by Peter G. Pupke
On May 24, 2023, Minnesota Governor Tim Waltz signed an omnibus tax bill that includes a one-time tax rebate, and a child care credit for low-income families. The bill also revises the state’s IRC conformity date; enacts a net investment income tax; conforms the state to the federal tax on foreign corporations; changes some itemized deductions for higher-income taxpayers; amends and extends several existing tax credits and enacts several new credits; exempts taxes on social security for certain taxpayers; and makes other changes to the corporate franchise and individual income tax. The bill makes a number of changes to the state sales and use and property taxes. The bill makes several changes related to minerals taxation including converting the net proceeds tax into a gross proceeds tax. Finally, the bill makes several miscellaneous changes including modifying service requirements for petitions to challenge property taxes; allowing for lower interest rates to be charged on delinquent taxes and repayment plans on tax-forfeited properties; and reducing the combined net receipts tax rate for charitable gambling revenues. (L. 2023, H1938 (c. 64), effective as stated.)
IRC conformity.
The bill updates the reference to the Internal Revenue Code for purposes of administration and compliance, individual income tax and corporate franchise tax, estate tax, and property tax refund purposes from December 15, 2022 to May 1, 2023.
Tax credits.
The bill enacts or amends the following Minnesota tax credits:
Renter’s credit: Effective for taxable years beginning after December 31, 2023, the Minnesota property tax renter’s credit is converted into a refundable income tax credit, and changes the income measure used to calculate the credit from “household income” to adjusted gross income (AGI). Rather than filing for a renter’s credit on a separate form and receiving a credit payment in August or September, a claimant would file for and receive the credit during the normal income tax filing period. The bill also makes conforming changes.
Child tax credit: Effective for taxable years beginning after December 31, 2022, a refundable child care tax credit of $1,750 per quailfying child is enacted. The credit is reduced by 12% of earned income or AGI, whichever is greater, in excess of $35,000 for a married taxpayer filing a joint return; or $29,500 for all other filers. The credit is adjusted for inflation, and the Commissioner of Revenue may establish a process to allow taxpayers to elect to receive one or more advance payments of the credit.
Credit for sales of manufactured home parks to cooperatives: Effective for taxable years beginning after December 31, 2022, a credit for sales of manufactured home parks to cooperatives is enacted. The credit is 5% of the amount of the sale price of the qualified property. If the credit exceeds the taxpayer’s tax liability, the excess may be carried over to each of the next five taxable years. The credit expires January 1, 2031, for taxable years beginning after December 31, 2030.
Short line railroad infrastructure credit: Effective for taxable years beginning after December 31, 2022, a short line railroad infrastructure modernization credit is enacted equal to 50% of eligible expenses, not to exceed $3,000 per mile, multiplied by the number of miles of railroad track owned or leased within the state by the eligible taxpayer for which the taxpayer made qualified railroad reconstruction or replacement expenditures as of the close of the taxable year for which the credit is claimed. If the credit exceeds the taxpayer’s tax liability, the excess may be carried over to each of the next five taxable years. The credit expires January 1, 2031, for taxable years beginning after December 31, 2030. The credit may also be claimed against the insurance premiums tax.
Dependent care credit: Effective for taxable years beginning after December 31, 2022, the bill amends the dependent care credit to allow unmarried taxpayers with a newborn child who do not have dependent care expenses to claim the “newborn credit.” This credit deems the taxpayer to have paid the maximum amount of expenses for one dependent for the purposes of the credit.
Working family credit: Effective for taxable years beginning after December 31, 2022, the bill amends the working family credit to provide that the credit is equal to 4% of the first $8,750 of earned income. The credit is increased by: (1) $925 for a taxpayer with one qualifying older child; (2) $2,100 for a taxpayer with two qualifying older children; or (3) $2,500 for a taxpayer with three or more qualifying older children. The credit is phased out jointly with the child care tax credit. For a taxpayer with one or more qualifying older children who did not qualify for the child care tax credit, the phaseout rate equals 9%.
