Update: The Minnesota Legislature adjourned on May 22, 2022, without enacting its omnibus tax bill or the IRC conformity bills discussed below. It is uncertain whether the legislature will be called into a special session to pass the omnibus tax bill and other budget-related measures.

On April 4, 2022, the Minnesota House and Senate each released omnibus tax bills outlining their respective plans for dealing with the state's projected $9.25 billion surplus. These proposals are subject to negotiation and will likely change, but the key income tax features of the two proposals are briefly discussed below.

Senate proposal — Senate File No. 3692 (2022 MN SF 3692)

The Senate's proposal focuses on three¹ income tax provisions affecting corporate and individual taxpayers in Minnesota. These proposals would (1) update Minnesota's conformity date to the Internal Revenue Code (IRC) and make other conformity changes, (2) reduce the lowest marginal individual income tax rate and (3) fully exclude Social Security income from the Minnesota individual income tax.

IRC conformity

Required conformity provisions. Minnesota's current IRC conformity date is as of December 31, 2018. For purposes of both the state's corporate and personal income tax laws, 2022 MN SF 3692 would update Minnesota's IRC conformity date to November 15, 2021, effectively conforming the Minnesota income tax laws to the following federal tax provisions for the tax years indicated:

• Further Consolidated Appropriations Act, 2020 (P.L. 116-94) (FCAA), enacted on December 20, 2019
• Expanded allowable uses of IRC Section 529 plans to include payments for certain student loans and apprenticeship programs (beginning with distributions in 2019)
• Introduced seven-year depreciation schedule for motorsports entertainment complexes (2018—2020)
• Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act), enacted on March 27, 2020
• Increased limit for qualifying contributions of food inventory in 2020 from 15% to 25% of modified income (2020)
• Included certain over-the-counter-medical products as qualified medical expenses (2020)
• Increased limit on charitable deductions for corporations from 10% of modified income to 25% (2020)
• Consolidated Appropriations Act, 2021 (P.L. 116-260) (CAA), enacted on December 27, 2020
• Excluded from gross income:
• Income from a forgiven mortgage on a qualified principal residence (2021—2025)
• Certain state payments to volunteer firefighters and emergency responders (2021)
• Income from certain loans forgiven by the Small Business Administration (2021)
• Proceeds from Shuttered Venue Grants (2021)
• Excluded up to $5,250 for employer payments of employee student loans (2021—2025)
• Allowed nonitemizers to deduct up to $300 ($600 married filing jointly) for cash charitable contributions (2021)

• Increased the limit on cash charitable contributions that individuals may deduct from 60% of modified income to 100% and from 10% of modified income to 25% (2021)
• Allowed seven-year depreciation schedule for motorsports entertainment complexes (2021—2025)
• Allowed accelerated depreciation for business property on Indian reservations (2021)
• Lowered depreciation period for certain residential rental property to 30 years from 40 years (2018)
• Allowed certain film, television and live theatrical productions to immediately deduct up to $15 million in production costs in the tax year incurred and $20 million for productions produced in certain low-income and distressed communities (2021—2025)
• Introduced a deduction for energy-efficient commercial buildings (2021)
• Introduced a special rule for the production period of beer, wine and distilled spirits (2021)
• Introduced special rules for disaster-related use of retirement funds (2021—2022)
• Introduced special rules for disaster-related personal casualty losses (2020)
• Allowed corporations to deduct up to 100% of taxable income for contributions to qualifying charities in a qualified disaster area (2021—2022)
• American Rescue Plan Act of 2021 (P.L. 117-2) (ARPA), March 11, 2021
• Excluded from gross income:
• Forgiven student loans (2021—2025)
• Advances of Economic Injury Disaster Loan (EIDL) (2021)
• Restaurant revitalization grants (2021)
• Increased the amount of maximum investment income qualifying for the earned income tax credit (2021)
• Increased the exclusion for employer-provided assistance for dependent care (2021)
• Extended the limitation on excess business losses for noncorporate taxpayers (2026)
• Repealed the worldwide interest allocation rules (2021)
• Denied deduction for certain highly compensated executives (beginning 2027)
• Infrastructure Investment and Jobs Act (P.L. 117-58) (IIJA), enacted on November 15, 2021
• Allowed proceeds from tax-exempt private activity bonds to be used for qualified broadband projects (2022)
• Allowed proceeds from tax-exempt private activity bonds to be used to fund carbon-capture technologies (2022)
• Modified tax treatment of corporate contributions to capital to exclude contributions to a regulated public utility for water or sewage disposal services (2021)

