On July 1, 2021, Minnesota Gov. Tim Walz signed into law House File 9, providing a number of significant tax-related developments. Two of the biggest developments, income and expenses from Paycheck Protection Program (PPP) loans and unemployment income exclusions, align Minnesota with the majority of other states addressing those issues. Additionally, the new law provides for a pass-through entity tax election and a new film production credit.
Before July 1, 2021, Minnesota conformed to the Internal Revenue Code as amended through Dec. 31, 2018. House File 9 expands the state’s conformity to include certain provisions of the CARES Act, Consolidated Appropriations Act of 2021, Further Consolidated Appropriations Act of 2020 and American Rescue Plan Act. Among the provisions included are the exclusion of PPP loans from taxable income, the deductibility of expenses used with the PPP loans and the exclusion of unemployment benefits up to $10,200 per individual. The bill also provides an exclusion from gross income for small business loan subsidy payments under the CARES Act and allows a deduction for associated expenses.
Pass-through entity level election
The Tax Cuts and Jobs Act limited the state and local tax deduction on individual federal returns to $10,000. For Taxable years beginning on Jan. 1, 2021, Minnesota will be joining a growing number of other states that have enacted an elective pass-through entity level tax. The tax is imposed at the highest individual rate. The election must be made on or before the due date, including extensions, of the tax return by owners who collectively hold more than 50% percent ownership. The election is binding on all owners. Once the election is made, it is irrevocable for the taxable year. The entity level tax is only available in a year the state and local tax deduction limit is effective. Minnesota will also treat the pass-through entity tax return like a composite return and composite filer for administrative purposes. The tax imposed on the pass-through entity will be equal to the amount of tax liability of each owner.
Partnership audit regime
In 2015, the federal government enacted a law change and created a new federal partnership auditing regime. The regime allows the IRS to review multiple years of partnership activity and to adjust the tax in the year the audit is completed. The federal tax is paid at the partnership level or partner level through an election for certain partnerships. Minnesota has adopted a similar audit regime which allows a partnership to elect to pay the state assessment, as a result of a federal audit or amended return. These new provisions are retroactively effective for taxable years beginning in 2018.
Film production credits
Minnesota will for the first time in its history offer a tax credit for film production. Taxpayers are eligible for a credit up to 25% of eligible production costs paid in the taxable year. Among other requirements, taxpayers will need to spend at least $1 million in the taxable year in order to be eligible to receive the credit. Credits allowed to pass-through entity are passed up to the owners based on the owner's pro rata share of the entity's assets or special allocations. The commissioner is allowed to allocate up to $4.95 million of credits each year until 2025.
The recently enacted law has brought many changes to Minnesota taxes with a few of the changes affecting tax year 2020 filings. Many taxpayers will need to consider whether changes have impacted their Minnesota income tax liability. With the adoption of the pass-through entity tax, Minnesota has joined a number of states that adopted a similar workaround. Multi-state pass-through entities will need to consider whether or not the workaround is beneficial. Finally, taxpayers with significant film production costs should consider whether filming in Minnesota provides a benefit as a number of states have limited film production credits recently.
Taxpayers with questions about recently enacted tax legislation should consult their Minnesota state and local tax advisor for more details.