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Jamie C. Yesnowitz
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On May 30, 2019, Minnesota Gov. Tim Walz signed into law an omnibus tax bill addressing the state’s reaction to federal income tax reform and sales tax issues arising from the U.S. Supreme Court’s Wayfair
The legislation advances Minnesota’s general Internal Revenue Code (IRC) conformity date to Dec. 31, 2018 and decouples from several provisions of the Tax Cuts and Jobs Act of 2017 (TCJA).2
Further, it limits allowable net operating loss (NOL) deductions, requires that the interest expense limitation imposed under IRC Sec. 163(j) be computed based on the income of all of the entities included in the Minnesota combined report, and extends the MinnesotaCare tax beyond 2019. For marketplace providers, the legislation clarifies existing economic nexus thresholds to $100,000 of retail sales or 200 or more retail transactions during a 12-month period.
Corporate income tax
IRC conformity and selective decoupling
Effective May 31, 2019, Minnesota’s IRC conformity date advances from Dec. 16, 2016, to Dec. 31, 2018.3
The changes incorporated as a result of the TCJA are effective retroactively to when the changes became effective for federal purposes.
Effective for tax years beginning after Dec. 31, 2017, taxpayers are allowed a subtraction for global intangible low-taxed income (GILTI) amounts included in gross income under IRC Sec. 951A.4
Also, an addition is provided for the amount deducted under IRC Sec. 250 (typically described as foreign-derived intangible income, or FDII).5
For all tax years in which the TCJA deemed repatriation provisions under IRC Sec. 965 apply, such income is excluded from the Minnesota tax base.6
Specifically, a subtraction is provided for the amount of deferred foreign income recognized because of IRC Sec. 965, and an addition is required for any special deductions under IRC Sec. 965.
The interest expense limitation provisions contained in IRC Sec. 163(j) are retroactively adopted for tax years beginning after Dec. 31, 2017. For corporations required to file a Minnesota combined return, the legislation requires that the interest expense limitation under IRC Sec. 163(j) be computed using the combined report entities included in the unitary group under Minnesota law.7
The limitation must be aggregated between combined report entities consistent with the application to a consolidated group for federal income tax purposes and not computed on a separate legal entity basis. Therefore, for taxpayers whose federal consolidated group differs from their Minnesota combined group, this interest expense limitation will need to be recomputed for Minnesota purposes.
The TCJA repealed the federal corporate alternative minimum tax (AMT) effective for tax years beginning after Dec. 31, 2017. The Minnesota legislation decouples the Minnesota corporate AMT from the federal corporate AMT by referencing the IRC as amended through Dec. 16, 2016, for purposes of determining the Minnesota AMT.8
As a result, Minnesota will continue to impose a corporate AMT under the pre-TCJA AMT provisions of the IRC.
Effective for tax years beginning after Dec. 31, 2017, the NOL deduction available to corporate taxpayers is limited to 80% of taxable net income, and even applies to NOL carryover amounts from pre-2018 tax years.9
Disqualified captive insurance companies included in Minnesota combined return
The Minnesota legislation adds definitions for a “captive insurance company” and a “disqualified captive insurance company.”10
A captive insurance company is defined as a company that is either: (i) licensed as a captive insurance company; or (ii) derives less than 50% of its premiums for the taxable year from sources outside the Minnesota unitary group.11
A disqualified captive insurance company is defined as a captive insurance company that either: (i) pays in tax less than 0.5% of its total premiums for the taxable year under Minnesota’s insurance premiums tax or a comparable tax in another state; or (ii) receives less than 50% of its gross receipts for the taxable year from premiums.12
A disqualified captive insurance company must be included in the Minnesota combined return along with the other entities included as part of the unitary group.13
This stands in contrast to the treatment of a captive insurance company, which is exempt from Minnesota income tax and is not included in the Minnesota combined return. These changes are effective for tax years beginning after Dec. 31, 2016, and revise and narrow a law enacted in 2017, which required the inclusion of captive insurance companies in the Minnesota combined return.14
Since corporate taxpayers have already filed their Minnesota returns for the 2017 tax year, the Minnesota Department of Revenue will need to provide guidance regarding how taxpayers should amend their returns in order to comply with these provisions.
