House File 1938 (HF 1938) was signed by Minnesota Gov. Tim Walz on May 24, 2023. HF 1938 includes several significant income tax changes impacting multiple types of taxpayers that are summarized below.
Internal Revenue Code (IRC) Conformity
Prior to HF 1938, Minnesota’s IRC conformity date was December 15, 2022. HF 1938 updates the state’s IRC conformity date to May 1, 2023.
Global Intangible Low-Taxed Income (GILTI)
Effective for tax years beginning after December 31, 2022, Minnesota conforms to the federal treatment of GILTI, with the exception that the state does not allow for an IRC Section 250 deduction. GILTI is classified as a dividend for Minnesota purposes and is subject to the dividends received deduction (DRD) updates described below. Prior to HF 1938, Minnesota decoupled from the federal treatment of GILTI.
Effective for tax years beginning after December 31, 2022, Minnesota allows a deduction from taxable net income for dividends received from domestic and foreign corporations. Corporations that are at least 20% owned by the recipient of the dividend may claim a 50% DRD. Those corporations that are less than 20% owned may claim a 40% DRD.
Previously, Minnesota allowed corporations that were at least 20% owned to claim an 80% DRD; those that were less than 20% owned could claim a 70% DRD.
Net Operating Losses (NOLs)
Effective for tax years beginning after December 31, 2022, Minnesota decouples from the federal limitation on corporate NOLs. The state will limit the NOL deduction to 70% of taxable income each year. Unused amounts of NOLs will continue to be carried forward indefinitely.
Pass-Through Entity Tax (PTET)
Effective for tax years beginning after December 31, 2022, multiple changes were made to the PTET:
- The PTET base is modified to include a resident owner’s pre-apportioned distributive share of income.
- A “qualifying entity” is modified to:
- Clarify that a qualifying limited liability company (LLC) is one taxed as either a partnership or an S corporation
- Replace the entities that are not a “qualified entity,” i.e., partnership, LLC or corporation that has a partnership, LLC other than a disregarded entity, or corporation as a partner, member, or shareholder, with a publicly traded partnership
- The definition of “qualified owner” is updated to include a disregarded entity that has a qualifying owner as its single owner.
- The PTET ends when the federal limitation on the state and local tax deduction under IRC §164(b)(6)(B) expires (currently scheduled to expire after 2025).
- Taxpayers are required, for purposes of deductions and credits, to compute their federal adjusted gross income (AGI) without any deduction for specified income tax payments and substantiate that computation.
- A qualifying owner is allowed to claim a credit against the PTET imposed on a qualifying entity for a PTET paid to another state until IRC §164(b)(6)(B) expires.
New Net Investment Income Tax
Effective for tax year 2024, Minnesota will impose a new net investment income tax for individuals, estates, and trusts. The tax will be 1% on net investment income exceeding $1 million. Net investment income includes interest, dividends, annuities, royalties, and other gains not derived from a trade or business. It does not include gains derived from agricultural land sales.
Nonresidents will be taxed on a ratio of net investment income from Minnesota sources to total net investment income.
Standard & Itemized Deductions for Individuals
Effective for tax year 2023, Minnesota adds two additional thresholds to the phaseout of standard and itemized deductions. For individual taxpayers with AGI over $220,650, the deduction will decrease by the lesser of: (1) 3% of the excess of the taxpayer’s AGI over $220,650 but not over $304,970, plus 10% of the excess AGI over $304,970; or (2) 80% of the standard or itemized deduction. For taxpayers with AGI exceeding $1 million, the deduction will decrease by 80%.
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