On July 1, 2021, Minnesota Gov. Tim Walz signed an omnibus tax bill (H.F. 9) conforming to several sections of recently enacted federal law, including loan forgiveness and expense deductions provisions relating to the Paycheck Protection Program (PPP), rules for COVID-19 related retirement fund distributions, and the exclusion of some unemployment insurance compensation from gross income.1 H.F. 9 also extends the sunset date for the small business investment tax credit (angel investment credit), establishes the state’s rules regarding partnership audits, and establishes a pass-through entity (PTE) tax. Finally, the bill modifies rules regarding accelerated sales tax payments, reducing the sales tax liabilities of some businesses.
Conformity with the Internal Revenue Code (IRC)
Individual income and corporate franchise tax changes
H.F. 9 conforms to several key IRC provisions enacted since the state’s IRC conformity date of Dec. 31, 2018, including:
- Subtitle B, Sec. 276 of the Consolidated Appropriations Act of 2021 (CAA 2021),2 which allows business to deduct expenses related to PPP loan forgiveness;3
- Sec. 1106(i) of the Coronavirus Aid, Relief and Economic Security (CARES) Act,4 which excludes PPP loan forgiveness from gross income;5
- Sec. 2202 of the CARES Act, which allows individuals to withdraw up to $100,000 from retirement accounts in relation to hardship caused by the COVID-19 pandemic and include such distributions in gross income over the next three years;6
- Sec. 101 of the Further Consolidated Appropriations Act of 2020 (FCAA 2020),7 which revived and extended the exclusion of qualified principal residence indebtedness from gross income under IRC Sec. 108(a)(1)(E);8 and
- Sec. 9042 of the American Rescue Plan Act (ARPA),9 which excludes $10,200 of unemployment insurance compensation from gross income for the 2020 tax year.10
Additionally, H.F. 9 extends the small business investment credit (angel investment credit) for one year, setting aside $10 million for tax years beginning in 2021 and $5 million for tax years beginning in 2022.11
H.F. 9 also clarifies that Minnesota conforms to the treatment of carryover amounts under IRC Sec. 179(b)(3) for property placed in service in taxable years beginning before 2020. This provision of H.F. 9 is effective retroactive to tax years beginning after 2019.12
Partnership audit rules
The Bipartisan Budget Act (BBA) of 2015 enacted new federal partnership audit and assessment procedures for tax years beginning after 2017.13 These new procedures shift the burden for assessing tax after a partnership–level audit from the Internal Revenue Service (IRS) to the partnership.
Under H.F. 9, Minnesota creates a procedure for taxpayers to report changes to federal taxable income that result from federal partnership audits under the procedures detailed in the BBA.14 Such procedures closely align with the model statute adopted by the Multistate Tax Commission (MTC).15 H.F. 9 allows audited partnerships to pay tax at the entity level, rather than at the partner level,16 and allows the Minnesota Department of Revenue to assess partners for taxes owed if an entity fails to timely pay.17 Any federal adjustments must be reported to the state no later than 90 days from the date of the final determination by the IRS.18
Establishment of PTE tax
Effective for tax years beginning in 2021 and thereafter (for tax years in which the annual $10,000 limit on the federal deductibility of state and local taxes is in effect19 ), H.F. 9 permits qualified entitles to file and pay the PTE tax, which is deductible from their federal income tax.20 An entity is qualified under the PTE tax if it is structured as a partnership, limited liability company (LLC) or an S corporation.21 Entities may not elect to file and pay the PTE tax if one or more of its partners, members, or shareholders is a partnership, a limited liability company other than a disregarded entity, or a corporation.22 More than 50% of an entity’s ”qualified owners”23 must elect to pay the PTE tax,24 and taxpayers may claim a refundable credit for their share of the amount of PTE tax paid by a qualified entity.25
Sales and use taxes
H.F. 9 reduces accelerated June sales tax liability payments, pending the outcome of a November budget forecast and the satisfaction of five other additional revenue priorities in the event of a budgetary surplus.26 The bill also exempts specific businesses that sell qualifying construction materials from the accelerated payment requirement for June.27
Property tax changes
Effective for property taxes payable in 2023 and thereafter, H.F. 9 raises the commercial-industrial market value exclusion from state property tax from $100,000 to $150,000,28 thereby decreasing the state general levy by $20.1 million.29
Commentary
H.F. 9 provides clarity regarding some key changes to the IRC enacted in recent years, most notably the treatment of forgiven PPP loans, depreciation under IRC Sec. 179(b)(3), retirement fund distributions for those impacted by the COVID-19 pandemic, and the exclusion of some unemployment insurance compensation from an individual taxpayer’s gross income.