Education credit: Effective for taxable years beginning after December 31, 2022, the bill amends the education credit to make technical changes to restructure and clarify the language describing which expenses qualify for the credit. The bill shifts the income measure used to phase out the credit from household income to AGI, and increases the phaseout threshold for the credit to $70,000 of AGI, plus an additional amount based on the number of the taxpayer’s children. The bill increases the maximum credit from $1,000 to $1,500. The phaseout thresholds are adjusted for inflation.
Military service credit: Effective for taxable years beginning after December 31, 2022, the military service credit is amended to make the credit available per calendar year (currently the credit is allowed per taxable year).
Historic structure rehabilitation credit: Effective retroactively from July 1, 2022, the historic structure rehabilitation credit is amended to provide that the credit sunsets after fiscal year 2030 (previously, after fiscal year 2022).
Credit for owners of agricultural assets: Effective for taxable years beginning after December 31, 2022, the credit rate for land sales is increased from 5% to 8% (or 12% for underserved farmers or ranchers) and increases the maximum credit for these sales from $32,000 to $50,000. The bill also allows sales of land to a spouse or family member (brother, sister, ancestor, or lineal descendant) to qualify for the credit. The bill also extends sunset date of the credit from tax year 2024 to tax year 2031.
Angel investment credit: Effective for taxable years beginning after December 31, 2022, the small business investment (“angel”) tax credit is extended to tax years before 2025 (previously, the credit was effective for taxable years beginning before January 1, 2023). The aggregate credit limit remains at $5 million.
Film credit: Effective for taxable years beginning after December 31, 2022, the bill modifies the definition of “film project” to allow the $1 million expenditure threshold to apply in any 12-month period instead of a taxable year, and increases the annual allocation for the film credit from $4,950,000 per year to $24,950,000 per year. For fiscal years 2024 and 2025, the increase in film credit allocations is limited to $14,040,000 relative to the February 2023 forecast base. Finally, the sunset of the credit is extended from tax year 2025 to tax year 2032.
Credit for taxes paid to another state: Effective for taxable years beginning after December 31, 2022, the credit for taxes paid to another state is amended to provide that a resident sole member of a disregarded limited liability company (LLC) is considered to have paid a tax imposed on the sole member in an amount equal to the net income tax paid by the disregarded LLC to another state.
Refund of contributions to political parties and candidates: Effective January 1, 2024, and applying to refunds for contributions made in calendar year 2024 and thereafter, the refund of contributions to political parties and candidates is increased to a maximum of $75 (previously, a maximum of $50) for an individual and $150 (previously $75) for a married couple, filing jointly.
PTE tax paid to another state: Effective for taxable years beginning after December 31, 2022, a credit is allowed against the tax on a qualifying entity under Minn. Stat. § 289A.08, subd. 7a, for pass-through entity (PTE) tax paid to another state. The credit is allowed as a credit for taxes paid to another state and may only be claimed by a qualifying owner. The provision expires at the same time and on the same terms as IRC § 164(b)(6)(B), except that the expiration does not affect the Commissioner’s authority to audit or power of examination and assessments for credits claimed under this provision.
Net investment income tax.
Effective for taxable years beginning after December 31, 2023, Minn. Stat. § 290.033 is enacted, which imposes a 1% additional tax on the net investment income of individuals, estates, and trusts in excess of $1 million. “Net investment tax” has the same meaning given in IRC § 1411(c), excluding the net gain attributable to the disposition of property classified as class 2a under Minn. Stat. § 273.13, subd. 23.
Pass-through entity tax.
Effective for taxable years beginning after December 31, 2022, the bill allows tiered PTEs to elect to file and pay the PTE tax. The bill requires the exclusion of any owner of a PTE that is not a qualifying owner from the election requirements and clarifies that the election must be made by the owners who collectively hold a majority of the total ownership interests of qualifying owners. The bill removes the requirement that the election may only be made if a qualifying owner’s state and local tax (SALT) deduction is limited federally and sunsets the PTE tax when the federal SALT deduction cap expires. The bill allows 100% of a resident qualifying owner’s income to be used in calculating the PTE tax. The bill provides that when computing federal AGI for purposes of credits and deductions, a taxpayer must calculate their federal AGI without any deduction for the specified income tax payments as defined in Internal Revenue Code Notice 2020-75. The taxpayer must provide detailed substantiation to support the computation.
