As local banks prepare for an onslaught of new applications for federal pandemic relief loans, Maine businesses and nonprofits that received loans are still waiting for state lawmakers to pass a bill that would exempt the forgiven amount of the loans from state taxes.

The Legislature will consider measures to address the tax issue, but it is unclear when such a bill might pass. That lack of certainty could force loan recipients to delay filing their taxes and create additional trouble and expenses.

The U.S. Treasury Department said Friday that a new, $284 million round of the Paycheck Protection Program would begin Monday. Qualified employers will be able apply for loans that can be forgiven – converted into grants – if they use most of the money to pay workers and follow other spending rules.

Maine employers took out more than 28,000 emergency loans worth almost $2.3 billion when the program was enacted last year. But employers could be stuck with a higher state tax bill as a result of the loans because state lawmakers have not conformed Maine’s tax rules to federal statutes.

Under recent federal rules, the proceeds from forgiven paycheck protection loans are not subject to federal income tax, and businesses can deduct expenses from the proceeds. To date, most loans have been completely forgiven, according to two of Maine’s largest lenders under the program.

The Maine Legislature adjourned last spring before the new federal tax rules were written and never conformed the state statutes with federal standards. That means paycheck protection loans are currently subject to state income tax in Maine. Even though businesses can deduct expenses from the loan proceeds, they will still have a larger state tax burden than if Maine’s rules were the same as those at the federal level.


“Right now, the way the law reads, Maine would tax the paycheck protection loan forgiveness,” said Mike Santo, a senior tax manager with Wipfli, a national accounting firm with offices in Maine, and a board member of the Maine Society of Certified Public Accountants. “Obviously it is a big tax dollar item. If Maine conforms to federal rules, it is a lot of tax dollars out of (the state’s) pocket. It is going to be tough for the state to adopt – you have to fund it somehow.”

Conforming with federal rules for paycheck protection loans would cost the state about $120 million in tax revenue, according to a Maine Revenue Services spokeswoman.

If Maine hasn’t changed its rules by the March deadline for filing federal business taxes, it could mean companies would have to pay for expensive extensions and modifications to their tax documents, Santo added.

“We are in tax season right now – we need answers sooner rather than later,” he said. “If we don’t have anything by March 15, we have to extend those tax returns or amend them down the line, which causes complexity and confusion.”

At least two bills have been submitted to the Legislature to exclude paycheck loan proceeds from taxation.

Sen. Cathy Breen, D-Falmouth, co-chair of the Appropriations and Financial Affairs Committee, submitted her bill last summer, when the disconnect between Maine and federal tax rules emerged.


There seems to be bipartisan support to amend the rule and shield the loans from state taxes, Breen said.

“I think it will happen; I think we will end up removing the state income tax liability from paycheck protection loans,” she said.

It is unclear whether the change will be made with a standalone bill, in a broader tax conformity package or as part of the state’s supplemental budget, Breen said. She’s also not sure how much attention the issue will receive or how urgently lawmakers will act on it.

“I honestly don’t know, I just know that it will be something we will take up over the session and it will be made retroactive to tax year 2020,” she said.

As legislators attempt to address unfinished business from last years’ paycheck protection loans, lenders and the U.S. Small Business Administration are preparing to launch another round of loans.

The second major federal COVID-19 relief package, passed in December, included $284 billion for new paycheck protection loans. The money will go to a narrower selection of businesses this time.


To qualify, employers cannot have more than 300 employees and have to prove a quarterly revenue loss of at least 25 percent in 2020. Establishments that received a loan last year can get another if they have used all their previous cash.

The first two application days are reserved for community financial institutions and set-asides that preserve tens of millions of dollars for first-time borrowers and establishments with 10 or fewer employees. The new loans also allow employers to spend money on protective equipment and retrofitting, and expand the types of businesses that qualify for funding.

Some Maine banks expect an application frenzy similar to last April when the loans were first available.

“We do expect a rush, we are certainly ready for it,” said Renee Smyth, chief experience and marketing officer at Camden National Bank, the second-largest paycheck protection lender in Maine.

So far, about 1,100 loans from Camden National have completed the forgiveness process, and nearly every one has been completely forgiven, Smyth said. Two-thirds of the 3,000 paycheck protection loans the bank made last year have applied for or completed forgiveness, she said.

About half of the loans made by Bangor Savings Bank, the state’s largest Paycheck Protection Program lender, have been forgiven, said Chief Commercial Lending Officer Jim Donnelly. About two-thirds of the borrowers have submitted an application for forgiveness.

Based on the data so far, Donnelly expects the vast majority of loans to be forgiven completely and few employers will wind up holding debt from the program.

Bangor Savings is prepared for a rush on new pandemic relief loans, he added.

“I think this round of paycheck protection loans is needed and will be in demand,” Donnelly said. “I think there is going to be a mad dash to make sure enough people get theirs.”

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