On May 27, Minnesota Gov. Tim Walz signed an omnibus tax bill that brings major changes to the Gopher State, including an Internal Revenue Code (IRC) conformity update (with selective decoupling provisions), partial conformity to the new federal Net CFC Tested Income (NCTI) regime, an extension of Minnesota’s pass-through entity tax (PTET) regime, a one-time boost to the homestead credit refund, and the creation of a direct state e-filing system.1
IRC and OBBBA conformity
IRC conformity date change
Minnesota is a static conformity state, meaning it adopts the IRC as of a specific point in time rather than the current IRC. As part of the omnibus tax bill, Minnesota advanced its IRC conformity date from May 1, 2023, to May 1, 2026.2 This change means Minnesota will generally conform to federal tax provisions made by the One Big Beautiful Bill Act (OBBBA), though significant departures from pure conformity to OBBBA remain.
Sec. 174A conformity
Pursuant to the Tax Cuts and Jobs Act, for the 2022 tax year and thereafter, IRC Sec. 174 required taxpayers to amortize domestic research and experimental (R&E) expenditures over five years, and foreign R&E expenditures over 15 years. The enactment of the OBBBA permitted the immediate expensing of domestic R&E expenditures under newly created IRC Sec. 174A, with foreign R&E expenditures still amortized over 15 years.
With Minnesota previously conforming to the May 1, 2023, version of the IRC, the state required taxpayers to amortize domestic R&E expenditures over five years and foreign R&E expenditures over 15 years. While Minnesota has advanced its IRC conformity date past the enactment of the OBBBA, Minnesota has chosen to require an addback for 80% of the domestic R&E deduction taken for federal income tax purposes starting with the 2025 tax year.
Minnesota subsequently requires ratable deductions for the 80% amount added back over the next four years.3 These adjustments are designed to restore a five-year amortization period for domestic R&E expenditures. The 15-year amortization period for foreign R&E expenditures remains in effect for Minnesota corporate income tax purposes.
The OBBBA also provided transition rules that allowed taxpayers options to account for any remaining unamortized domestic R&E expenditures paid or incurred in taxable years beginning in 2022, 2023, and 2024. For federal income tax purposes, taxpayers may elect to deduct any remaining unamortized domestic R&E expenditures either entirely in the first tax year beginning after Dec. 31, 2024 (for calendar year taxpayers, 2025), or ratably over two taxable years (for calendar-year taxpayers, 2025 and 2026).
Separately, the OBBBA created transition rules for small businesses (taxpayers with gross receipts of less than $31 million) to elect to apply Sec. 174A retroactively for years beginning in 2022 and deduct the remaining amounts of domestic R&E expenses incurred from 2022 through 2024.
Minnesota decouples from these OBBBA transition rules. Small business taxpayers are required to add back 80% of the deduction claimed retroactively.4 Subsequently, these small-business taxpayers must deduct 20% of the remaining balance over the next four years. The addback provision is effective retroactively to tax years beginning after Dec. 31, 2021, with the subtraction provision being effective for tax years beginning after Dec. 31, 2022.
Corporate taxpayers electing to deduct either immediately or ratably over two years for any unamortized amounts of domestic R&E expenses incurred from 2022 through 2024 are required to add back any amounts deducted on their federal return.5 Subsequently, Minnesota requires taxpayers to continue amortizing these domestic R&E expenses incurred during 2022 through 2024 according to their original amortization schedule (amortized over five years).
This subtraction is determined under IRC Sec. 174A as if the taxpayer did not elect to deduct the unamortized amounts either immediately or over the two-year period. This provision is effective retroactively to tax years beginning in 2025 and thereafter.
Qualified opportunity zone (QOZ) capital gains addback
Minnesota now decouples from the federal benefits derived from investing in QOZ funds. For tax years beginning after Dec. 31, 2026, any capital gain that a taxpayer defers or excludes under the QOZ program must be added back to Minnesota taxable income.6 Accordingly, Minnesota taxpayers investing capital gains into QOZs will owe Minnesota tax as if the gain were recognized, despite the federal deferral or exclusion.
Minnesota will also allow a future subtraction to the extent that those added-back gains are later recognized federally to prevent double taxation.7 Notably, the subtraction will not include the step-up in basis that occurs when a QOZ investment is held for at least 10 years.8 Minnesota’s decoupling from federal QOZ treatment applies to both corporations and individuals.
