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Do Maine Nonprofits Have to Pay State Income Tax on PPP? Likely Not. 

by Sarah Skillin Woodard

There’s been a lot in the local media lately about the state proposal to tax forgiven Paycheck Protection Program (PPP) loans, even though the federal government agreed not to. MANP reached out to legal professionals and state officials for a definitive answer as to whether nonprofits would also be taxed on this “income.”

According to Michael Allen at the Maine Revenue Service:

“Generally, tax-exempt entities are exempt from federal income taxes with respect to activity that is substantially related to the charitable purpose or mission of the entity.  If a tax-exempt entity’s PPP loan proceeds are used for activities substantially related to its charitable purpose or mission, then the cancellation of its PPP loan debt would not be taxable income. This would apply to EIDL loans too.

If a tax-exempt entity engages in certain activities that are unrelated to its charitable purpose, the entity may be subject to federal income tax on the unrelated activity. A tax-exempt entity is taxable for Maine purposes to the same extent that it is for federal tax purposes. Therefore, a tax-exempt entity that is subject to federal income tax in relation to its unrelated business activity will likewise be subject to Maine income tax to the extent that those activities are conducted in Maine. 

Under the Governor’s proposal, a tax-exempt entity receiving PPP loans used in an unrelated trade or business activity, which have been or will be forgiven, would be subject to Maine income tax to the extent that the forgiven loans would have been includable in federal unrelated business income. It is important to note that under the Governor’s proposal, any Maine income tax that may be due is calculated after qualifying expenses paid with the forgiven loans have been deducted in arriving at net Maine taxable income.”

We shared this information with Rob Levin, a Portland attorney who specializes in nonprofit law. This is his opinion: 

“The only way I know of that a federally tax-exempt organization would owe state income taxes is via the UBIT [Unrelated Business Income Tax] avenue. I would be very hard-pressed to find that revenue from a forgiven loan would qualify as an unrelated trade or business. For the vast majority of tax-exempt organizations in Maine, there won’t be any additional Maine income tax as a result of any PPP loan forgiveness.”

For more information about this issue, please read MANP’s August 2020 blog, PPP Loan Forgiveness and Maine Tax Considerations for Tax-Exempt Organizations.

*Please note that MANP recommends you consult with a financial advisor or tax attorney to assist you with your organization’s unique tax situation. 

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