Subpart F income considered a dividend
Codifying the existing policy of the Department, the legislation provides that, effective May 31, 2019, the net income of a domestic corporation included pursuant to IRC Sec. 951 (Subpart F) is considered dividend income eligible for Minnesota’s dividends received deduction (DRD).15
A Minnesota DRD is not allowed with respect to any dividend for which a deduction is not allowed under IRC Sec. 246A (relating to debt-financed portfolio stock).16
Individual income tax
Reduction in second tier of income tax rate
Minnesota’s individual income tax system currently consists of four rate tiers based on income levels. In order to reduce the tax impact of the federal tax conformity changes on individuals and pass-through entities, the legislation decreased the second tier of Minnesota’s individual income tax rate from 7.05% to 6.8%, and slightly lowered the income level for the fourth tier income tax rate.17
For married individuals who file a joint return, this rate reduction applies to taxable income between approximately $39,000 and $154,000. These changes are effective for tax years beginning after Dec. 31, 2018.
Selective IRC decoupling
The TCJA modified existing tax law on claiming excess business losses by limiting losses from all types of business for noncorporate taxpayers.18
By updating its IRC conformity date, Minnesota has retroactively adopted the federal provision which, for individual taxpayers, limits the deduction of active pass-through business losses to no more than $500,000 for married taxpayers who file a joint return.19
Similar to corporate taxpayers, individual taxpayers are required to make the following adjustments to their Minnesota income tax base related to changes to the IRC under the TCJA:
Deductions and exemptions
- Subtract GILTI amounts included in federal taxable income;20
- Add back FDII amounts included in federal taxable income;21 and
- Exclude deemed repatriation amounts under IRC Sec. 965 included in federal taxable income.22
The legislation changes the starting point for the individual income tax from the use of federal taxable income to the use of federal adjusted gross income.23
Further, it adopts the federal standard deduction amount contained in the TCJA rather than the lower federal amount which was previously used and the new law generally conforms to the itemized deductions allowed for federal purposes (subject to a phase out of the lesser of 80% of the deduction amounts for higher-income individual taxpayers or 3% of the excess of the taxpayer’s federal adjusted gross income over the income threshold amount).24
These changes are effective for taxable years beginning after Dec. 31, 2018.
The TCJA disallowed unreimbursed employee expenses that were subject to the 2% adjusted gross income (AGI) limit, and also disallowed personal and dependent exemptions. However, the Minnesota legislation allows taxpayers to claim the unreimbursed employee expense deductions, subject to the 2% AGI limit,25
and allows taxpayers to claim exemptions for dependents.26
Clarifications related to Wayfair decision27
Prior legislation had expanded the imposition of the Minnesota sales tax to include marketplace providers.28
Under that legislation, the economic nexus threshold was 100 or more retail sales during a 12-month period or 10 or more retail sales totaling more than $100,000 during a 12-month period. Further, a small seller who made sales to Minnesota customers solely through a marketplace provider and who made retail sales to Minnesota customers of less than $10,000 during a 12-month period was not required to collect and remit sales tax to Minnesota.
