12

Each member receives a Schedule K-1 (or Maine equivalent) documenting their share of the credit.12 The member then applies this amount to their own Maine income tax return (Form 1040ME or 1120ME). For these individuals, the “tax due under this Part” includes all of their Maine-source income, not just the income from the research-performing entity.19 This allows individuals to use R&D credits from a loss-generating startup to offset tax due on other Maine-source income, such as wages or investment gains, provided those items are taxable under Part 8.12

Comprehensive Example: Multi-Entity Application

To illustrate the interplay between credit generation, Part 8 tax liability, and the statutory limitations, consider the following scenario involving a Maine-based technology group.

Scenario: Precision Innovations Unitary Group

Precision Innovations is a unitary group consisting of two corporations: “Research Sub” (which performs R&D) and “Sales Sub” (which generates revenue).

Step 1: Credit Generation (Research Sub)

• Current Year Maine QREs: $2,000,000
• Base Amount (Prior 3-year avg): $1,500,000
• Incremental QRE: $500,000
• Incremental Credit (5% of $500,000): $25,000
• Basic Research Payments to UMaine: $100,000
• Basic Research Credit (7.5% of $100,000): $7,500
• Total Credit Generated by Research Sub: $32,500

Step 2: Determination of Tax Due Under Part 8 (Combined Group)

• The unitary group files a combined return.
• The total group “Tax Due Under This Part” is $150,000.
• Based on apportionment, $10,000 of the tax is attributable to Research Sub.
• The remaining $140,000 is attributable to Sales Sub.

Step 3: Initial Application (Research Sub)

• Research Sub must first apply its credit against its own $10,000 tax due.1
• Since $10,000 is less than $25,000, Research Sub can use the credit to offset 100% of its tax.1
• Research Sub uses $10,000 of its $32,500 credit.
• Excess Credit Remaining: $22,500

Step 4: Sharing Excess Credit (Sales Sub)

• Research Sub applies its $22,500 excess against Sales Sub’s $140,000 tax due.1
• Sales Sub’s limitation must be calculated:

• 100% of first $25,000 = $25,000
• 75% of remaining $115,000 ($140k – $25k) = $86,250
• Total Sales Sub Limit = $111,250.1

• Sales Sub can easily absorb the $22,500 excess from Research Sub.

Step 5: Final Tax Outcome

• Total Group Tax Due: $150,000
• Total Credit Used: $32,500 ($10,000 by Research Sub + $22,500 by Sales Sub).
• Net Group Tax Payable: $117,500

In this example, the “Tax Due Under This Part” for the individual members dictated the initial usage, while the group’s collective liability and the statutory limitation formula determined the final utilization capacity.1

Carryover Provisions and Long-Term Utilization

The Maine Research Expense Tax Credit features one of the state’s longest carryover periods, reflecting the long-term nature of R&D investments.10 Under 36 M.R.S. § 5219-K(5), any credit amount not allowed in the current year because it exceeds the tax due or is restricted by the 75% limitation can be carried forward for 15 years.1

The 15-Year Carryover Mechanism

This provision is critical because it prevents the permanent loss of the incentive during cyclical downturns or heavy investment years.10 Unlike the federal R&D credit, which allows for a 1-year carryback and 20-year carryforward, Maine does not permit any carryback of the research credit.10 Therefore, the “tax due” in prior years cannot be offset; the credit must look forward to future Part 8 obligations.12

The carryover remains with the individual corporation or taxpayer that generated the credit, although in the case of unitary groups, it can be shared in future years subject to the same intra-group rules.1

Statistical Overview and Economic Trends

The fiscal impact of the Research Expense Tax Credit is tracked by the Maine Revenue Services Office of Tax Policy and the Legislature’s Office of Program Evaluation and Government Accountability (OPEGA).9 These statistics provide a window into the scale of “tax due” that is being offset by innovation-related credits.

Foregone Revenue and Taxpayer Participation

According to the Maine State Tax Expenditure Reports, the fiscal impact of the credit has shown a steady increase, indicating both a rise in R&D activity and a potential increase in the “tax due” baseline of participating companies.9

Note: Data extracted from official state expenditure reports.9

The OPEGA review of the credit conducted in 2022 noted that while 70% of states offer an R&D credit, Maine’s performance on attracting new research has been historically lower than some peers.13 OPEGA concluded that the incremental structure of the credit is effective at targeting new investment but noted that the 5% rate and the $25,000 threshold might limit its impact for larger firms.13 This finding likely influenced the subsequent legislative efforts to expand the credit.

Legislative Evolution: Doubling the Incentive

The Maine Legislature has recently shown a strong commitment to expanding the Research Expense Tax Credit to make the state more competitive in the high-tech and biotech sectors.24 Understanding the “tax due” requirements under current law also requires an awareness of these proposed and enacted changes.

The Impact of LD 308 and LD 643

During the 130th and 131st Legislative sessions, multiple bills were introduced to significantly increase the credit’s potency.24 Key proposals included:

• Rate Increases: Doubling the incremental credit from 5% to 10% and the basic research payment credit from 7.5% to 15%.26
• Threshold Expansion: Increasing the 100% offset limit from the first $25,000 of tax due to the first $50,000.24
• Base Amount Modification: Reducing the base amount calculation from 100% of the 3-year average to only 50%.25 This change alone would dramatically increase the “excess QRE” and the resulting credit against the tax due.25

While some of these measures were designed to take effect for tax years beginning in 2024 or 2025, the version enacted as part of PL 2023 c. 360 focused primarily on technical clarifications, aggregation rules for controlled groups, and enhanced reporting requirements for the State Tax Assessor to the Department of Economic and Community Development.1 However, the legislative momentum suggests that the “tax due” offset capacity of the R&D credit may increase in future biennial budgets.

