by Peter G. Pupke
On January 12, 2023, Minnesota Governor Walz approved a bill that conforms the state taxes that reference either federal adjusted gross income (FAGI) or federal taxable income (FTI) to the federal Internal Revenue Code (IRC) as amended through December 15, 2022. The bill also makes a number of other amendments, including state additions to, and subtractions from, the federal amount for C corporations, individuals, estates and trusts. The bill establishes a requirement for how refunds under the pass-through entity tax are administered when the owners of a pass-through entity have already claimed the pass-through entity tax credit. The bill also enacts special rules for charitable contributions, casualty losses, the dependent care credit, and property tax refunds. The bill also allows a taxpayer whose tax liability changes as a result of the bill to file an amended return by December 31, 2023, and extends the time the Commissioner of Revenue may review and assess such an amended return. (L. 2023, H31 (c. 1), effective 01/13/2023 or as stated.)
IRC conformity.
The bill conforms the state taxes that reference either FAGI or FTI to the federal IRC as amended through December 15, 2022. Previously, the IRC conformity date was December 31, 2018. The bill also repeals the temporary partial conformity provision in Minn. Stat. § 290.0111 that was enacted as part of the 2021 state omnibus bill.
Pass-through entity tax credit.
The bill provides that once a credit is claimed by a qualifying owner of a pass-through entity, the entity cannot receive a refund for tax paid for any amounts claimed under Minn. Stat. § 290.06, subd. 40 by the qualifying owners. Once a credit is claimed under Minn. Stat. § 290.06, subd. 40, any refund must be claimed in conjunction with a return filed by the qualifying owner. This provision is effective retroactively for taxable years beginning after December 31, 2020.
Addition for disallowed business interest deduction.
The bill provides that for any taxable year beginning after December 31, 2018, and before January 1, 2021, the amount of business interest deducted under the special rule in IRC § 163(j)(10)(A) and IRC § 163(j)(10)(B), as amended through December 15, 2022, is an addition to FAGI for individuals or to FTI for C corporations, estates and trusts. Entities that are part of a combined reporting group under the unitary rules in Minn. Stat. § 290.17, subd. 4, must compute deductions and additions as required under Minn. Stat. § 290.34, subd. 5.
Subtraction for delayed business interest.
Effective retroactively for taxable years beginning after December 31, 2019, for each taxable year an addition is required under Minn. Stat. § 290.0131, subd. 19, for the amount of the addition, less the sum of all amounts subtracted in all prior taxable years, that does not exceed the limitation on business interest in IRC § 163(j), as amended through December 15, 2022, notwithstanding the special rule in IRC § 163(j)(10), is a subtraction from FAGI for individuals or FTI for C corporations, estates and trusts. Any excess is a delayed business interest carryforward, the entire amount of which must be carried to the earliest taxable year. No subtraction is allowed under this provision for taxable years beginning after December 31, 2022.Effective for taxable years beginning after December 31, 2022, for each of the five taxable years beginning after December 31, 2022, there is allowed a subtraction equal to one-fifth of the sum of all carryforward amounts that remain after the expiration of previous paragraph.Effective retroactively for taxable years beginning after December 31, 2019, entities that are part of a combined reporting group under the unitary rules of Minn. Stat. § 290.17, subd. 4, must compute deductions and additions as required under Minn. Stat. § 290.34, subd 5.
Addition for disallowed NOL deduction—individuals, estates and trusts.
The amount of a net operating loss (NOL) arising in any taxable year beginning after December 31, 2017, and before January 1, 2021, and carried back under IRC § 172(b)(1)(D) is an addition to FAGI for individuals or to FTI for estates and trusts in the taxable year the loss is carried. No addition is required for an NOL deduction that is a farming loss under IRC § 172(b)(1)(B) carried to the two years preceding the year the farming loss arose.
The amount of an NOL deduction in any taxable year beginning after December 31, 2017, and before January 1, 2021, that exceeds the deduction allowed under IRC § 172(a)(2) is an addition. The deduction allowed under IRC § 172(a)(2) is allowed in the case of a taxable year beginning after December 31, 2017.