Nonconformity adjustments. In 2019, the Minnesota Legislature enacted House File 5 (HF 5)² creating Minn. Stat. 290.993, which provided a special limited adjustment equal to the difference between the Minnesota individual income tax³ using the IRC as of December 16, 2016, and the same tax using the IRC as of December 31, 2018. The adjustment is calculated without applying credits and must result in no additional tax or refund due. This effectively meant that HF 5 generally did not affect the tax paid for tax year 2018 even though it required conformity to certain federal changes retroactively.

2022 MN SF 3692 would create a new nonconformity adjustment for tax years 2017-21. The nonconformity adjustment would not apply, however, for the following federal changes:

• Taxpayer Certainty and Disaster Relief Act (enacted as Div. EE of the CAA)
• Deduction for qualified tuition and related expenses (2018—2020)
• Employee retention credit for employers affected by qualified disasters (disasters declared after January 1, 2019 and 61 days before December 20, 2019)
• Families First Coronavirus Response Act (P.L. 116-127), enacted on March 18, 2020
• Payroll credit for required paid sick leave (2020)
• Payroll credit for required paid family leave (2020)
• CARES Act
• Allowed nonitemizers to deduct up to $300 ($600 married filing jointly) for cash charitable contributions (2020)
• Temporarily lifted the cap on deductions for individual annual giving from 10% of federal AGI to 25% for cash contributions (2020)
• Excluded up to $5,250 of employer payments of employees' student loans (2020)
• Introduced employee retention and rehiring tax credit (2020)
• Modified net operating losses by allowing retroactive carrybacks of net operating losses and suspending the 80% limit (for losses arising in tax years beginning in 2017 and before 2021)
• Temporarily suspending the limitation on losses for non-corporate taxpayers (2018—2020)
• Temporarily increasing the limitation on the deduction for business interest expense from 30% of adjusted taxable income to 50% (except for partnerships) (2018—2020)
• TCDRA
• Extended and modified the employee retention under the CARES Act (for wages paid after December 31, 2020 and before July 1, 2021)
• Temporarily allowed full deduction for business meals (2021—2022)
• Extended eligibility for employee retention credit under CARES Act to employers affected by qualified disasters other than COVID-19 (i.e., disasters declared after December 31, 2019 and 60 days after December 27, 2020)
• ARPA
• Introduced employer payroll tax credit for providing COBRA continuation coverage (April 1, 2021 to September 30, 2021)
• Enhanced child and dependent care credit and made it refundable (2021)
• Introduced payroll tax credit for sick leave and family leave (leave taken after March 31, 2021 and before September 30, 2021)
• Extended employee retention credit (for wages paid after June 30, 2021 and before January 1, 2022)

• Other miscellaneous provisions
• Allowing income from forgiven mortgages on qualified principal residences to be excluded from gross income (2021—2025)
• Allowing individuals with a net disaster loss from certain non-COVID federally declared disasters to increase their standard deduction by the amount of their net disaster loss (2020)
• Increasing the limit for each casualty loss from $100 per casualty to $500 and waiving the 10%-of-adjusted-gross-income (AGI) limit
• Allowing income from forgiven student loans to be excluded from gross income (2021—2025)

The proposed nonconformity adjustment would only apply to the extent taxpayers reported a nonconformity adjustment on their return beginning in tax years 2017 to 2021. The nonconformity adjustment would equal the difference between federal AGI (for individual taxpayers) and federal taxable income (for all other taxpayers) resulting from (1) the amount calculated through the amendments to the Minnesota income tax law as of the 2021 First Special Session omnibus tax bill (2022 MN Ch. 14 (HF 9) (see Tax Alert 2021-1393) and (2) the amount calculated under the Minnesota income tax law incorporating changes to the IRC as amended through November 15, 2021 (not including impacts on state credits).

