The state of Minnesota has enacted a new Passthrough Entity (PTE) tax as part of its recently signed omnibus tax bill. This new tax system is designed to thwart the SALT (sales and local tax) deduction limit imposed by 2017’s Tax Cuts and Jobs Act. It could dramatically reduce Federal tax liabilities for Minnesota business owners.
The mechanics of the tax are straightforward – qualifying PTEs elect to calculate and pay the Minnesota tax liability due on the entity’s income instead of passing it through to be taxed at the individual owner level. This tax liability is a Federal tax deduction reducing the net business income of the entity, not a separately stated itemized deduction, and is not subject to the SALT cap. Finally, the business owners are granted a Minnesota tax credit equal to their share of the PTE tax to avoid double-taxation of the income.
Further specifics on the law are as follows:
- Tax is effective for tax year 2021 and future years until the SALT cap expires or is repealed
- Election must be made no later than the extended due date of the entity’s tax return
- Election decision can be made year-to-year, but once made is irrevocable for that year
- S corporations and entities taxed as partnerships (traditional partnerships or LLCs) are eligible to make the election
- C corporations and pass-through entities with C corporation or other pass-through owners are disqualified from making the election
- More than 50% of an entity’s ownership group must sign off on the election, which is then binding on all owners
- PTE tax is levied at a flat 9.85% (equal to the top Minnesota individual rate)
- Payment of the PTE tax satisfies the entity’s nonresident withholding requirements (if any)
- Payment of the PTE tax will relieve nonresident owners of any MN filing requirement
- Electing entities will be required to make estimated tax payments against their PTE tax liability
- IRS has indicated they will not challenge this or similar tax structures
We recommend contacting your tax advisor as soon as possible to determine if making the PTE tax election would be beneficial to your business and to begin calculating or adjusting estimated tax payments for the entity or ownership group.
If you have questions regarding the new Minnesota PTE tax, contact Olsen Thielen Tax Director Zachary Deo.