The sales tax economic nexus thresholds for both remote sellers and marketplace providers are modified to require more than $100,000 of retail sales (excluding sales for resale) or 200 or more retail transactions during the prior 12-month period.29
Once one of these thresholds is exceeded, the retailer or marketplace provider must start collecting sales tax on the first day of the month no later than 60 days after the threshold was exceeded. These provisions are intended to clarify prior Minnesota law, and are effective for sales and purchases made after Sept. 30, 2019.30
Increased June accelerated payment requirement
Under prior law, for vendors who had a sales tax liability of $250,000 or more during the prior fiscal year, Minnesota required an accelerated sales tax payment for the month of June to be made two business days before June 30 in an amount equal to 81.4% of the estimated June liability. For 2020 and 2021, this remittance percentage is increased to 87.5% of the estimated June liability. For 2022 and beyond, the remittance percentage changes to 84.5%.31
Penalties for failure to make this payment are not imposed to the extent the payment made is at least the lesser of: (i) the remittance percentage of the prior May’s liability; or (ii) the remittance percentage of the average monthly liability for the prior calendar year.32
Under prior law, the 2% MinnesotaCare tax imposed on gross revenues received by hospitals, health care providers or wholesale drug distributors was scheduled to sunset for gross revenues received after Dec. 31, 2019.33
The legislation continues the imposition of the MinnesotaCare tax at a reduced rate of 1.8% starting in 2020.34
Notably, it also extends Minnesota nexus for purposes of the tax to the extent allowed by the laws of the United States for taxpayers meeting specified economic nexus thresholds.
This legislation brings to an end the uncertainty surrounding Minnesota’s ultimate conformity to the TCJA following the veto of last year’s tax bills by former Minnesota Gov. Mark Dayton. By excluding GILTI, FDII and deemed repatriation amounts from the Minnesota tax base for corporations and individuals, the legislature and the governor have seemingly decided that the opportunity to capitalize on the revenue-raising opportunity created by the foreign income activity provisions was not worth the negative impact on business along with related potential constitutional issues.
That said, not all of the corporate income tax provisions of this legislation are taxpayer-friendly. Minnesota will now impose a limit allowing no more than 80% of the taxpayer’s income to be offset by the NOL deduction. Furthermore, retroactively conforming to the IRC Sec. 163(j) interest expense limitation will add complexities for taxpayers. The law does contain a provision requiring that the limitation be computed based on those entities included in the Minnesota combined group, consistent with how the limitation is computed for federal consolidated purposes. Since these provisions are retroactive to the 2018 tax year, it is hoped that the Department will grant relief from late payment penalties and the underpayment of estimated tax charge for impacted taxpayers.
Minnesota’s decision to retain its corporate AMT adds a further layer of complexity to the corporate state income tax compliance process in a year in which the state has just achieved partial conformity with the TCJA. Despite AMT relief on the federal side, Minnesota corporate taxpayers must still compute a hypothetical federal AMT (based on the federal law in effect in 2016) for purposes of determining the starting point for its Minnesota AMT. Maintaining this provision will not do Minnesota corporate taxpayers or the Department any favors from an administrative standpoint.
Significantly, for the second year in a row, the Minnesota legislature declined to restrict the application of the sales tax exemption for purchases of software loaded and used in a certified data center. Current law provides that the exemption for these purchases is to apply for a 20-year period if the business decided to locate a data center in Minnesota. Despite efforts by the governor and the Department to attempt to restrict the exemption, the legislature has again decided that the state must abide by the statutory commitment which was made several years ago when the program was first established. Furthermore, by clarifying the marketplace provider provisions and economic nexus thresholds for its sales tax, Minnesota is adopting the economic nexus thresholds which were approved in the Wayfair
decision. By enacting economic nexus thresholds for the MinnesotaCare tax, the state appears to have further extended the economic nexus concepts embodied in Wayfair
Prior to Minnesota’s first special session held on May 24–25, 2019, the Minnesota House and Senate each passed strikingly dissimilar tax bills, which ultimately required considerable negotiations to arrive at the final omnibus tax bill. The following provisions, which were considered in the House– or Senate–passed tax bills, but did not make it into the final legislation, could resurface in future legislative sessions:
- Allowance of IRC Sec. 179 expensing amounts without requiring an addback;
- Allowing S corporations and partnerships to elect to be taxed as a C corporation for Minnesota purposes;
- Partnership audit provisions intended to address the federal law changes allowing the IRS to issue assessments at the partnership level and the reporting of federal audit adjustments;
- Inclusion in the Minnesota unitary group of controlled foreign corporations (CFCs) that generate GILTI, with the option to elect to file on a worldwide basis;
- Additional individual income tax rate imposed on capital gains; and
- Creation of a private letter ruling program.
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