Minnesota Governor Tim Walz on May 27, 2026, signed into law House File 2438 (HF 2438), Minnesota's tax omnibus bill.¹ HF 2438 updates Minnesota's Internal Revenue Code (IRC) conformity date, conforms to certain changes in the 2025 federal "One Big Beautiful Bill Act" (OBBBA) and extends the state's elective pass-through entity tax (PTET). This Tax Alert discusses the significant corporate income tax and PTET provisions of HF 2438.

IRC conformity

HF 2438 updates Minnesota's IRC conformity date from May 1, 2023, to May 1, 2026. The change is effective the day following final enactment of HF 2438, except that the changes in federal law are effective retroactively at the same time the changes were effective for federal purposes.

Domestic research and experimentation expenditures

For corporate taxpayers, HF 2438 decouples from IRC Section 174A's immediate expensing of domestic research and experimentation (R&E) costs and requires 80% of the amount claimed for federal purposes to be added back to federal taxable income. HF 2438 allows taxpayers a ratable subtraction of the amount added back over the following four years, similar to how Minnesota treats bonus depreciation This provision is effective retroactively to tax years beginning after December 31, 2024.

Corporate taxpayers that make the "small business" election under Section 70302(f)(1) of the OBBBA must add back to federal taxable income 80% of the amount of any deduction claimed retroactively for a tax year. A ratable subtraction of the amount added back is allowed over the following four years. The addback provision is effective retroactively to tax years beginning after December 31, 2021, with the subtraction adjustment effective for tax years beginning after December 31, 2022.

For corporate taxpayers making an election to deduct unamortized amounts incurred in tax years beginning before January 1, 2025, under Sections 70302(f)(2)(A)(i) or (ii) of the OBBBA, the amount of the deduction claimed for unamortized amounts is added back to federal taxable income. For the tax year in which an addition is required, and for each of the immediately following tax years, an amount equal to the amortized amount is allowed as a subtraction. The "amortized amount" is defined as "the amount of the deduction allowed for an expenditure in a [tax] year under IRC Section 174A if the taxpayer did not make the election under Sections (f)(2)(A)(i) or (ii) of the OBBBA." This provision is effective retroactively to tax years beginning after December 31, 2024.

HF 2438 allows pass-through entities full expensing of the OBBBA's domestic R&E deduction.

Net Controlled Foreign Corporation Income

HF 2438 amends Minn. Stat. 290.21, subd. 10 to reference net controlled foreign corporation income (NCTI), instead of global intangible low-taxed income (GILTI), and to provide that NCTI computed under new Minn. Stat. 290.034 is dividend income subject to Minnesota's 50% dividends received deduction.

For purposes of this deduction, Minnesota adopts its own definition of NCTI. New Minn. Stat. 290.034 and 290.035 require "Minnesota NCTI" be computed as follows:

1. Any amounts included in federal taxable income pursuant to IRC Section 951A determined without regard to the OBBBA's permanent extension of the "look-through rule" (i.e., OBBBA changes to IRC Section 954(c)(6)(C))

Minus

2. The amount calculated under IRC Section 951A(b)(2)( A), but excluding IRC Section 951A(b)(2)(B), where any references to the federal calculation refer to the IRC as amended through May 1, 2023 (the amount, in effect, is the adjustment for 10% of qualified business asset investment (QBAI) that was taken into account in arriving at federal GILTI before OBBBA changes to IRC Section 951A).

The calculation of Minnesota NCTI cannot be less than zero.

Further, HF 2438 amends Minn. Stat. 290.0134 to create a subtraction adjustment for the amount calculated under new Minn. Stat. 290.034(a)(2). The subtraction adjustment cannot exceed the amount of NCTI computed under new Minn. Stat. 290.034.

The legislature had considered apportionment factor representation for NCTI for certain taxpayers, but that bill did not advance in the legislative session.²

The provisions related to NCTI are effective for tax years beginning after December 31, 2025.

Subpart F income

For corporate tax purposes, HF 2438 determines subpart F income without regard to the OBBBA's permanent extension of the look-through rule and treats that income as dividend income subject to Minnesota's 50% dividend received deduction.

Opportunity Zone capital gain income

Beginning with tax year 2027, HF 2438 requires corporate taxpayers to add opportunity zone capital gain income to federal taxable income. The addition is the sum of the amount of capital gain deferred under IRC Section 1400Z-2(a) and the amount by which the taxpayer's basis in the investment was increased by IRC Section 1400Z-2(b)(2)(B) or (c). HF 2438 allows a subtraction adjustment in the year the gain is recognized federally to avoid double taxation.

IRC Section 139L

HF 2438 requires corporate taxpayers to add interest income earned by qualified lenders on loans secured by rural or agricultural real property excluded by IRC Section 139L to their federal taxable income or to their federal adjusted gross income. This provision is effective retroactively to the time the corresponding provision under federal law was effective.

Expenses for certain business meals

HF 2438 requires corporate taxpayers to add back business meal expenses exceeding the 50% limitation in IRC Section 274(n)(2)(C) and all expenses allowed as a deduction under IRC Section 274(e)(8). This provision is effective for tax years beginning after December 31, 2025.

PTET

HF 2438 extends Minnesota's elective PTET for tax years 2026 and 2027. The PTET expires for tax years beginning after December 31, 2027. Effective for tax year 2026 only, HF 2438 will not impose an addition to tax penalty for failing to make estimated payments due to the retroactive reinstatement of the PTET.

Implications

HF 2438's update of Minnesota's IRC reference contains a significant amount of OBBBA conformity, but for declining to readopt immediate expensing of domestic R&E costs.

HF 2438 is also notable in its unique computation of NCTI and subpart F income for purposes of the state's subtraction rules, which add complexity to state tax compliance.

The extension of the elective PTET is a welcome development for electing business owners.