Effective for taxable years beginning after December 31, 2023, the bill provides the computation of a qualifying owner’s net investment income tax liability must be computed under Minn. Stat. § 290.033 (see herein). Effective retroactively for taxable years beginning after December 31, 2020, a partnership subject to a federal partnership level audit must report adjustments and file a new PTE tax return to account for the changes.
State itemized and standard deduction phase-out.
Effective for taxable years beginning after December 31, 2022, the bill amends the phase-out of the state itemized and standard deductions to specify that the deductions are reduced by: (1) the lesser of 3% of the excess of the taxpayer’s AGI over $220,650 but not over $304,970; plus 10% of the taxpayer’s AGI over $34,970; or (2) 80% of the amount of the taxpayer’s itemized or standard deduction. The bill also specifies that the itemized and standard deductions are reduced by 80% if the taxpayer’s AGI is over $1 million. For tax years beginning after December 31, 2023, the phase-out amounts are adjusted for inflation.
Income tax provisions.
The bill makes a number of changes to the state’s individual income tax law. Among the changes are the following:
Social security benefits: Effective for taxable years beginning after December 31, 2022, Minnesota’s social security subtraction is expanded to allow taxpayers with AGI below $100,000 (for married joint returns) or $78,000 (for single or head of household returns) to subtract the full amount of the taxpayer’s taxable social security benefits. This change switches the measure of income used to phase out the subtraction from provisional income to AGI. The subtraction is phased down by 10% for each $2,000 of AGI in excess of the phaseouts (for married joint taxpayers the phaseout is 10% for each $1,000 of AGI). The thresholds are indexed for inflation. The bill allows taxpayers to continue to claim the state subtraction amounts allowed under current law, if those amounts are greater than the new “simplified” approach established in the bill. The amounts for the “simplified” approach are not indexed for inflation.
Student loan discharges: Effective for taxable years beginning after December 31, 2022, the bill permanently adopts (for taxable years after 2025) the American Rescue Plan Act (ARPA) exclusion for discharged student loans, by allowing a subtraction for discharged student loans which would qualify under the ARPA exclusion.
Sexual harassment and abuse settlements: Effective May 25, 2023, the bill prohibits sexual harassment and abuse settlements between employees and employers to be provided as wages or severance pay.
Subtraction for retirement benefits: Effective for taxable years beginning after December 31, 2022, the bill enacts a subtraction for a portion of public pension benefits. The subtraction applies to pension benefits that are earned based on service for which the member or survivor did not earn social security benefits. The subtraction applies to state or federal pension plans whose members do not qualify for social security benefits. The bill defines these benefits as “qualified benefits.” The subtraction is limited to $25,000 for married joint filers, and $12,500 for other filers. The subtraction is phased out beginning at $100,000 of AGI for married joint filers and $78,000 for single and head of household filers. The subtraction is reduced by 10% for each $2,000 of AGI above those thresholds.
Net operating loss deduction.
Effective for taxable years beginning after December 31, 2022, the amount of the Minnesota net operating loss deduction cannot exceed 70% (previously 80%) of taxable net income in a single taxable year.
Dividends received from another corporation.
Effective for taxable years beginning after December 31, 2022, Minnesota will allow a 50% or 40% deduction for dividends received from another corporation (previously a 80% or 70% dividend deduction), depending on whether the receiving corporation owns 50% (previously 20%), or less than 20% of the stock of the paying corporation.
Deferred foreign income.
May 25, 2023, the bill makes a technical correction to language in existing law relating to the subtraction for IRC § 965 (deemed repatriation) income.
Controlled foreign corporations.
Effective for taxable years beginning after December 31, 2022, the net income of a corporation (previously, of a domestic corporation) that is included under IRC § 951 is deemed dividend income.
Global intangible low-taxed income.
Effective for taxable years beginning after December 31, 2022, any amounts included in taxable income under IRC § 951A are deemed dividend income.
One-time refundable credit payment (rebate).