Charitable contribution deduction
Minnesota now fully adopts IRC Sec. 170 as amended through the new conformity date, ensuring alignment with federal percentage limitations and recent charitable provisions. However, Minnesota retains a 1% floor on charitable deductions; consistent with prior law, individuals may only deduct charitable contributions exceeding 1% of their “contribution base” for Minnesota tax purposes.9
Conformity changes related to the international tax reporting regime
In advancing its IRC conformity date to May 1, 2026, Minnesota has updated its statutory references from the Global Intangible Low Taxed Income (GILTI) regime in effect for IRC purposes for the 2018-2025 tax years to the Net CFC Tested Income (NCTI) regime applicable for IRC purposes for the 2026 tax year and thereafter.10 However, the bill also specifically defines NCTI for Minnesota purposes. The Minnesota-specific NCTI calculation requires taxpayers to calculate NCTI under IRC Sec. 951A but without the application of the look-through rule under IRC Sec. 954(c)(6) when determining tested income.11
Additionally, taxpayers then subtract the amount calculated under IRC Sec. 951A(b)(2)(A), in effect as of May 1, 2023, to arrive at Minnesota-specific NCTI. Effectively, Minnesota has restored the 10% adjustment for qualified business asset investment (QBAI) that was removed under the OBBBA. The bill specifies that NCTI, as calculated for Minnesota purposes, is to be treated as dividend income and subject to Minnesota’s 50% dividends received deduction.12
Minnesota now also disallows the application of the look-through rule for determining a taxpayer’s Subpart F inclusion for Minnesota corporate income tax purposes.13 This modified Subpart F inclusion is treated as dividend income subject to Minnesota’s 50% dividends received deduction.14
The implications of Minnesota’s conformity to the NCTI and Subpart F regimes are significant, requiring consideration of how the federal provisions governing international tax reporting operate. U.S. shareholders are required to calculate their controlled foreign corporations’ (“CFCs”) Subpart F inclusion on an annual basis.15 The look-through rule of IRC Sec. 954(c)(6) applies at the CFC level and prevents “cascading” Subpart F inclusions on certain intercompany payments among related CFCs.
If one CFC pays passive-type income (dividends, interest, rents, or royalties) to another related CFC, the payment “looks through” to the character of the payor’s underlying earnings. If those underlying earnings are related to an active trade or business, then the payment is excluded from the calculation of Subpart F income.
In addition to Subpart F income, U.S. shareholders of CFCs are required on an annual basis to determine whether their CFCs are in a tested income or loss position in a given year. Once each CFC’s tested income or loss is determined, the U.S. shareholder must aggregate these results to calculate their NCTI inclusion. In order to prevent double taxation, income categorized as Subpart F income is excluded from the definition of tested income.
By excluding the look-through rule, Minnesota is effectively broadening the income treated as Subpart F income. Accordingly, certain intercompany dividends, interest, or similar payments that would be characterized as GILTI/NCTI under federal rules would be characterized as Subpart F income for Minnesota purposes. Accordingly, these amounts would not be eligible for the 10% QBAI deduction, resulting in increasing Minnesota taxable income.
HF 2438 also creates an additional subtraction adjustment for the 10% QBAI adjustment used to determine the Minnesota-specific NCTI inclusion. However, this subtraction adjustment cannot exceed the amount of Minnesota-specific NCTI.16
PTET extension through 2027
As the Minnesota PTET was set to expire at the end of the 2025 tax year, the new law now extends Minnesota’s PTET election for an additional two tax years.17 Pass-through entities (specifically, S corporations and partnerships) can therefore continue to elect the Minnesota PTET regime for the 2026 and 2027 tax years, allowing qualifying owners a state tax deduction at the entity level, with the opportunity to claim a corresponding credit on their Minnesota personal income tax returns.
Additionally, the law has created a new provision that permits the Minnesota Department of Revenue (Department) to deny any credits claimed by a pass-through entity owner if the tax liability due by the underlying pass-through entity has not been paid.18
One-time homestead credit refund increase
For individual homeowners receiving the Homestead Credit Refund (formerly known as the Property Tax Refund), the bill provides a one-time increase to deliver extra relief. For refund claims based on property taxes payable in 2026, the refund amount a taxpayer is otherwise eligible for will be automatically increased by 14.88%.19 Taxpayers do not need to take any special action to get the increase, as the Department will calculate the augmented refund when processing claims. After this one-time enhancement, refund calculations are expected to return to normal levels for subsequent years.
