States continued to respond to federal tax reform throughout the 2019 state legislative sessions, and Minnesota was no exception. As part of a special session, the Minnesota legislature passed House File 5, which was signed into law on May 30, 2019, by Governor Tim Walz. Although the intent of this law was to conform to federal law changes, it seems to have had the opposite effect on Minnesota’s tax-exempt organizations.
Notable exceptions for tax-exempt organizations
The Tax Cuts and Jobs Act (TCJA), P.L. 115-97, added section 512(a)(7) to the Internal Revenue Code, providing that unrelated business taxable income is increased by the amount of any disallowed transportation fringe benefits, including employer-provided parking. Although this may impact an organization’s federal unrelated business taxable income, it will not impact its Minnesota tax. As part of the new law, Minnesota created a deduction for these expenses and will not impose a tax on employer-provided transportation fringe benefits. See Minn. Stat. section 290.05, subd. 3(b)(3). This law change is effective retroactively for tax years beginning after Dec. 31, 2017.
Another important TCJA change is the siloing rule added in section 512(a)(6). Under this provision, exempt organizations may not use losses generated from one trade or business to offset gains generated from another trade or business. Minnesota decouples from the siloing provision, allowing exempt organizations to “calculate any losses without the application of the limitation provided for under section 512(a)(6) of the Internal Revenue Code.” See Minn. Stat. section 290.05, subd. 3(d). This law change is effective retroactively for tax years beginning after Dec. 31, 2017.
Lastly, TCJA modified the net operating loss (NOL) deduction rules affecting all organizations. The new TCJA provisions limit the use of any current NOL deduction to 80% of net taxable income. In addition, any pre-TCJA NOLs may be carried forward in order to offset the remaining 20% of net taxable income, resulting in no taxable income at the federal level. However, Minnesota provides that the amount of NOL deduction “must not exceed 80 percent of taxable net income in a single taxable year.” See Minn. Stat. section 290.095, subd. 2(c). This means that Minnesota does not categorize NOLs based on pre-and-post-TCJA, and as a result, does NOT allow for an additional deduction against the remaining 20% net taxable income. Thus, while a tax-exempt organization may have no federal tax liability, it may still have Minnesota taxable income and tax based on the NOL deduction rules. This law change is effective retroactively for tax years beginning after Dec. 31, 2017.
Key takeaways
Minnesota tax-exempt organizations may find some relief knowing that Minnesota does not conform with two major federal changes that impact many tax-exempt organizations. In contrast to the federal rules, Minnesota will allow exempt organizations to 1) avoid additional tax on employer-provided transportation fringe benefits, and 2) report in aggregate all of their unrelated trade or business in one activity when calculating an overall net gain or loss subject to tax.
However, complexities remain around Minnesota’s treatment of NOLs, and tracking NOLs has never been more important. Minnesota exempt organizations are now expected to track NOLs by activity when used for federal purposes, and for timing differences when used for Minnesota purposes. Because of Minnesota’s 80% limitation, a tax liability may exist for Minnesota purposes even when none exists for federal purposes.
Minnesota tax-exempt organizations are encouraged to speak to their exempt organization tax advisers with questions about how the state conforms to federal tax reform.
