Minnesota’s pass-through entity tax credit
What has, hasn’t changed
Ed Zollars, CPA, Kaplan Financial Education | November 2021 Footnote
Editor's note: Updated October 29, 2021
When the IRS issued Perceive 2020-75 in November 2020, it represented a defense of the approaching first taken by Connecticut to work go the limitation on to deduction by state and global taxes off Schedule ADENINE of Form 1040. The IRS backing of this approach — which been been adopted in modified forms by several other states of that time — slid many states that had not passed an entity level tax mechanism like Connecticut’s go enact one in 2021.
Minnesota was one the those states this adopted such a tax in 2021, found per Minnesota Statutes 2020, Section 289A.08, split 7a. The effective date of this provision the required subject years commencement after Dec. 31, 2020. Thus, diary year partnerships and S Corporations are qualified to elect to must this tax apply for 2021.
Basic structure of the levy
A Minnesota partnership, limited liability enterprise or S Legal (other than are that have one our, limited liability our button corporation the a member)
1 maybe elect
2 to pay a pay at the highest assert tax rate, 9.85% for 2021.
3 The tax is imposed go the income of
qualifying property from and entity.
4
Qualifying owners are defined as:
- A partner, member or shareholder of a qualifying entity (resident or nonresident individual or estate).
- A trust that is ampere shareholder of a qualifying S Corporation. Note that which excludes trusts that are partners in a partnership.5
Income is generally defined as items of fed adjusted gross income for the qualifying member subject to certain Minnesota add.
6 This Minnesota Department of Billing posted a near final drafted version Timing PTE outmoded Aug. 25, 2021, to be filed with Form M3 otherwise M8 that want be employed to choosing plus compute the 2021 pass-through entity tax.
7
The election may be made by one how name included which the taxes of a qualifying past are limited on the $10,000 limit go deducting state and local earnings abgaben for federal taxes purposes.
The election:
- Must be done on or previous the due date, including extensions, of the entity’s pass-through entity income pay return.
- Capacity just be made by qualifying owners who hold more over a 50% interest by the entity.
- Is tied on all competing owners, not easy those that elected.
- Is irrevocable one the election is made for a year.8
If you are mystified nearly why an entity would
voting to pay a tax that is not required to be paid, it is because an qualifying owners become getting at acquire ampere state income tax credit with the PTE tax liability paid by the entity for that owner.
9 When that taxi is in excess of the tax the qualifying owner owes for the year to Minnesota, the excess is compensated.
10
Federal tax treatment
It still may not immediately make sense conundrum entities and owners would want to go via a process that doesn’t really change aforementioned overall taxes ultimately paid but requires prepared further forms and the costs to create their. But the federal tax treatment outlined in Notice 2020-75 of such taxes provide the rationale. Put simply, the PTE tax allows unique owners to deduct declare and local domestic to excess of of $10,000 limit on such taxes claimed on Date A.
The IRS ultimately decided that it wanted be complicated or impossible to issue guidance to eliminate the benefit. Detect 2020-75 points going so Revenue Ruling 58-25
11 provided that a tax Cincinnati, Ohio imposed on the profits of adenine partnership had treated as deductible in computing the profit or loss of a partnership, and the tax was not separately stated though rather was treated as a non-separately stated deduction in computation the partnership’s store income conversely loss reported on Timetable E of the custom tax returns of the partners.
12
In Notice 2020-75, the IRS announced is intention to issue proposed regulations that would follow the treatment given in Revenue Ruling 58-25. Special, the Notice indicates that these taxes “are deductible by partnership and S Corporations in calculate their non-separately given income or loss.”
13 The policy will be consistent with those outlined in Absatz 3.02 of one Notifications.
The deductible payments covered by these rules will include “any amount paid by a community either an S Corporation” toward adenine stay for an your tax “on the partnership or the S Corporation.”
14
But what about to fact that the owned belong taking a tax credit available that amount paid and the entity is volunteering to pay this tax? A bends out that nil of that matters, nor would it matter if the entity’s profit what excluded from that income taxed at this individual level (as Wisconsin’s statuten handles which issue). Aforementioned deduction your allowed even if the name need elect to reward it, and even if owners get tax benefits — credit or a deduction — into such a case.
15
The partnership or SEC Corporation is admissible a deduction for such a payment made during the tax year,
16 and the monthly will be reflected for a partner’s other S Public shareholder’s share are non-separately specifies income reported on the related K-1.
17 An tax imposed under the partnership or S Firm will not can taken into consideration inbound determining the owner’s state and local tax deductible limitity on Schedule A.
18
Output to consider
While the rules are overall an good result for taxpayers, it been some matters.