Effective for tax years 2022 and 2023, individual and corporate filer would have to make an addition adjustment if the nonconformity adjustment increases net income or a subtraction adjustment if the nonconformity adjustment decreases net income. Partners, shareholders and beneficiaries who file on a calendar-year basis and receive an addition or subtraction from a pass-through entity filing on a fiscal-year basis would be required to claim the addition or subtraction in the tax year it is received.

Reductions in individual income tax rates

2022 MN SF 3692 would reduce Minnesota's lowest-marginal individual income tax rate from 5.35% to 2.8% beginning in tax year 2022.

Exclusion for Social Security income

2022 MN SF 3692 would allow individuals to subtract 100% of their taxable Social Security benefits from their Minnesota income tax base beginning in tax year 2022.

House proposal — House File No. 3669 (2022 MN HF 3669)

2022 MN HF 3669 proposes a broader array of tax provisions than the Senate's proposal, covering changes to the state's corporate and personal income tax, as well as changes to its sales and use taxes, property taxes and other local taxes. This Alert focuses on the corporate and individual income tax proposals in 2022 MN HB 3669.

IRC conformity

Like the Minnesota Senate's proposal, 2022 MN HF 3669 would update Minnesota's conformity to the IRC to November 15, 2021. This update would incorporate the following five federal acts into Minnesota's income tax laws:

• FCAA
• The Families First Coronavirus Response Act (P.L. 116-127), enacted on March 18, 2020
• CARES Act
• The Paycheck Protection Program and Health Care Enhancement Act (Public Law 116-139), enacted on April 24, 2020
• CAA
• IIJA

With a few exceptions, the Minnesota House approaches IRC conformity in 2022 MN HF 3669 by allowing taxpayers to claim a Minnesota corporate or individual income tax subtraction or addition in tax year 2022 so they can "catch up" to any federal income tax provisions to which Minnesota did not conform and that affect tax years before 2022.

Social Security benefits

2022 MN HF 3669 would allow Minnesota individual income taxpayers with federal AGI of up to $75,000 (married filing jointly) or $58,600 (separate filer) to subtract 100% of taxable Social Security income included in federal AGI. The subtraction would be reduced by 10% of each $4,000 of AGI above the phaseout threshold. Alternatively, taxpayers could elect to claim an "alternate subtraction" equal to the subtraction allowed under current law.

Elective pass-through entity tax

In 2021, Minnesota enacted 2021 MN HF 9 (see Tax Alert 2021-1393), which established a new elective pass-through entity tax (PTE Tax) for tax years beginning after December 31, 2020. This was intended to enable a Minnesota taxpayer who owns a pass-through entity (i.e., a partnership, S corporation or limited liability company) (each, a PTE) to deduct its share of Minnesota individual income tax liability over the $10,000 limitation on the federal deduction for state and local taxes (SALT Cap). The PTE Tax equals the sum of the tax liability of each qualifying owner. Liability for the PTE Tax for both resident and nonresident individuals equals the owner's income allocated and assigned to Minnesota (as provided for nonresident partners and shareholders under Minnesota Statutes sections 290.17, 290.191 and 290.20), multiplied by the highest Minnesota income tax rate for individuals. 2022 MN HF 3669 would retroactively change this computation to allow a PTE to allocate 100% of a Minnesota PTE owner's income for purposes of calculating the PTE Tax.

Implications

The Minnesota Legislature is in recess through April 18, 2022, with the legislative session scheduled to conclude on May 23, 2022. The two tax proposals in the Minnesota House and Senate reflect different approaches to Minnesota tax policy and will be the subject of negotiation in the coming weeks.

EY will continue to monitor developments in this area.

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ENDNOTES

¹ 2022 MN SF 3692 also includes proposals affecting the portability of deceased spousal unused exclusion amounts in estate tax computations. These proposals are not discussed in this Alert.

² 1st Special Session, Ch. 6, Sec. 61.

³ Including partnerships electing to file a composite return.