Effective for taxable years beginning after December 31, 2020, and before January 1, 2022, a taxpayer is allowed a credit against the individual income tax equal to $520 for a married couple filing a joint return and $260 for a single filer, head of household, or married taxpayer filing a separate return. For a taxpayer with a dependent the credit is increased by $260 per dependent up to an additional maximum credit of $780.
The credit is not available to a taxpayer who: (1) was not a resident of Minnesota during any part of 2021; (2) was a dependent for 2021; (3) did not file a 2021 Minnesota individual income tax return, or a property tax refund return under Minnesota Statutes, chapter 290A, based on property taxes payable in 2022 or rent constituting property taxes paid in 2021, by December 31, 2022; (4) had AGI for taxable years beginning in 2021 greater than: (a) $150,000 for a married couple filing a joint return, and (b) $75,000 for all other income tax filers; or (5) died before January 1, 2023.
Sales and use tax amendments.
The bill makes a number of sales and use tax amendments, including the following:
Exclusion for certain suite licenses and season tickets for collegiate events: Effective retroactively for sales and purchases made after June 30, 2022, the sale of a bundled transaction is not considered a retail sale if one of the products included in the bundle is a suite license exempt under Minn. Stat. § 297A.67, subd. 35, or a right to purchase season tickets to collegiate events exempt under Minn. Stat. § 297A.67, subd. 38, if the seller maintains books and records identifying through reasonable and verifiable standards the portions of the price that are attributable to the distinct and separately identifiable products.
Firearm storage units: Effective for sales and purchases made after June 30, 2023, secure firearm storage units are exempt.
Sale of property used in a trade or business: Effective for sales and purchases made after June 30, 2023, sales between a sole member of a disregarded LLC and the disregarded LLC qualify for the sales tax exemption for tangible property used in a trade or business that is not in the business of selling that property.
Amenities included with privilege of admission: Effective retroactively for sales and purchases made after June 30, 2022, and before July 1, 2030, the sale of amenities, including but not limited to food and beverages, parking services, and promotional items, that are included in the sales price of the privilege of admission to athletic events and places of amusement under Minn. Stat. § 297A.61, subd. 3(m), are exempt when sold by a seller of the privilege of admission that is a professional sports team competing in Major League Baseball, Major League Soccer, the National Basketball Association, the Women’s National Basketball Association, the National Football League, or the National Hockey League.
Blood centers: Effective retroactively for sales and purchases made after December 31, 2019, and before January 1, 2028, sales, except for those listed in Minn. Stat. § 297A.70, subd. 7(f), to a blood center are exempt, if the items purchased are used in providing blood collection and distribution services. Leases by a blood center of a truck, a bus, or a passenger automobile are exempt if the truck, bus, or automobile is used for carrying out the purposes of the blood center, including the collection of blood from donors, setting up of blood drives, and delivering blood to hospitals.
Certain natural gas fees: Effective retroactively for fees applied to sales and purchases of natural gas that are billed from September 1, 2021, to December 31, 2026, fees related to natural gas sold for residential use to customers who were metered and billed as residential users and who used natural gas for their primary source of residential heat are exempt from sales and use tax for purposes of the billing periods May to October, provided that: (1) the fee for the natural gas is subject to a cost recovery plan for the price increase in natural gas during the period from February 13, 2021, to February 17, 2021, identified in docket G-999/CI-21-135 before the Minnesota Public Utilities Commission; and (2) the fee is separately stated and labeled as a fee pursuant to a cost recovery plan.
Definition of “state” amended: Effective for sales and purchases made after June 30, 2023, the term “state” includes any territory of the United States, including American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.
Sales tax exemptions for construction materials: The bill exempts from sales tax construction materials used or consumed in certain specified projects.
Temporary moratorium: Effective May 25, 2023 until May 31, 2025, the bill prohibits a political subdivision from engaging in certain specified activities in connection with imposing new local sales and use tax or modifying and existing sales and use tax.
Local taxation: The bill authorizes a number of specified localities to impose or extend, if approved by the voters, local sales and use taxes and/or lodgings taxes.
Property tax amendments.
The bill makes a number of property tax changes, including the following:
Solar energy generating systems: Effective beginning with assessment year 2024, real property is classified as class 3a (commercial) if the property contains more than one solar energy generating system that cannot be combined with another system for the purposes of the solar energy production tax, and the systems in aggregate exceed one megawatt.