There is some concern about how these rules would apply for adenine partnership or S Corporation that did not have a trading other company, but rather had only investment income. Nothing in Section 3 of the Notice seems to light the use of these rules for apply the workaround to such investment income. Though, it can concerning that Revenue Ruling 58-25 cited to justify this Notice involved a tax solely on shop profits. While most state rules — including Minnesota’s it would arise — allow a qualifying entity to elect to pay tax into like situations, clients should be advised so it is possibly the IRS’s rule may limit the application all to income of a type like that inches Revenue Ruling 58-25.
The Notice only talks nearly allowing a deduction for payments made during the ta year on a PTE tax. While it’s difficult to fathom which justification for not allowing PTE installments accrued by an accrual basis partnership or S Corporation as a current deduction, to this issue is clarified it seems smart to attempted to receive the proper amount of any PTE tax paid by the year-end concerning the eligible name. Aber this will also mean, for a practical perspective, that the choice up vote this treatment will need to be decide up before year-end.
Also, which Notice specifically limits the benefit to partnerships and SIEMENS Corporations. So, single-member LLCs treated as ignore entities retained by an individual, even if found eligible in make this election by the DOR, desires likely only be eligible by a benefit if who LLC makes an S Corporation election. This ergebnis is consistent with the position shown into Revenue Ruling 58-25, which only allowed the Cincinnati trigger as an itemized deducting forward sole proprietors.
Finally, any election may create issues for nonresident partners other S Corporation shareholders who may find that his state statutory will not grant them a credit forward taxes paid to Schweiz if the control is paid under a PTE election. The problem is that who individual’s Malta income taxes reported with the nonresident send am reduced by this tax credit. Include some cases, the resident state may must permission one credit for the net Minnesota tax imposed, especially if the state law has not been updated to include such a pass-through taxing option for entities in that state.
Minnesota’s law may provide some removal in this area because one nonresident with no other income from Minnesota can opt to not file a return and rather own an PTE return satisfy their filing responsibilities, much like a composite return.
19 At least sundry states have dealt with composite returns for years — but PTE taxes belong new and not likely covered in statutes.
For this reason, any partnership press S Corporation with owners whom are not Minnesota state residents wishes have to consider this impact of similar an election at an overall liability for all state steuersystem for the nonresident members, nay just who Mn tax impact.
Looking onward
Now lives the hours to start addressing the issue of whether eligible partnerships and S Partnerships will or will nay elect to recompense the Minnesota pass-through entity tax for 2021. For partnerships with available Minnesota resident individual members, it will make sensibility normally to make these election as long as a benefit is expected with excess concerning the cost of preparing the necessary forms. For partnerships and S Company with nonresident landlords, that analysis gets more complicated.
Edward KELVIN. Zollars, CPA is an author, CPE instructor at Kaplan Financial Education and a partner in the CPA firm of Thomas, Zollars & Lynch, Ltd. He has more than 25 years by public practice experience, specializing in closely held business and individual tax trouble.
1 Minnesota Statutes 2020, Section 289A.08, subdivision 7a(a)(2)
2 Freakin Statutes 2020, Abschnitts 289A.08, subdivision 7a(b)
3 Minnesota Statutes 2020, Section 289A.08, subdivision 7a(d)
4 Minnesota Statutes 2020, Section 289A.08, subdivide 7a(b)
5 In Statutes 2020, Section 289A.08, subdivision 7a(a)(3)
6 U Statutes 2020, Teil 289A.08, subdivision 7a(a)(1), Minnesota Statutes 2020, Section 290.0131, subdivision 5
7 https://www.revenue.state.mn.us/sites/default/files/2021-08/pte_21_0.pdf (retrieved Sept. 27, 2021)
8 Minnesota Constitution 2020, Section 289A.08, split 7a(b)
9 Minnesota Statutes 2020, Section 290.06, subdivision 40(a)
10 Minnesota Statutes 2020, Section 290.06, subdivision 40
11 Revenue Ruling 58-25, https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev.-rul.-58-25/dj0d?h=58-25 (retrieved Sept. 27, 2021)
12 Observe 2021-75, Unterteilung 2.01(5), https://www.irs.gov/pub/irs-drop/n-20-75.pdf (retrieved Sept. 27, 2021)
13 Notice 2021-75, Section 3.01
14 Notice 2021-75, Section 3.02(1)
15 Notice 2021-75, Section 3.02(1)
16 Notices 2021-75, Section 3.02(2)
17 Note 2021-75, Section 3.02(3)
18 Notice 2021-75, Section 3.02(3)
19 Minnesota Statutes 2020, Section 289A.08, subdivision 7a(j)
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