Minnesota’s adoption of the partnership audit procedures that align with those included in the MTC model statute is a positive step in pursuing uniformity in state procedures following federal partnership audit adjustments. As discussed above, the new federal procedures are intended to shift the burden for assessing tax after a partnership-level adjustment to the partnership. A federal partnership audit that produces an adjustment may change corresponding state tax liability, and often proves to be problematic for several reasons. For example, the identity of the partners in a partnership may change between the tax year in which the adjustment occurs, and the tax year in which the liability is finally fixed. In addition, while states have not had much opportunity to react to the new federal rules, a lack of uniformity in this area could make things extremely unwieldly for multistate partnerships and their partners. Minnesota’s adoption of procedures that align with the MTC model statute should encourage other states to continue following this trend.
Unfortunately, the 2021 Minnesota legislature failed to address much-needed changes to the definition of a Minnesota resident trust under Minn. Stat. Sec. 290.01, subd. 7b that came to light in the Minnesota Supreme Court’s 2018 decision in Fielding v. Commissioner.30 The Court held that one of the definitions of a resident trust was unconstitutional, stating that neither past Minnesota residency of the grantor nor current Minnesota residency of a trust beneficiary establishes “the necessary minimum connection to justify taxing the Trusts’ income.”31 This marks the third legislative session since the Fielding decision where the Minnesota legislature has failed to act on this issue, adding unnecessary uncertainty for those looking to create a trust with some connection to the state.
Finally, although discussed by the Minnesota taxpaying community and/or members of the Minnesota House and Senate throughout the 2021 legislative session, the following provisions did not make it into the final legislation, but could resurface in future legislative sessions:
- Decrease the exemption period and/or the percentage of sales tax available for refunds related to the sales tax exemption for data centers;
- Increase the highest marginal individual income tax rate and/or the corporate income tax rate;
- Retroactive taxation of IRC Sec. 965 repatriated income and GILTI;
- Worldwide filing election for corporate taxpayers; and
- Creation of a private letter ruling (PLR) program.
1 H.F. 9 (1st Spec. Sess.), Laws 2021.
2 P.L. 116-260, subt. B, § 276.
3 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 6, adding MINN. STAT. § 290.0111, subd. 4(a)(2).
4 P.L. 116-136, tit. 1, § 1106.
5 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 6, adding MINN. STAT. § 290.0111, subd. 3(1).
6 Id., adding MINN. STAT. § 290.0111, subd. 3(2).
7 P.L. 116-94, tit. 1, § 101.
8 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 6, adding MINN. STAT. § 290.0111, subd. 2(a)(1).
9 P.L. 117-2, tit. 9, § 9042.
10 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 6, adding MINN. STAT. § 290.0111, subd. 5.
11 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 1, adding MINN. STAT. § 116J.8737, subd. 5.
12 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 1, § 17, clarifying application of MINN. STAT. §§ 290.0131, subd. 10 and 290.0133, subd. 12.
13 P.L. 114-74, amended by P.L. 114-113 and P.L. 115-141. The federal partnership audit provisions begin at IRC § 6221.
14 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 2.
15 Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments, Multistate Tax Commission, adopted Jan. 24, 2019.
16 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 2, § 9, adding MINN. STAT. § 289A.382, subd. 3.
17 Id., adding MINN. STAT. § 289A.382, subd. 6.
18 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 2, § 9, adding MINN. STAT. § 289A.382, subd. 2.
19 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3, § 2, adding MINN. STAT. § 289A.08, subd. 7a(b).
20 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3.
21 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3, § 2, adding MINN. STAT. § 289A.08, subd. 7a(a)(2).
22 Id.
23 A “qualified owner” is defined as a resident or nonresident individual or estate that is a partner, member, or shareholder of a “qualifying entity;” or a resident or nonresident trust that is a shareholder of a qualifying S corporation; see H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3, § 2, adding MINN. STAT. § 289A.08, subd. 7a(a)(3).
24 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3, § 2, adding MINN. STAT. § 289A.08, subd. 7a(b)(2).
25 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 3, § 6, adding MINN. STAT. § 290.06, subd. 40.
26 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 4, § 1, adding MINN. STAT. § 16A.152, subd. 2(a)(6).
27 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 4, § 2, amending MINN. STAT. § 289A.20, subd. 4(b).
28 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 6, § 10, amending MINN. STAT. § 275.025, subd. 2(1).
29 H.F. 9 (1st Spec. Sess.), Laws 2021, Art. 6, § 9, amending MINN. STAT. § 275.025, subd. 1.
30 916 N.W.2d 323 (Minn. 2018).
31 Id. at 331.
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