Agricultural homestead property: The Commissioner must annually certify the first tier limit for agricultural homestead property. For assessment year 2024, the limit is $3.5 million. Beginning with assessment year 2025, the limit is the product of: (1) the first tier limit for the preceding assessment year; and (2) the ratio of the statewide average taxable market value of agricultural property per acre of deeded farm land in the preceding assessment year to the statewide average taxable market value of agricultural property per acre of deeded farm land for the second preceding assessment year.
Green Acres Program: Real estate that received the tax deferment under the Green Acres Program for assessment year 2012 and would have continued to qualify for tax deferment for assessment years from 2013 to 2023 but for an eminent domain action that reduced the real estate to less than 10 acres, must reapply and, if determined eligible, will qualify for the tax deferment for assessment year 2024 and thereafter until: (1) the property no longer qualifies for classification as class 2a; (2) the property is voluntarily withdrawn from the program; or (3) the property is sold, transferred, or subdivided. The application for deferment must be filed by May 1 of the year prior to the year in which the taxes are payable.
Low-income rental property: Effective beginning with assessment year 2024, the owner of low-income rental property classified as class 4d(1) must use the property tax savings received from the 4d(1) classification for one or more of the following eligible uses: property maintenance, property security, improvements to the property, rent stabilization, or increases to the property’s replacement reserve account. To maintain the class 4d(1) classification, the property owner must annually reapply and certify to the Housing Finance Agency that the property tax savings were used for one or more eligible uses. Class 4d(1) property has a classification rate of 0.25%.
Community land trust property: Effective beginning with assessment year 2024, a unit that is owned by the occupant and used as a homestead by the occupant, and otherwise meets all the requirements for community land trust property is classified as class 4d(2), provided that by December 31 of each assessment year, the community land trust certifies to the assessor that: (1) the community land trust owns the real property on which the unit is located; and (2) the unit owner is a member in good standing of the community land trust. For all units qualifying as class 4d(2), the market value determined by the assessor must be based on the normal approach to value without regard to any restrictions that apply because the unit is a community land trust property. Class 4d(2) property has a classification rate of 0.75%.
Homestead of veteran with a disability or family caregiver: Effective beginning with assessment year 2023, surviving spouses of veterans who died before receiving the 100% permanent disability exclusion can apply for the exclusion any time after the death of the veteran, regardless of when the veteran died. The bill also allows surviving spouses to reapply for the exclusion if they had previously received the exclusion and had the exclusion expire.
Homestead market value exclusion: Effective beginning with assessment year 2024, the value thresholds and the maximum exclusion amount for the homestead market value exclusion are increased. Certain community land trust property is allowed to receive the exclusion.
Senior citizens property tax deferral: Effective for applications for deferral of taxes payable in 2024 and thereafter, the bill increases from $60,000 to $96,000 the household income limit for the senior citizens’ property tax deferral. The bill also reduces from 15 to five the minimum number of years the homeowner must own and occupy the property to qualify.
Renter’s credit and homestead credit: Effective only for refunds based on rent paid in 2022 and property taxes payable in 2023, the bill provides for a one-time increase by 20.572% of the amount of the homestead credit refund and the renter’s credit otherwise payable.
Targeting property tax refund: Effective for refunds based on property taxes payable in 2023 only, the bill increases the additional “targeting” refund for homeowners who experienced large year-over-year property tax increases. Under current law, the refund applies to homeowners whose property tax refunds increase by more than 12%, and is limited to $1,000. For refunds payable in 2023 only (based on 2023 property taxes payable), the refund would apply to homeowners with increases larger than 6%, and the maximum refund would be $2,500.
Homestead application: Effective retroactively for refund claims based on property taxes payable in 2022 and thereafter, the deadline for filing of a homestead application, and for the property to be classified as a homestead, is changed from December 15 to December 31, for purposes of the property tax refund, to match the deadlines for homestead applications for purposes of the homestead market value exclusion.
