Minnesota Creates New State Tax Option for Pass-through Entities

The 2022-2023 Minnesota State Budget signed into law by Governor Tim Walz included a major change for pass-through entities. House File 9 (HF 9) created an election that will allow pass-through entities to pay state and local level taxes on the entity's Minnesota tax return rather than the individual partner/shareholder's tax return. Minnesota's new pass-through entity tax (PTE tax) will be effective for tax years beginning after December 31, 2020. This change applies to any electing partnership, LLC or S-Corporation. 

The election has a few requirements:

  • Must be made on or before the due date (including extensions) of the entity's tax return
    • Once the election is made, it is irrevocable for that tax year
  • May only be made by qualifying owners who collectively own more than 50% of the entity
    • Qualifying owners generally include individuals, estates or trusts
  • All qualifying owners must be included if the election is made

The PTE tax is targeted at helping pass-through owners who would otherwise be limited by the Federal $10,000 state and local tax deduction limitation. Since the tax would be assessed at the entity level, the electing entity will be able to deduct the Minnesota PTE tax on its Federal tax return. The PTE tax will have a rate equal to Minnesota's highest individual income tax rate of 9.85%. This PTE tax is then claimed on the individual owner's tax return as a refundable credit for their applicable share.

Electing entities will be required to make quarterly estimated tax payments at the entity level to cover the PTE tax in the same manner an individual owner would. The PTE tax election would also satisfy filing requirements for nonresident owners, eliminating the need for withholding or composite filings in Minnesota.  

This is a substantial change that will impact nearly all Minnesota-based small business owners. With how new this law is, Minnesota has not released the updated forms or the exact mechanics for how this process will work. At Malloy, Montague, Karnowski, Radosevich & Co., P.A. (MMKR), we stay on top of the ever-changing tax laws so that you don’t have to. If you are concerned about how this new PTE tax will impact your 2021 taxes, call our team today to schedule a consultation with one of our accountants.