Maine Just Taxed Business Owners Making $1 Million — Here's the Legal Workaround

Maine business owners who had a good year just found out how good is too good. Governor Janet Mills signed a supplemental budget on April 10, 2026, that adds a 2% surtax on individual income above $1 million — $1.5 million for joint filers — retroactive to January 1, 2026. That pushes Maine's top marginal income tax rate from 7.15% to 9.15%, and it's expected to raise about $160 million over the next two years from roughly 2,600 filers statewide.

That last number is the one small business owners need to sit with. Twenty-six hundred filers isn't a list of hedge fund managers — in a state Maine's size, it includes a meaningful share of successful contractors, medical and dental practices, law firms, manufacturers, and other owner-operated businesses organized as LLCs, S corps, and partnerships. Because pass-through income flows straight onto the owner's personal return, a strong year can put an owner over the $1 million line even if the business itself isn't a household name.

Who Actually Owes This

Here's the distinction that trips people up: the surtax is a personal income tax, not an entity-level business tax. Maine's LLCs, S corporations, and partnerships are not directly taxed by this law at the entity level. What's taxed is the income that passes through to an owner's individual return once it crosses $1 million for a single filer or $1.5 million for a married couple filing jointly.

So the businesses at risk are specifically:

• Sole proprietorships, where all business profit already flows to the owner's personal return
• S corporations and partnerships whose owners' share of business income, combined with other personal income, pushes them past the threshold
• Multi-member LLCs taxed as partnerships, for the same reason

If you're deciding how to structure a new business, this is exactly the kind of detail that makes the choice between an LLC and an S corp more than a paperwork question — how income ultimately lands on your personal return matters once state-level surtaxes like this one are in play.

The Planning Opportunity Most Owners Don't Know About Yet

Buried in the same tax law is a provision that gives pass-through business owners a real lever to pull: Maine's Pass-Through Entity Tax (PTET) election, effective for tax years starting January 1, 2026. Under a PTET election, an eligible S corp or partnership can choose to pay Maine income tax at the entity level instead of passing that liability entirely to the owners' personal returns.

Why does that matter? PTET elections exist in most states specifically to work around the federal $10,000 cap on state and local tax (SALT) deductions that individuals have been stuck with since 2017. When the business pays the state tax instead of the individual, that payment becomes a business expense deductible on the federal return — sidestepping the personal SALT cap entirely. For an owner whose pass-through income is about to get hit by both the SALT cap and Maine's new surtax, electing into PTET can mean real federal tax savings even though it doesn't erase the 2% surtax itself.

What This Doesn't Do

The PTET election does not exempt an owner from the millionaire surtax. The surtax applies to the owner's individual income regardless of how the entity elects to pay its state tax. What PTET does is change how the state tax bill gets paid in a way that can reduce the owner's federal taxable income. The two provisions solve different problems — one is a new cost, the other is a planning tool that can offset part of the pain, not eliminate it.

Timing Matters More Than Usual This Year

Because the surtax applies retroactively to January 1, 2026, and the budget wasn't signed until April, business owners who had already made estimated tax payments earlier in the year may need to recalculate what they owe for the rest of 2026. Quarterly estimated payments are typically due in April, June, September, and January — owners with pass-through income near the $1 million mark should revisit their Q3 estimate due in September now, rather than getting surprised at filing time.

This is also a good moment to pull an updated profit and loss statement and project full-year income before the September estimated payment deadline. If your business is trending toward pushing you over the threshold, you have time to talk to a tax professional about the PTET election and adjust withholding or estimated payments accordingly — waiting until tax season removes options that are still available now.

What Maine Business Owners Should Do Now

• Project your 2026 personal income, including pass-through business income, to see whether you're likely to cross $1 million (or $1.5 million filing jointly).
• Talk to your accountant about the PTET election before your entity's tax year closes — this is typically an annual election, not something you can retroactively apply after the fact in every case.
• Revisit your Q3 estimated tax payment due in September to account for the retroactive January 1 start date.
• Reconsider your entity structure if you're currently a sole proprietor with income near the threshold — forming an LLC or S corp doesn't avoid the surtax, but it does open the door to strategies like PTET that aren't available to sole proprietors. If you haven't formalized your business structure yet, our LLC formation guide walks through the basics.

Maine joins a growing club of states — including Massachusetts, New York, and Washington — that have added millionaire-level surtaxes in recent years. For business owners, the lesson isn't just about this one law. It's that pass-through income is increasingly exposed to state-level surtaxes that didn't exist a few years ago, which makes proactive tax planning worth more than it used to be.

Photo by Kelly Sikkema on Unsplash