Service requirements when challenging assessments: Effective May 25, 2023, a petition challenging the validity of an assessment must be served personally on the county auditor and allows the auditor to waive personal service in multiple ways. The bill removes requirements for additional copies to be served on other county officials. The county auditor must provide copies of the petition to the county assessor, treasurer, and attorney and send a list of petitioned properties to the school board of the district containing the properties. The bill reduces the number of copies of the petition and proofs of service that must be filed with the district court.
Interest rate: Effective for property taxes, penalties, and costs determined to be delinquent on or after January 1, 2024, the bill removes a 10% minimum interest rate on delinquent property taxes; and allows a county board by resolution to set a lower interest rate on property taxes than the prime rate charged by banks during the 6-month period ending on September 30 of that year. Effective January 1, 2024, the bill allows a county board, or a county auditor if the county board has delegated its authority over tax-forfeited lands, to charge a lower interest rate on the unpaid balances of repurchase plans than the rate charged on delinquent taxes.
Mineral taxes.
Effective beginning with assessment year 2023, the net proceeds tax on nonferrous mining is converted to a gross proceeds tax. This conversion eliminates the deductions under present law for the expenses of converting raw materials to marketable ores. The tax rate is reduced from 2% to 0.4%. The bill also establishes a $2 million minimum payment for mining operations which have received all required permits to mine nonferrous materials but have not begun mining.
Lawful gambling tax.
Effective for games reported as played after June 30, 2023, the bill reduces the charitable gambling combined net receipts tax rates as follows: net receipts under $87,000 to 8% from 9%; net receipts over $87,500, but not over $122,500 to 17% from 18%; net receipts over $122,500 but not over $157,500 to 25% from 27%; and for net receipts over $157,500 to 33.5% from 36%.
Effective for games approved after August 1, 2023, the bill amends the definition of “electronic bingo device” to provide that such a device cannot contain any spinning reels or other representations that mimic a video slot machine, including but not limited to free plays, bonus games, screens, or game features that are triggered after the initial symbols are revealed that display the results of the game. The bill also amends the definition of “electronic pull-tab device” to require that the device be designed so that a player must individually activate or open each individual line, row, or column of each electronic pull-tab ticket. The bill also requires that the device not include representations that mimic the display of video slot machines in this manner. The bill amends the definition of “electronic pull-tab game” to require that the game contain a mechanism requiring a player to manually activate each ticket to be opened and a mechanism requiring a player to manually activate the reveal of each row of symbols as a separate and distinct action.
Miscellaneous provisions.
Withholding: Effective May 25, 2023, when there is an overpayment of nonresident withholding tax by a partnership or S corporation, a refund to the payor is limited to the amount of the overpayment that was not deducted and withheld from the shares of the payor’s partners or shareholders.
Effective May 25, 2023, a withholding rate of 6.25%, or the rate directed by the recipient, is established for periodic payments and nonperiodic distributions such as annuities and IRA distributions on demand.
Effective May 25, 2023, the bill clarifies that the obligation to withhold surety deposits on construction contracts exceeding $50,000 applies to payments to construction companies that are corporations and cooperatives that are not organized under Minnesota law.
Payment plan fee: Effective for payment plans entered into beginning 30 days after May 25, 2023, the bill eliminates the $50 fee for entering into a payment agreement with the Commissioner.
Return preparers: Effective for returns filed after December 31, 2023, the bill requires publication of a paid tax preparer who has been assessed a penalty in excess of $1,000 for failing to provide a preparer tax identification number on returns they prepare and file for others.
Tourism improvement district: Effective May 25, 2023, the bill authorizes, upon a petition by impacted business owners, a governing body of a municipality to adopt an ordinance establishing a tourism improvement district. A municipality may impose a service charge on a business for the purpose of providing activities and improvements that will provide benefits to a business that is located within the tourism improvement district and subject to the tourism improvement district service charge. Service charges must be based on a percentage of gross business revenue, a fixed dollar amount per transaction, or any other reasonable method based upon benefit and approved by the municipality.
Free filing report: By January 15, 2024, the Commissioner must provide a written report providing information on free electronic filing options for preparing and filing Minnesota individual income tax returns. The Commissioner must survey tax preparation software vendors for information on a free electronic preparation and filing option for taxpayers to file Minnesota individual income tax returns.
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