Minnesota Pass-Through Entity (PTE) Tax
- The Minnesota PTE tax regime expired December 31, 2025, leaving businesses in limbo heading into tax season
- The 2026 Tax Bill, signed May 27th, extended PTE through the end of 2027
- PTE allows businesses (partnerships and S corps) to pay Minnesota income tax at the entity level, creating a federal deduction for owners: a workaround for the federal SALT cap
- Q1 2026 estimated PTE payments were not required due to legislative uncertainty; penalty relief is available if Q1 and Q2 amounts are both paid by the Q2 deadline
- Taxpayers who made personal Minnesota estimates instead of PTE-level estimates may need to wait until their 2026 return is filed to reconcile. Amounts generally cannot be transferred between account types
- PTE applies only to Minnesota-source income; out-of-state income does not qualify
- Mid-year tax planning recommended to account for PTE payments alongside withholding and other estimates
Section 174 / R&D Expensing
- The Tax Cuts and Jobs Act required R&D costs to be capitalized and amortized beginning in 2022 rather than immediately expensed
- The “One Big Beautiful Bill” (federal) restored immediate expensing of R&D costs
- Minnesota, as a static conformity state, did not automatically follow the federal change. The 2026 MN Tax Bill now conforms for partnerships and S corporations, allowing full immediate expensing
- C corporations in Minnesota remain under the capitalized/amortized regime (consistent with prior federal rules)
- For tax years 2022–2024, there are transition rule options at both the federal and Minnesota level to recover previously capitalized costs, a significant planning opportunity
Minnesota R&D Tax Changes
- Separate from the expensing issue, qualifying R&D expenditures can also generate a state tax credit
- Refundability of the Minnesota R&D credit increases from 19.5% to 25% starting in 2026, meaning businesses can receive cash back beyond their tax liability
- Research must be conducted in Minnesota to qualify
- Pass-through entity credits flow to owners’ personal returns; C corp credits offset entity-level liability
- Two methods for calculating qualifying expenses: a detailed documentation approach (higher potential credit) and a simplified method (lower credit, less documentation)
- The IRS has increased scrutiny of R&D credit claims in recent years. Proper documentation is important
Bonus Depreciation Conformity
- Federal bonus depreciation increased from 40% to 100% under recent federal legislation
- Minnesota now conforms to the 100% federal bonus depreciation base for add-back calculation purposes
- Minnesota still requires an 80% add-back on bonus depreciation, applied over 5 years, but the calculation now uses 100% bonus as the starting point rather than 40%
- Simplifies prior-year calculations that required two separate add-backs