Minnesota Tax Law Update: IRC Conformity and Pass-Through Entity Tax

Minnesota tax code changes were recently signed into law this summer. It affects the Paycheck Protection Program (PPP), unemployment compensation, and other provisions. We combed through the details of this new tax bill for you in order to offer high level information on two especially important and note-worthy categories: IRC Conformity and Pass-Through Entity Tax.  

Please note that there is no action for taxpayers to take at this time. However, it is well worth your while to stay informed. Keep reading to learn more. 

IRC Conformity 

IRC Conformity is defined as the degree to which a state's tax code matches the federal tax code.  

In this circumstance, it pertains to quite a few qualifiers, so here are a few to give you an idea: 

• The allowance for businesses that received loan forgiveness through the PPP to deduct their associated expenses and/or the exclusion from gross income for loan forgiveness through federal PPP, for all rounds of PPP. 
• The exclusion from gross income for small business loan subsidy payments, as well as the deduction allowed for associated expenses. 
• The exclusion from gross income for $10,200 of unemployment insurance compensation. Note: the exclusion is limited to taxpayers with federal adjusted gross income (FAGI) that is less than $150,000. For joint returns, the exclusion is $10,200 of compensation received (by each spouse.) 
• The exclusion from gross income for advances through the COVID-19 Economic Injury Disaster Loan (EIDL) and Targeted EIDL Advance programs and the deduction allowed for associated expenses. 

  There are other areas included on this that span across different industries and circumstances. If you are interested in learning more about these federal law provisions, do not hesitate to ask the Froehling Anderson team. 

Pass-Through Entity Tax (PTE Tax) 

For taxable years that begin after December 31, 2020. 

Recent federal legislation limits the itemized deduction for taxes for individuals up to $10,000. This includes all personal taxes such as:  

• Property taxes 
• Auto tabs
• State income taxes 

In the past, there was often found to be little or even no benefit to state income tax deduction. Minnesota has now passed legislation that allows partnerships and subchapter S corporations to pay this tax and deduct it at the entity level, in the same vein as many other states. This gives full federal tax benefit to any state income tax deduction that is attributable to this Pass-Through business entity.  

To file and pay this Pass-Through Entity tax, the owners of an entity must hold more than a 50% ownership. Only available in a year that the State and Local Tax (SALT) deduction cap is effective for federal purposes. 

In order to be considered a qualifying entity under the Pass-Through Entity tax, you must fit into one of the following categories:  

• Partnerships 
• A Limited Liability Company (LLC) 
• An S Corporation  

The taxpayer may also claim a refundable credit for their share of the amount of PTE tax that is paid by an electing pass-through business.    

If you have specific questions about this tax law update, please contact Froehling Anderson. We can walk you through everything in more comprehensive detail.