The amount of a Minnesota disallowed loss carryover is an addition. “Minnesota disallowed loss carryover” means, for any taxable year beginning after December 31, 2017, and before January 1, 2021, a disallowed loss carryover as defined in IRC § 461(l)(2), for a loss that is not allowed under IRC § 461(l)(1)(B). For purposes of this provision, the limitation under IRC § 461(l)(1)(B) applies for any taxable year beginning after December 31, 2017.
For purposes of this deduction, “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended through December 15, 2022.
Subtraction for delayed NOL deduction—individuals, estates and trusts.
Effective retroactively for taxable years beginning after December 31, 2018, the amount of the sum of each addition required in Minn. Stat. § 290.0131, subd. 20, for each taxable year, except as otherwise provided, less the sum of all amounts subtracted in all prior taxable years, that does not exceed 80% of federal taxable income as defined in Minn. Stat. § 290.01, subd. 19, is a subtraction from FAGI for individuals or from FTI for estates and trusts. Any excess is a delayed NOL deduction carryforward, the entire amount of which must be carried to the earliest taxable year. No subtraction under this provision is allowed after 20 taxable years from the taxable year in which an operating loss arises. The sum of the additions required under Minn. Stat. § 290.0131, subd. 20(a), are aggregated and assigned to the taxable year immediately succeeding the taxable year in which the operating loss arises, for purposes of determining this subtraction in that succeeding taxable year and the amount carried forward.
Subtraction for excess business loss—individuals, estates and trusts.
Effective for taxable years beginning after December 31, 2025, the amount of a disallowed loss carryover under IRC § 461(l)(1)(B) is a subtraction from FAGI for individuals or from FTI for estates and trusts.
Alternative minimum tax.
The bill makes a nonsubstantive change to a cross-reference in the Minnesota individual alternative minimum tax. The changes are effective at the same time the changes in § 10101(a)(4)(A) of Public Law 117-169 are effective for federal purposes.
Property tax refunds—IRC conformity.
The bill updates the definition of “Internal Revenue Code” for federal changes through December 15, 2022, for the property tax refund, effective retroactively beginning with refunds based on rent paid in 2021 and property taxes payable in 2022.
Estate tax—IRC conformity.
The bill updates the definition of “Internal Revenue Code” for Minnesota estate tax purposes for federal changes through December 15, 2022.
Temporary additions and subtractions—individuals, estates and trusts.
The bill enacts the following temporary additions and subtractions for individuals and for trusts and estates, effective retroactively at the same time the changes were effective for federal purposes..
Subtractions: The following amounts are subtractions from FAGI for individuals and from FTI for trusts and estates:
- the amount of wages used for the calculation of the employee retention credit for employers affected by qualified disasters, to the extent not deducted from income, under Public Law 116-94, division Q, § 203, or Public Law 116-260, division EE, § 303;
- the amount of wages used for the calculation of the payroll credit for required paid sick leave, to the extent not deducted from income, under Public Law 116-127, § 7001, as amended by § 9641 of Public Law 117-2;
- the amount of wages or expenses used for the calculation of the payroll credit for required paid family leave, to the extent not deducted from income, under Public Law 116-127, § 7003, as amended by § 9641 of Public Law 117-2;
- the amount of wages used for the calculation of the employee retention credit for employers subject to closure due to COVID-19, to the extent not deducted from income, under Public Law 116-136, § 2301, as amended by Public Law 116-260, division EE, § 207, and Public Law 117-2, § 9651; and
- the amount required to be added to gross income to claim the credit in IRC § 6432.
Additions: The following amounts are additions to FAGI for individuals and to FTI for trusts and estates:
- the amount subtracted for qualified tuition expenses under IRC § 222, as amended by Public Law 116-94, division Q, § 104;
- the amount of above the line charitable contributions deducted under § 2204 of Public Law 116-136;
- the amount of meal expenses in excess of the 50% limitation under IRC § 274(n)(1) allowed under subsection (n), paragraph (2), subparagraph (D), of that section; and
- the amount of charitable contributions deducted from federal taxable income by a trust for taxable year 2020 under Public Law 116-136, § 2205(a).