Direct free e-filing system for individual taxes
Minnesota is set to launch its own direct e-filing system for individual income tax returns. The law directs the Department to develop a state-run, free electronic filing portal, available to taxpayers of all income levels, for filing Minnesota individual tax returns online. The bill requires the e-filing system to be operational for tax year 2027 filings (i.e., available in early 2028 for 2027 returns).20
Refund limitations
The omnibus bill also changes Minnesota’s procedures related to refund claims. The bill changes the time limit to file a refund claim to the later of: (i) 3½ years from the date of filing a return (plus any extensions); or (ii) 2 years from the date the tax, penalties, or interest was paid.21 Previously, a taxpayer could file a refund claim by the later of: (i) 3.5 years from filing (plus any extensions); or (ii) 1 year from the date of paying tax, penalties, or interest.
However, Minnesota now also limits the amount of a refund based on when the refund was filed. If a refund claim was filed within the 3.5-year period plus extension, the refund cannot exceed the tax, penalties and interest paid within the 3.5-year period plus the applicable extension. If a refund claim was filed within 2 years after paying tax, penalties, or interest, the refund cannot exceed the amount of tax, penalties, or interest actually paid during the 2 years immediately preceding the filing of the claim.
Commentary
Prior to enactment of the omnibus tax bill, Minnesota projected fiscal year 2028-2029 expenses to exceed revenue by approximately $3 billion in its budget forecast.22 Accordingly, it should not come as a surprise that Minnesota decided to decouple from key provisions of the OBBBA and sought additional revenue-raising provisions through additional taxes on foreign income and capital gains. While Minnesota decoupled from many of the OBBBA provisions, Minnesota ultimately decided not to decouple from IRC Sec. 168(n), which provides for a full deduction for qualified production.
With Minnesota’s specific changes to the federal NCTI regime, Minnesota has decided to effectively impose additional taxes on foreign revenue. Many states are looking for revenue-raising provisions without directly raising taxes on individuals. Instead, increasing taxes on foreign revenue remains a popular choice. In 2023, Minnesota effectively taxed GILTI at 50% and did not provide apportionment factor representation.23
At that time, Minnesota was a relative outlier amongst the states; however, other states such as Illinois have taken a similar approach to Minnesota.24 States such as California are considering whether to impose mandatory worldwide combined reporting and remove the water’s edge corporate tax election.25 For this legislative cycle, Minnesota instead chose the rather unique route of decoupling from specific provisions of the federal Subpart F regime.
In light of Minnesota’s decoupling from select provisions of the NCTI regime, tax professionals and multinational taxpayers should also be aware that Minnesota’s conformity to NCTI and Subpart F now requires state-specific calculations to be performed. Outside of requiring taxpayers to recalculate their Subpart F inclusion and Sec. 951A inclusion as if the look-through rule did not apply, restoring the QBAI deduction further increases taxpayers’ compliance burdens.
For example, calculating QBAI requires maintaining IRC Sec. 168(g) fixed-asset registers for each CFC. Following the enactment of OBBBA, which removed QBAI, taxpayers and practitioners may now be required to maintain additional fixed asset schedules for a single state.
1 Minn. H.F. 2438 (enacted May 27, 2026).
2 MINN. STAT. § 289A.02, subd. 7.
3 MINN. STAT. §§ 290.0133, subd. 16(a), 290.0134, subd. 22(a).
4 Id.
5 MINN. STAT. §§ 290.0133, subd. 16(c); 290.0134, subd. 22(b).
6 MINN. STAT. § 290.0131, subd. 24(b)(1).
7 MINN. STAT. § 290.0132, subd. 40.
8 MINN. STAT. § 290.0131, subd. 24(b)(2).
9 MINN. STAT. § 290.0122, subd. 4.
10 MINN. STAT. §§ 290.0132, subd. 41; 290.0134.
11 MINN. STAT. §§ 290.034 & 290.035.
12 MINN. STAT. § 290.21, subd. 10.
13 MINN. STAT. § 290.035.
14 MINN. STAT. § 290.21, subd. 9.
15 CFCs are foreign entities in which U.S. shareholders (owning at least 10%) have a controlling interest.
16 MINN. STAT. § 290.0132, subd. 40.
17 MINN. STAT. §§ 289A.08, subd. 7a; 290.06, subd. 23a(b).
18 MINN. STAT. § 290.06, subd. 40.
19 MINN. H.F. 2438, § 11, subd. 1.
20 MINN. STAT. § 289A.081.
21 MINN. STAT. § 289A.40, subd. 1.
22 See, Minnesota Dept. Management and Budget February 2026 Economic Forecast Presentation.
23 For further discussion, see GT SALT Alert: Minnesota taxes GILTI and net investment income, increases sales tax.
24 For further discussion, see GT SALT Alert: Illinois acts on federal tax conformity, Chicago hikes indirect taxes.
25 See, Cal. A.B. 1790 (2026).
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