Documentation and Recordkeeping: Protecting the Credit

Because the Research Expense Tax Credit directly reduces the “tax due under this Part,” it is subject to rigorous audit scrutiny from MRS.10 Guidance from state and federal sources emphasizes the necessity of contemporaneous documentation to support every dollar of credit claimed.29

The Four-Part Test for Qualified Research

Taxpayers must demonstrate that their Maine activities meet the federal definition of qualified research under IRC Section 41(d).14 This involves satisfying the “Four-Part Test” 14:

1. Permitted Purpose: The research must relate to a new or improved business component’s function, performance, reliability, or quality.14
2. Elimination of Uncertainty: The activity must be intended to discover information to eliminate uncertainty regarding the capability, method, or design of the component.29
3. Process of Experimentation: Substantially all of the activities must constitute elements of a process of experimentation, such as modeling, simulation, or systematic trial and error.14
4. Technological in Nature: The research must fundamentally rely on principles of physical or biological science, engineering, or computer science.10

Recommended Evidence

MRS and tax professionals recommend maintaining the following records for at least six years following the filing of the return 10:

• Project records, lab notes, and prototypes.29
• Time tracking reports linking employee wages to specific R&D projects.29
• Photographs or videos of testing stages.29
• A copy of the federal Form 6765 submitted to the IRS.12

Failure to provide this documentation upon audit can result in the assessment of additional “tax due,” plus interest and potentially substantial penalties.30

Interaction with Other Maine Tax Benefits

The Research Expense Tax Credit is part of a broader ecosystem of incentives that can interact with a taxpayer’s “tax due under this Part.” Understanding these interactions is essential for maximizing total tax efficiency.

Pine Tree Development Zones (PTDZ)

Certified businesses operating in Pine Tree Development Zones may be eligible for a 100% tax credit for their first five years.33 However, the law generally prohibits combining certain credits for the same activity.33 A taxpayer receiving a PTDZ credit under section 5219-W may be restricted from claiming the Research Expense Tax Credit for the same business activity to prevent a “double dip” on the same Maine-source income.33

R&D Sales Tax Exemptions

Separate from the income tax credit found in Part 8, Maine provides a sales tax exemption under Part 3 for machinery and equipment used “directly and exclusively” in research and development.21 While this does not reduce the “tax due under this Part” for income tax purposes, it provides an immediate cash-flow benefit by reducing the cost of R&D inputs.21

Renewable Chemicals and Biofuels

Innovators in the green energy sector may also qualify for the Renewable Chemicals Tax Credit (§ 5219-XX), which offers 8 cents per pound for bio-based chemicals.21 Like the R&D credit, this is nonrefundable and limited by the Part 8 tax liability, but it has its own 10-year carryover provision.21

The Super Credit: Historical Context and Future Potential

Taxpayers often encounter references to the “Super Credit for Substantially Increased Research and Development” (36 M.R.S. § 5219-L).13 It is important to clarify its relationship with the standard R&D credit and the “tax due” calculation.

Mechanics of the Super Credit

The Super Credit was designed to provide an additional layer of benefit for taxpayers who truly accelerated their R&D spending.39 It allowed a credit equal to the excess of QREs over a “super credit base amount” (usually the 3-year average increased by 50%).11

Unlike the standard R&D credit, the Super Credit had more stringent application rules:

• Timing: For many years, it only applied to tax years beginning before January 1, 2014.11
• Limit: It was limited to 50% (and in some proposals 25%) of the taxpayer’s tax due after the allowance of other credits.11
• Floor: It could not be used to reduce the tax liability below the amount of tax due in the preceding taxable year.11

Legislative efforts (such as LD 977 and LD 498) have repeatedly sought to restore this credit for tax years after 2019 to further stimulate the Maine economy.40

Administrative Procedures for Claiming the Credit

The local state revenue office (MRS) provides specific forms and electronic portals to handle the credit application process.

1. Worksheet 36 M.R.S. § 5219-K: The “Research Expense Tax Credit Worksheet” must be completed annually.12 Line 8 of this worksheet is where the 100/75 limitation formula is operationalized for corporations.12
2. Form 1120ME/1040ME: The final allowable credit amount is transferred to the main tax return. For corporations, this is entered on Schedule C; for individuals, it is entered on Schedule A.6
3. Electronic Funds Transfer (Rule 102): If the taxpayer’s combined annual tax liability (which includes the tax due under Part 8) is $10,000 or more, all payments must be made electronically via the Maine Tax Portal or ACH methods.6
4. Information Returns (Chapter 825): Pass-through entities must file information returns documenting the allocation of credits to members to ensure that the individual-level “tax due” offsets are accurate.2

Conclusion: Strategic Value of the R&D Credit

The Research Expense Tax Credit remains one of Maine’s most enduring and significant tools for fostering an innovation-based economy. By grounding the credit in the concept of “Tax Due Under This Part,” the Maine Legislature and Maine Revenue Services have created a balanced incentive that rewards growth while protecting the state’s fiscal stability.

For the corporate taxpayer, the 100/75 limitation rule requires a nuanced understanding of how to sequence credits and share them among unitary members. For the small business owner or startup founder, the flow-through mechanics and the 15-year carryover window provide a long-term pathway to reducing their Maine income tax burden as their venture matures. The ongoing legislative interest in doubling these incentives underscores the state’s recognition of R&D as a vital economic multiplier.

Ultimately, the utility of the Research Expense Tax Credit is only as strong as the taxpayer’s “tax due” and their ability to document their qualified activities. As Maine continues to align its code with federal standards while maintaining local restrictions, businesses must remain vigilant in their recordkeeping and strategic in their multi-year tax planning to ensure that every dollar invested in research translates into a valid and durable reduction in their tax obligations to the State of Maine.

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/