January 27, 2023 Minnesota updates IRC conformity and enacts other tax changes
On January 12, 2023, Governor Tim Walz signed HF 31, which, among other changes, updates Minnesota's date of conformity to the IRC as amended through December 15, 2022. HF 31 is generally effective as of January 1, 2023. Changes that conform to federal provisions with retroactive effective dates, however, are retroactively effective to the date of the federal provision. IRC conformity Minnesota's IRC conformity update is intended to align Minnesota law with the IRC for tax years 2017-22. The legislature acted quickly to allow the Minnesota Department of Revenue (MN DOR) time to update affected forms and instructions, and to work with certified tax software providers to update their products for the opening of the tax filing season. The MN DOR has posted a conformity chart and additional information about HF 31 on its website. HF 31 affects Minnesota conformity as follows: Addition for disallowed business interest — corporations and individuals. HF 31 requires taxpayers for tax years beginning after December 31, 2018, and before January 1, 2021, to add back the business interest deducted under IRC Section 163(j)(10)(A) and (B), which increased IRC Section 163(j)(10)'s limitation on adjusted taxable income (ATI) to 50% of ATI from 30% and allowed taxpayers to use their 2019 ATI in 2020.1 Entities that are part of a Minnesota combined report must compute adjustments under Minn. Stat. 290.34, Subd. 5, which requires the combined report entities to compute the limitation for Minnesota purposes in aggregate, "consistent with the application to a consolidated group for federal income tax purposes." Subtraction for delayed business interest — corporations and individuals. For tax years in which Minn. Stat. 290.0131, Subd. 19 required an addition, HF 31 allows a subtraction adjustment that (1) equals the addition adjustment, less the sum of all amounts subtracted in all prior tax years, and (2) does not exceed the limitation on business interest in IRC Section163(j).2 No subtraction is allowed for tax years beginning after December 31, 2022; for each of the five tax years beginning after that date, however, taxpayers can subtract 1/5th of the sum of all carryforward amounts that remain after the expiration of the subtraction adjustment. Entities that are part of a combined reporting group must compute adjustments under Minn. Stat. 290.34, Subd. 5, which requires the combined report entities to compute the limitation for Minnesota purposes in the aggregate, "consistent with the application to a consolidated group for federal income tax purposes." The change is retroactively effective for tax years beginning after December 31, 2019. Addition related to NOL deductions — individuals, trusts, and estates. An addition adjustment is required in the amount of any NOL arising in any tax year beginning after December 31, 2017, but before January 1, 2021, and carried back under IRC Section 172(b)(1)(D).3 HF 31 also allows an addition modification for the amount of an NOL deduction in any tax year beginning after December 31, 2017, but before January 1, 2021, that exceeds the deduction allowed under IRC Section 172(a)(2). Subtraction for delayed NOL deduction — individuals, estates and trusts. Effective retroactively for tax years beginning after December 31, 2018, HF 31 allows a subtraction adjustment in the amount of any addition required by Minn. Stat. 290.0131, Subd. 20, less the sum of all amounts subtracted in all prior tax years that does not exceed 80% of federal taxable income. The excess, if any, is a delayed NOL deduction that must be carried forward to the earliest tax year. A subtraction under this rule is not allowed after 20 tax years from the tax year in which the NOL arises. The sum of the additions required under Minn. Stat. 290.0131, Subd. 20 are aggregated and assigned to the tax year immediately succeeding the tax year in which the NOL arises to determine the subtraction in that succeeding tax year and the amount to be carried forward. Modifications for excess business loss — individuals, estates and trusts. The amount of a disallowed loss carryforward under IRC Section 461(I)(1)(B) is a subtraction effective for tax years beginning after December 31, 2025. For any tax year beginning after December 31, 2017, and before January 1, 2021, HF 31 allows an addition equal to a Minnesota disallowed loss carryforward, which is defined as a disallowed loss carryforward as defined in IRC 461(I)(2) for a loss not allowed under IRC 461(I)(1)(B). Temporary additions and subtractions HF 31 enacted temporary additions and subtractions for corporations, individuals, trusts and estates that are effective retroactively to the date that the changes became effective for federal purposes. The MN DOR must apply the following subtractions and additions when computing a nonresident's Minnesota allocation percentage, a taxpayer's alternative minimum taxable income and income used to determine tax for composite files and the pass-through entity tax: Corporations, individuals, trusts, and estates — temporary additions
Corporations, individuals, trusts, and estates — temporary subtractions (to the extent not deducted from federal taxable income for corporations, trusts and estates or from federal adjusted gross income for individuals)
Individuals, trusts, and estates — temporary additions
Statute of limitations extension Any taxpayer whose tax liability changes as a result of HF 31 may file an amended return by December 31, 2023. The MN DOR may audit and assess a taxpayer's return covered by HF 31 by the later of: (1) the date the statute of limitations expires for the original return (i.e., generally 3.5 years from the filing date); or (2) one year from the date that the taxpayer files an amended return due to the changes enacted in HF 31. Interest on any additional liabilities resulting from the HF 31 changes will not begin to accrue until January 1, 2024. PTE tax credit Minnesota has an elective PTE tax. A qualifying owner of a PTE may claim a credit based on its share of the PTE tax liability. Under HF 31, a PTE may not receive a refund of overpaid tax at the entity level once a qualifying PTE owner claims the credit. Qualifying owners must claim the refund on their return. This change is effective retroactively for tax years beginning after December 31, 2020. Implications Taxpayers should consider these changes, along with the due date for filing amended returns, if needed. Taxpayers will need to analyze these provisions to determine if addition or subtraction adjustments may apply for prior years. PTEs that have elected to be taxed at the entity level will also need to consider the changes made to refund procedures. ———————————————
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor ——————————————— ENDNOTES 1 If taxpayers followed Minnesota law at the time of the original filing, no impact would be expected from this change as Minnesota followed the 30% ATI limitation at that time and had not incorporated the special IRC Section 163(j) rules enacted by the CARES Act. 2 This is a subtraction from federal adjusted gross income for individuals and from federal taxable income for corporations. 3 An addition is not required for an NOL deduction that is a farming loss under IRC 172(b)(1)(B) and carried to the preceding years in which the farming loss was incurred. | ||||||
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