Application of temporary subtractions and additions: The Commissioner of Revenue must apply the subtractions and the additions when calculating the following: (1) the percentage under Minn. Stat. § 290.06, subd. 2c(e) (allocation by nonresidents); (2) a taxpayer’s alternative minimum taxable income under Minn. Stat. § 290.091; and (3) “income” as defined in Minn. Stat. § 289A.08, subd. 7(j), for the purposes of determining the tax for composite filers and the pass-through entity tax.
Property tax refunds: For the purpose of calculating property tax refunds under Minnesota Statutes, chapter 290A, any amounts allowed as a subtraction are excluded from “income,” as defined in Minn. Stat. § 290A.03, subd. 3. This provision is effective retroactively beginning with refunds based on rent paid in 2021 and property taxes payable in 2022.
Temporary additions and subtractions—corporations.
The bill enacts the following temporary additions and subtractions for C corporations, effective retroactively at the same time the changes were effective for federal purposes.
Subtractions: The following amounts are subtractions from FTI for C corporations:
- the amount of wages used for the calculation of the employee retention credit for employers affected by qualified disasters, to the extent not deducted from income, under Public Law 116-94, division Q, § 203, or Public Law 116-260, division EE, § 303;
- the amount of wages used for the calculation of the payroll credit for required paid sick leave, to the extent not deducted from income, under Public Law 116-127, § 7001, as amended by § 9641 of Public Law 117-2;
- the amount of wages or expenses used for the calculation of the payroll credit for required paid family leave, to the extent not deducted from income, under Public Law 116-127, § 7003, as amended by § 9641 of Public Law 117-2;
- the amount of wages used for the calculation of the employee retention credit for employers subject to closure due to COVID-19, to the extent not deducted from income, under Public Law 116-136, § 2301, as amended by Public Law 116-260, division EE, § 207, and Public Law 117-2, § 9651; and
- the amount required to be added to gross income to claim the credit in IRC § 6432.
Additions: The following amounts are additions to FTI for C corporations:
- the amount of meal expenses in excess of the 50% limitation under IRC § 274(n)(1) allowed under subsection (n), paragraph (2), subparagraph (D), of that section; and
- the amount of charitable contributions deducted for taxable year 2020 pursuant to the provisions of Public Law 116-136, § 2205(a).
Charitable contribution deduction—special rule for 2020.
For charitable contribution deductions under Minn. Stat. § 290.0122, for taxable year 2020, the provisions of Public Law 116-136, § 2205(a), do not apply. The provision is effective retroactively at the same time the changes were effective for federal purposes.
Dependent care credit—special rule for 2021.
For the purpose of calculating the dependent care credit under Minn. Stat. § 290.067, for taxable year 2021, the provisions of Public Law 117-2, §§ 9631 and 9632, do not apply. The provision is effective retroactively at the same time the changes were effective for federal purposes.
Casualty loss deduction—special rule for 2021.
For the purpose of calculating the standard deduction under Minn. Stat. § 290.0123, and the casualty loss deduction under Minn. Stat. § 290.0122, subd. 8, the following provisions do not apply: (1) § 204(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, Public Law 116-94; and (2) § 304(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Public Law 116-260. The provision is effective retroactively at the same time the changes were effective for federal purposes.
Working Family credit—special rule for tax year 2021.
For the purpose of calculating the Working Family credit under Minn. Stat. § 290.0671, for taxable year 2021, the provisions of IRC § 32(n) do not apply. The provision is effective retroactively at the same time the changes were effective for federal purposes.
Extension of statute of limitations.
Notwithstanding any law to the contrary, a taxpayer whose tax liability changes as a result of this act may file an amended return by December 31, 2023. The commissioner may review and assess the return of a taxpayer covered by this provision for the later of: (1) the periods under Minn. Stat. § 289A.38; Minn. Stat. § 289.39, subd. 3; and Minn. Stat. § 289A.40; or (2) one year from the time the amended return is filed as a result of a change in tax liability under this provision. Interest on any additional liabilities as a result of any provision in this act accrue beginning on January 1, 2024. The provision is effective retroactively at the same time the changes were effective for federal purposes.
Property tax refunds—COVID-related retirement distributions.
For the purpose of calculating property tax refunds, “income” does not include coronavirus-related distributions included in gross income under § 2202(a)(5) of Public Law 116-136. The provision is effective retroactively at the same time the changes were effective for federal purposes.
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